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Contract Act, 1872 – Depositories Act, 1996 – Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 - Whether the Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 19961 has the legal effect of overwriting the provisions relating to the contracts of pledge under the Indian Contract Act, 1872 and the common law as applicable in India – Held: The Depositories Act prescribes how the dematerialised securities can be pledged – The provisions of the Depositories Act and the 1996 Regulations are not in derogation of the Contract Act but in addition to it – In this regard, reference is made to Section 28 of the Depositories Act – Therefore, the object of the Depositories Act is not to rewrite the provisions of the Contract Act but to regulate the creation and transfer of dematerialised securities – Regulation 38(1)(e) requires a depository to maintain, inter alia, records of all approvals, notices and entries, and cancellation of pledge or hypothecation, as the case may be. Contract Act, 1872 – ss. 148-171, 172-179 – Bailment and Pledge – Legal Distinction – In the cases of bailment, the goods are bailed for specific purpose and once the purpose is accomplished the bailee is bound to deliver the possession of the goods back to the bailor or to dispose off the goods as per the bailor’s direction – Unlike bailment, in pledge there is the delivery of possession of the goods by the pawnor to the pawnee by way of security upon the promise of repayment of a debt or the performance of a promise, thereby creating an estate that vests with the pawnee – Pledge is preceded by bailment Words and Phrases – “Pledge”, “Mortgage” – Movable Property – Legal Distinction – A mortgage conveys the whole legal interest in the chattel, while a pledge conveys only a special property leaving the general property in the pledger, and the pledgee never has absolute ownership of property – Further unlike pledgee, a mortgagee acquires general right in the things mortgaged subject to the right of redemption of the mortgagor – Compared to the pledge, a pawnee has only special right in the goods pledged, namely the right of possession as security and in case of default, he can bring a suit against the pawnor as well as sell the goods after giving a reasonable notice. Contract Act, 1872 – Accretion of the Pawned Goods – Duty of the the Pawnee towards such accretion – The pledge extends to accretions and additions, and therefore, when the pawnee returns the pledged goods, the accretions and additions must be returned to the pawnor – Further it also follows that the pawnee’s right to retain and sell the pledged goods stretches to the right to retain and sell any increase and accumulations to the pledged goods. Contract Act, 1872 – s. 176, 177 – Pawnee’s duty to give notice of intended sale of pawned goods – Extent - Section 176 of the Contract Act, unlike some of the sections of the Contract Act, does not specifically provide that the contractual terms can override the provision by using the expression “in the absence of the contract to the contrary” or “subject to special contract to the contrary” – The notice, that is to be given for the intended sale by the pawnee, is a special protection that the statute has given to the pawnor, and the parties cannot agree that the pawnee may sell the pledged goods without notice to the pledgor – Further, the mere tendering of notice to the pawnor does not binds pawnee to put the intended sale to the effect and he is not bound to sell even after tendering of such notice – If the notice is served, the pawnor may redeem the goods as per s. 177 before the ‘actual sale’ by the pawnee. Contract Act, 1872 – s. 63, 176 – Whether Parties to Pledge Agreement can waive the requirement of Notice As contemplated by s. 176 – Settled Legal position – S. 63 of the Contract Act governs the domain of waiver and it is a general principle of law that everyone has a right to waive the advantage of a law or rule made solely for the benefit and protection of the individual in his private capacity however, such a waiver cannot infringe any public right or public policy – But the requirement of ‘notice’ u/s 176 is a mandatory requirement and a special protection given to the pawnor – S. 176 is not eclipsed or curtailed by the phrase “in the absence of the contract to the contrary” and therefore the parties cannot contract out of Section 176 – Further the need for notice to the pawnor of the intended sale by the pawnee is the special protection given to the pawnor, and the parties cannot override the special protection by agreement. Contract Act, 1872 – Whether a Pawnee can Sell Goods Pledged to ‘Himself’ – Settled Legal Position – It is settled legal position that a pawnee cannot sell goods to himself, and if he does so then such transfer could not be said to be a ‘sale’ but a ‘conversion’ and hence could not interpreted as ‘sale’ in terms of s. 176. Interpretation of Statutes – Rules of Interpretation when two or more than two statutes apply – To resolve a debate when two views are evident, it is best to interpret the provision when we know why the statute is enacted – If a statute is looked at, in the context of its enactment, with the glasses of the statute-maker provided by such context, its scheme, the sections, clauses, phrases and words may take colour and appear different than when the statute is looked at without the glasses provided by the context and this principle may equally apply when we examine interplay between two statutes – Two statutes shall be read together consistently and harmoniously to complement each other so far as it is reasonably possible to do so, and where such conciliation is not possible to clarify the legal position by application of principles of interpretation applicable to such situations. Depositories Act, 1996 – s.2(1)(a), 2(1)(j) – Words and Phrases – “Registered Owner’’, ‘Beneficial Owner’ - Legislative Intent and Purpose - The Depositories Act is enacted to lay down a process and rules for the dematerialization of securities by converting them into electronic data stored in the computers of ‘the depository’ and hence by the aforesaid enactment, the legislature sought to get away with physical security – Further the Depositories Act establishes the depository eco-system and introduces the concepts of a ‘registered owner’ and ‘beneficial owner’ – The depository’ becomes the ‘registered owner’ in respect of the security, whereas the person who surrenders the physical shares is recorded as ‘the beneficial owner’ – Further the beneficial owner’ shall be solely entitled to all rights, benefits, and liabilities attached to the securities held by ‘the depository’. And therefore Power and right to transfer ownership of a dematerialised security vests with the ‘beneficial owner’ same as in the case of buying and selling physical securities. Contract Act, 1872 – s. 176, 177 – Depositories Act, 1996 – s.12 25, 28 – Securities and Exchange Board of India (Depositories and Participants) Regulation 1996 – Regulation 58 – Interplay of The Statutes - In terms of sub-section (1) of Section 12, a ‘beneficial owner’ can create a pledge or hypothecation regarding the security owned by him through ‘the depository’, subject to prior approval of ‘the depository’ but the aforesaid provision nowhere defines the term ‘pledge’ – Section 25 of the Depositories Act, the Securities and Exchange Board of India has been vested with the power to make Regulations to carry out the purpose of the Depositories Act – As per s. 25(2)(d) the regulations may provide for the manner of creating a pledge or hypothecation in respect of a security owned by a ‘beneficial owner’ under sub-section (1) to Section 12 of the Depositories Act – Further as per Regulation 58 a beneficial owner may create a pledge on security owned by him and for this purpose, in cases of Pledge, the pawnee, to exercise the right under s. 12 r/ w Regulation 58, shall, by virtue of Regulation 58(8), get himself recorded as ‘beneficial owner’ before he proceeds to sell the pledged securities – The Acts and the Regulations are not inconsistent but are subject to harmonious construction in order to attain the objective sought to be achieved more so when s. 28 itself provides that “the provisions of this Act shall be in addition to and not in derogation of any other law for the time force relating to the holding and transfer of securities’’ – Further Sections 176 and 177 are not obliterated, in so far as they would equally apply to pawned dematerialised securities as they apply to other pawned goods – Further the requirement of pawnee to get himself registered as ‘beneficial owner’ in in terms of the Act and Regulation, is not an actual sale and would not affect the right of the pawnor of redemption u/s 177 of the Contract Act more so because the pawnee is not getting anything paid against the debt due. |
