Partly allowed

Mr v. Sriram Ors. v Bank of Baroda

DRAT17 Jan 2025REGULAR APPEAL/29/2021

Case brief

AI extract

What is this about?

In four related appeals, the Debts Recovery Appellate Tribunal examined whether borrowers could avoid repaying loans by alleging the lender’s negligence in not selling pledged shares during market fluctuations. The tribunal recognized the bank's lapse in timely sale but held the borrowers partially liable.

What did the court decide?

Bank entitled to recover loan amount after deducting Rs.37,34,700/- calculated based on share value on April 2, 2001, plus interest.

Mr v Sriram Ors. versus Bank of Baroda — Contract and Commercial Disputes | DRAT (2025)

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IN THE DEBTS RECOVERY APPELLATE TRIBUNAL AT CHENNAI

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Dated the 17^th of January, 2025

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PRESENT: Hon’ble Mr. Justice G. Chandrasekharan CHAIRPERSON

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R.A : 18/2021

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(OA 182/2002, of DRT -I, Chennai)

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R.A : 28/2021

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(OA 183/2002 of DRT -I, Chennai)

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R.A : 29/2021

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(OA 185/2002of DRT -I, Chennai)

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and

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R.A : 30/2021

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(OA 186/2002 of DRT -I, Chennai)

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R.A : 18/2021:

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Between

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Mr. R. Srinivasan, No.4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004.

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Mrs. Viji Srinivasan, No. 4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004.

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… Appellants

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And

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Bank of Baroda, Mount Road Branch, No. 168, Anna Salai, Chennai – 600 002.

… Respondent

R.A : 28/2021:

Between

Mrs. Viji Srinivasan, No.4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004. 2. Mr. R. Srinivasan, No. 4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004.

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… Appellants

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And

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Bank of Baroda, Mount Road Branch, No. 168, Anna Salai, Chennai – 600 002.

… Respondent

R.A : 29/2021:

Between

Mr. V. Sriram, No.4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004.

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Mrs. Viji Srinivasan, No. 4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004. 3. Mr. R. Srinivasan, No. 4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004.

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… Appellants

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And Bank of Baroda, Mount Road Branch, No. 168, Anna Salai, Chennai – 600 002.

… Respondent

R.A : 30/2021:

Between

Mr. R. Ramadurai, No.4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004. 2. Mrs. Viji Srinivasan, No. 4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004. 3. Mr. R. Srinivasan, No. 4, 1^st Main Road, C.I.T. Colony, Mylapore, Chennai – 600 004. … Appellants And Bank of Baroda, Mount Road Branch, No. 168, Anna Salai, Chennai – 600 002.

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… Respondent

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Counsel for Appellant : Learned Sr. Counsel Mr. R. Parthasarathy Counsel for Respondent : Learned Sr. Counsel Mr. E. Om Prakash for M/s. Ramalingam and Associates

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COMMON ORDER

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Respondent Bank filed OA 182/2002, OA 183/2002, OA 185/2002 and OA 186/2002 against the Appellants for recovery of amount mentioned in the respective OAs.

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Appellants, Mr. R. Srinivasan and Mrs. Viji Srinivasan

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are Defendants in all the OAs. Apart from them, one Mr. V. Sriram is a Defendant in OA 185/2002 and one Mr. R. Ramadurai, is a Defendant in OA 186/2002.

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Common grounds had been raised in all the OAs filed before DRT. The case of the Respondent Bank in the OAs is that, at the request of 1^st Defendant in the OA, Over Draft (OD) facility to the limit of Rs.16 Lakhs was sanctioned. In support of OD facility, 1^st Defendant executed loan documents in favour of Bank, on 05.01.2000. The OD facility was collaterally secured by 10,000 shares of Software Solution Integrated Ltd., standing in the joint name of the

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first and second Defendants. One Mr. V. Sriram and one Mr.

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R. Ramadurai had also availed Rs.16 Lakhs OD facility each, in their names. These OD facilities were individually and collaterally secured by the pledge of shares standing in the name of Defendants.

