Source:Delhi High Court

Why in News?

Justice Manoj Kumar Ohri observed that pledgee’s right to sell pledged shares would be subservient to the pledgor’s right to redeem.

• Delhi High Court gave this observation in the case of DLF Limited v. PNB Housing Finance Limited.

What is the Background of DLF Limited v. PNB Housing Finance Limited Case?

• The petitioner no. 1 (DLF), petitioner no. 2 (Chinsha Property) and the respondent no.4 (Hubtown) were shareholders in respondent no. 3 (JHL). They held 100% shares of the company.
• JHL borrowed a big loan amount of 800 Crores, from Punjab National Bank (PNB) in 2017. The petitioners were not a party to this loan agreement. However, they were called 'Promoters' of PNB.
• The loan was secured by a mortgage and shareholdings of respondent no. 1 was pledged as security.
• Respondent no. 3 failed to pay resulting which the assets being declared as Non-performing Assets (NPA) and being declared for auction which failed due to a lack of bids.
• The respondent no. 1 invoked the pledge and asked shareholders of respondent no. 3 to use their first right of refusal.
• Petitioner no. 1 offered to acquire entire shareholding of respondent no. 3 however respondent no. 1 failed to reply to that offer.
• The shares were sold to an undisclosed third party, hence respondent no.1 approached the court asking the court to disclose the identity of the transferee(s) and to restrain them from creating any third-party interest again.

What were the Court’s Observations?

• Delhi HC observed that as per Section 177 of Indian Contract Act, 1872 (ICA), pawnor’s (pledgor of shares) right of redemption is sacrosanct.
  • This right cannot be defeated in a casual manner through the process adopted to conclude the sale at express speed.

What is Pledge under Indian Contract Act, 1977?

• About:
  • As per Section 172 of ICA a pledge refers to a type of bailment where a pledgor deposits goods or valuable items to pledgee as security for the performance of a promise or repayment of a debt.
  • The act of creating a pledge is often referred to as "pawning."
  • The goods or items deposited in pledge are known as "pledged goods" or "pledged property".
• Key Features:
  • Delivery of Possession:
    • In a pledge, the pledgee must take actual possession of the pledged goods.
    • This means the goods are physically delivered to the pledgee, and they have control over them during the period of the pledge.
  • Security for a Debt or Promise:
    • Pledges are typically created to secure the performance of a debt or a promise.
    • For example, if a person borrows money from a lender, they might pledge their jewelry as security until the borrowed amount is repaid.
  • Return of Goods:
    • Once the debt or promise is fulfilled, the pledgee is obligated to return the pledged goods to the pledgor.
    • If the pledgor fails to perform their obligation, the pledgee may have the right to sell the pledged goods to recover the debt.

What are the Rights of Pledgee and Pledgor?

• Rights of Pledgee: -
  • Right to Retain:
    • The pledgee has the right to retain the pledged property until the debt or obligation for which the property was pledged is discharged.
    • This means that the pledgee can keep the property in their possession until the borrower (pledgor) repays the debt in full.
  • Right to Sue:
    • If the pledgor fails to repay the debt within the agreed-upon time or breaches any other terms of the pledge agreement, the pledgee has the right to sue the pledgor for the recovery of the debt.
  • Right to Appropriate:
    • If there is more than one debt owed to the pledgee by the pledgor, the pledgee has the right to appropriate the pledged property to any of the debts as long as there is no specific agreement to the contrary.
  • Right to Extraordinary Expenses:
    • The pledgee has the right to recover any extraordinary expenses incurred in preserving the pledged property.
    • These expenses may include costs related to the maintenance or protection of the property.
  • Right to Receive Income:
    • Unless otherwise agreed, the pledgee is entitled to receive any income or benefits generated by the pledged property during the period of the pledge.
  • Right of Sale:
    • If the pledgor defaults on the debt and there is no agreement to the contrary, the pledgee has the right to sell the pledged property after giving reasonable notice to the pledgor.
    • The sale must be conducted in a commercially reasonable manner, and the proceeds of the sale are used to satisfy the debt. Any surplus is returned to the pledgor.
  • Right to Compensation:
    • If the pledgor has made any fraudulent misrepresentations about the pledged property, the pledgee may have the right to seek compensation or damages for any loss suffered as a result of the misrepresentation.
• Rights of Pledgor: -
  • Right to Retain Possession:
    • The pledgor has the right to retain possession of the pledged goods or assets unless there is an agreement to the contrary.
    • This means that the pledged items remain in the possession of the pledger, but they are held as security for the debt.
  • Right to Redemption:
    • The pledgor has the right to redeem (get back) the pledged goods or assets upon repayment of the debt or fulfillment of the obligation for which the pledge was made.
    • The pledgor must pay the debt, including any interest or charges, as agreed upon.
  • Right to Receive Surplus:
    • If the pledged goods or assets are sold by the pledgee (the person to whom the pledge is made) due to non-payment of the debt or violation of the agreement, the pledgor has the right to receive any surplus amount after the debt and expenses are settled.
    • However, if there is a shortfall, the pledger may still be liable for the remaining amount.
  • Right to Terminate the Pledge:
    • If the pledgee has not used the pledged goods or assets and the purpose of the pledge is fulfilled, the pledgor has the right to demand the termination of the pledge and the return of the pledged items.