Right Of Pledgee To Sell Pledged Shares Is Subservient To The Pledgor’s Right To Redeem Such Shares: Delhi High Court

The Delhi High Court has held that the right of the pledgee to sell the pledged shares for default to repay the loan amount is subservient to the right of the pledgor to redeem such shares under Section 177 of Indian Contract Act. The bench of Justice Manoj Kumar Ohri held that the pledged shares cannot be sold by the pledgee without deciding on the offer made by the pledgor to redeem such shares. The Court noted that a pledgor can question the process of assignment and subsequent sale of the pledged shares, if it undermined its right of redemption under Section 177 of the Contract Act. The Court also held that loss caused by the sale of pledged shares cannot be compensated in terms of money as their loss causes a person to lose control and ownership of a company, which right is invaluable given the enormous time and effort it takes to set up a business and the goodwill associated with it, therefore, the Court exercising power under Section 9 of the A&C Act should preserve the subject matter of arbitration and grant an injunction in favour of the pledgor if the sale, on a prima facie examination, appears to be in violation of Section 177 of the Contract Act. Facts The petitioner no. 1 (DLF), petitioner no. 2 (Chinsha Property) and the respondent no.4 (Hubtown) were shareholders in respondent no. 3 (JHL), holding 100% of its shareholding in a ratio of 37.5%, 37.5% and 25% respectively. Respondent no. 3 availed of a loan facility from respondent no. 1 (Punjab National Bank) vide a Loan Agreement dated 20.12.2017 for a sum of Rs. 800 Crores. The petitioners were not the party to this agreement, however, they were defined as ‘Promoters’ of the respondent no. 1. The loan was secured by way of mortgage created in favour of the respondent no. 1. Additionally, the entire shareholding of the respondent no.3 was pledged as security to the loan amount and three separate Share Pledge Agreements (SPA) dated 26.12.2017 were executed between the shareholders and the respondent no.1/bank. Clause 17.11 of the agreement provided for the resolution of dispute through arbitration. Respondent no. 3 failed to repay the loan amount, accordingly, it was declared as Non-Performing Asset. Thereafter, the respondent no. 1 initiated the recovery process under the SARFAESI Act, 2002 and issued the notice of demand, followed by the possession and sale notices. However, the auction under the SARFAESI Act resulted in failure due to lack of bids. Thereafter, the respondent no. 1 issued a notice under Clause 6 of the SPA indicating its intention to invoke the pledge and sell the pledged shares. Additionally, it issued a notice of redemption to the shareholders of the respondent no.3, including both the petitioners, to exercise their right to first refusal. The sale price for the entire shareholding at Rs. 1075 Crores. Accordingly, the petitioner no. 1, vide a letter dated 10.11.20122, exercised its right of redemption and offered an amount of Rs. 1450 to acquire the entire shareholding of the respondent no.3. However, the respondent no. 1 failed to reply to the offer made by the petitioner no. 1. Thereafter, the respondent no. 1 issued a public notice dated 05.08.2023 seeking interests for assignment of the loan. Consequently, the loan was assigned in favour of the respondent no. 2(Omkara Asset Reconstruction). Respondent no. 2, vide a letter dated 06.09.2023, informed the petitioners about the sale of their portion of pledged shares to an undisclosed third party for an undisclosed sum, thereby, clearing the account. Aggrieved by the sale of their shares in respondent no.3, the petitioners invoked the arbitration clause and approached the court praying the Court to pass directions for disclosure of the identity of the transferee(s) of shares and to restrain the transferees from further creating any third-party interest. Contention of the parties The petitioners challenged the transfer/sale of their shares in the respondent no.3 on the following grounds: The sale of the shares was not bonafide and was a collusive act between the respondent nos. 1-3. The assignment of the loan was rushed through rather suspiciously as the public notice of sale of financial asset of the bank was issued by respondent no. 1 on 05.08.2023, wherein the cut-off date for submission of bid from the prospective bidders was set after mere three days on 08.08.2023.The sale is also in contravention of the terms of the SPA as in terms therein, the petitioner had already exercised its right of redemption of shares and offered an amount of Rs. 1475 crores. Therefore, the respondent no.2 acting as the assignee could not have directly sold the shares when the petitioner had already exercised its right to redemption. The respondents made the following counter-arguments: The petition is another attempt by the petitioners to frustrate the recovery...

Right Of Pledgee To Sell Pledged Shares Is Subservient To The Pledgor’s Right To Redeem Such Shares: Delhi High Court

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Right Of Pledgee To Sell Pledged Shares Is Subservient To The Pledgor’s Right To Redeem Such Shares: Delhi High Court

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