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At the request of Defendants, through application dated 06.01.2000, the credit facility was enhanced to Rs.20 Lakhs, on 31.03.2000, which has been collaterally secured by the pledge of same shares. The Defendants executed the following documents:

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i) Demand Promissory Note for Rs.20 Lakhs,

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ii) Undertaking Letter and

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iii) Memorandum of Loan Agreement.

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First Defendant undertook to pay additional interest at the rate of 2% p.a. on the defaulted payment and accepted to pay the agreed rate of interest in quarterly rests. During April, 2000, the value of the shares shooted up, and hence,

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at the request of Defendants, on 07.04.2000, 7500 shares have been released to the Defendants. Subsequently, due to fall in the share value, at the request of the Bank, the Defendants again pledged 3500 shares, and the OD accounts were collaterally secured by 6000 shares with the required margin. The pledged shares are in the demat form, lying with the depository participant, namely M/s Stock Holding Corporation of India Ltd.

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The value of the shares was fluctuating till November, 2000. In December, 2000, the price started falling down, and till January, 2001, there was no raise in the said price. The Bank wrote a Letter to the Defendant, on 23.02.2001 and another Letter on 17.03.2001 to regularise the OD account or to bring in additional security. The Bank received a Letter dated 04.04.2001 from the 1^st Defendant finding fault with the Bank stating that the Bank was solely responsible for the loss incurred to him, and he is not liable to pay any amount to Bank. Therefore, Lawyer’s Notice dated

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03.05.2001 was issued to Defendant No.1, to clear the outstanding dues. No reply was sent by the Defendant No.1.

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Other OD facilities availed by R. Ramadurai and V. Sriram were also turned as Non Performing Asset (NPA). The Bank issued another Lawyer’s Notice on 19.12.2001 to 1^st Defendant. First Defendant sent a Letter dated 22.12.2001 stating that, since the Counsel was out of town, he would send the reply in the first week of January, 2002. On 07.01.2002, 1^st Defendant sent a letter stating that claim is baseless. The Defendants had intentionally failed and neglected to repay the loan amount, therefore, the OAs have been filed for recovery of amount.

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Identical Reply Statements had been filed to these OAs.

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The case of the Appellants/Defendants is that, in all these OAs, the advances are made against the same block of 6000 shares of SSI Limited, over which, a common lien has been marked. First Defendant is the beneficiary of the loan and also the owner of the shares under lien. The shares are held

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in the joint names of the 1^st and 2 Defendants. It is the failure of the Bank to sell the shares that led to the loss to

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the holders of the shares. The 1^st Defendant is the first holder of the shares.

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In the present case, the margin was fixed at 50%, i.e.

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the value of the shares offered on lien should be at least twice the loan amount sanctioned. The Bank has fixed the higher margin than the minimum set out by RBI at 25%. Only at the request of Bank, the Defendants applied the Bank for availing loan facilities against the shares. All the four Defendants were sanctioned a sum of Rs.16 Lakhs, each. This facility was enhanced to Rs.20 Lakhs, on the applications by Defendants. The lien was created on 17.12.1999 for 10,000 shares of SSI Limited in favour of Bank. Consequent to increase in price of shares, the Bank released 7500 shares of SSI Limited from the lien in April, 2000. Then, in order to increase the limit to be drawn and also due to the change in the valuation of shares, an additional lien of 3500 shares of SSI Limited, has been

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created, on 15.05.2000. The Defendants were servicing the loan in terms of the contract. The market price of the shares of SSI Limited started falling from August/September, 2000. As per the sanction, the Bank must have sold at least such number of shares which would have helped them to liquidate the loan outstanding in the names of all the Defendants. However, the Bank did not sell the shares despite the Bank’s attention was drawn on various occasions from September, 2000, with regard to fall of shares and to protect the interest of shareholder.

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On 12.01.2001, the price of shares of SSI Limited, closed at around Rs.1,111/-, resulting in the value of shares on lien to the Bank going well below the loan amount outstanding. On 13.01.2001, 1^st Defendant called on the Deputy General Manager, Senior Branch Manager of Anna Salai Branch and the Chief Manager at the Zonal Office and expressed surprise at shares not being sold by the Bank even when the value of shares was below the loan amount outstanding. After 13.01.2001, the share prices moved up

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again to a high of Rs.1660/-, on 29.01.2001. Had the shares been sold at that point of time, the Bank would have recovered the full amount, and would have refunded Rs.20 Lakhs to the Appellants. The Bank issued Notice dated 24.01.2001, followed by Notices dated 23.02.2001 and 17.03.2001. The 1^st Defendant sent reply dated 04.04.2001, reiterating that the Bank was solely responsible for not selling the shares. On 03.05.2001, the Bank issued Lawyers’ Notice and followed by another Notice dated 19.12.2001. The Appellants sent reply dated 07.01.2002. Without considering the reply, the Bank filed the OAs for recovery of the amount. By the act of the Bank, in not selling the shares, the Appellants were put to loss, and therefore, the Appellants had also raised Counter Claim in the Reply Statement.

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On the basis of pleadings and evidence produced, Learned Presiding Officer, DRT-I, Chennai, found that the Bank is entitled for recovery of the amount claimed in the

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respective OAs, and allowed the OAs. Therefore, these Appeals are filed.

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Learned Senior Counsel for Appellants submitted that the availing of the credit facilities, execution of loan documents, and creation of pledge over the shares are admitted. Initially, each Appellant was sanctioned Rs.16 Lakhs and it was enhanced to Rs.20 Lakhs. Loans were sanctioned only on the basis of creation of pledge over the shares.

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Learned Senior Counsel for Appellants would contend that as per the condition in Clause 11 (c) of the Sanction Letter issued to Appellants, namely R. Srinivasan and Mrs. Viji Srinivasan, on 03.01.2000, “branch should have a close watch on the fluctuation in the market value of shares at least once in a month to arrive at the drawing power and to ensure that requisite margin is maintained either by deduction in limit or by covering the shortfall by additional securities. In case there is no response, action should be

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taken to sell the securities towards appropriation of liabilities with Bank.”

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It is the further contention of Learned Senior Counsel

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for Appellants that as per condition in Clause 11 (d), “bank’s lien should be noted on the shares pledged by the applicant and a confirmation to this effect obtained from bank’s designated depository participant in the prescribed format and retained in the file. Branch should release the loan only after receiving pledge confirmation report from Depository Participant.”

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It is submitted that, a combined reading of these conditions makes it clear that the Bank has complete control over the shares pledged and the Borrower cannot deal with the shares in any manner. It is the duty of the Bank to watch share price movement, especially, when the share price movement is volatile and vaporous. In case there is no response from the Borrower to cover the shortfall by pledging additional securities, the Bank is empowered to sell the

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shares towards appropriation of liabilities. The Bank should have sold the shares at appropriate time. Though there are Circulars issued by RBI and Respondent Bank, the Bank has not chosen to sell the shares at appropriate time to recover the loan amount. The value of shares fell below the margin from 50% to 25%, in September/November, 2000. The claim of the Bank that the Appellants had requested the Bank not to sell the shares, on 13.01.2001, is totally false. From September, 2000 to 24.01.2001, the Bank slept over its right of sale of shares despite having power to sell. Subsequently also, the Bank had not taken any steps for selling the shares by mitigating the loss to the Bank as well the Appellants. The Appellants are not liable to pay any amount since the loss had occasioned for not selling the shares in time. Preventing the Defendants from dealing with their property over which the Bank has no right or charge, has resulted in paying additional income tax, and caused mental agony, pain and sufferings. Therefore, the Appellants made Counter Claim. The order allowing the OAs and rejecting the Counter Claim is against the law. Thus, the Learned Senior

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Counsel for Appellants prayed for setting aside the order of Learned Presiding Officer and for allowing the Counter Claim.

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In reply, Learned Senior Counsel for Respondent Bank submitted that there is no dispute with regard to availing of loan; execution of loan documents and security provided in the form of shares. The Bank has produced all the relevant documents before the Tribunal in the form of Exhibits A1 to A79 in support of its claim and proved its claim. The Appellants have produced their documents as Exhibits D1 to D53 in support of their case.

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It is submitted that in consideration of the loan availed by the Defendants, the following documents were executed in favour of Respondent Bank:

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i) Demand Promissory Note for Rs.20 Lakhs, Letter of Undertaking and Memorandum of Loan Agreement in respect of OA 182/2002, which are marked as Exhibits A17, A18 and A19;

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ii) Demand Promissory Note for Rs.20 Lakhs, Letter of Undertaking, Share Pledge Letter and Memorandum of Agreement, in respect of OA

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183/2002, which are marked as Exhibits A20, A21, A22 and A23;

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iii) Demand Promissory Note for Rs.20 Lakhs, Letter of Undertaking, Letter of Pledge and Memorandum of Agreement, in respect of OA

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185/2002, which are marked as Exhibits A43, A44, A45 and A46; and

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iv) Demand Promissory Note for Rs.20 Lakhs, Letter of Undertaking, Letter of Pledge and Memorandum of Agreement, in respect of OA

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186/2002, which are marked as Exhibits A58, A59 , A60 and A61.

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The loan was not sanctioned entirely based on the pledge of

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shares alone.

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Whether the Appellants are absolved from their liability for the reason that the Bank has not sold their shares towards loan liability? is the question raised by Appellants.

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The main point canvassed by Learned Senior Counsel for Appellants in these Appeals is that the Sanction Letter clearly stipulates that the Bank is empowered to sell the securities towards appropriation of liabilities, in case there is no response from the Borrower to cover the shortfall by providing additional securities or by reducing the loan limit. Failure on the part of the Bank to sell the securities at appropriate time resulted in monitory loss to the Appellants and not realising the loan amount due to the Bank. Therefore, the Appellants are not liable to pay any amount.

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In answer to this, Learned Senior Counsel for Respondent Bank submitted that there was a meeting held in November/December, 2000, with the Defendants, with regard to the reduction in value of shares and to provide

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additional shares and to maintain 50% margin. There was no response from the Appellants. The Legal Notices sent by the Bank were also not replied. Mere violation of regulatory guidelines by the Bank, will not confer right on the Appellants to deny the claim of the Bank. The loan was not sanctioned entirely based on the pledge of shares. It is evident from the records that the Defendants had executed Promissory Note and other loan documents for the loan availed by them. Even in the absence of pledge of shares and failure to sell the shares, the Bank can very well recover its due on the basis of other loan documents executed by Defendants. There is no merit in the Counter Claim made by the Defendants. Thus, the Learned Counsel for Respondent Bank prayed for dismissal of these Appeals.

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Considered the rival submissions and perused the records.

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From the submissions made and records produced, it

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appears that there is no dispute with regard to sanction of

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Rs.16 Lakhs to each, to R. Srinivasan, Mrs. Viji Srinivasan,

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R. Ramadurai and V. Sriram through the Sanction Letters dated 03.01.2000, marked as Exhibits A5, A6, A7 and A8. Subsequently, the Borrowers through the application dated 06.01.2000 sought enhancement of limit of advance from Rs.16 Lakhs to Rs.20 Lakhs, which are marked as Exhibits A9, A10, A11 and A12. The Bank enhanced the limit from Rs.16 Lakhs to Rs.20 Lakhs, vide Sanction Letters dated 24.03.2000 and 27.04.2000, which are marked as Exhibits A13, A14, A15 and A16. This was also not disputed by Appellants. It is also not in dispute that the Respondent Bank had not exercised its power given in Sanction Letter to sell the securities towards the appropriation of liabilities.

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As indicated above, the first Sanction Letter dated 03.01.2000 in favour of the Borrowers, is marked as Exhibits A5 to A8 and second Sanction Letters dated 24.03.2000 and

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27.04.2000 are marked as Exhibits A13, A14, A15 and A16.

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It is necessary to understand the terms of contract between the Bank and the Borrowers from the Sanction Letter. A perusal of these Sanction Letters shows that initially, a sum of Rs.16 Lakhs was sanctioned as CC (Misc) – F for trading in shares. 10,000 shares of SSI totally valued at Rs.186.95 Lakhs, were offered as security by pledge of these shares. The margin for the loan is 25% on the market value of the shares. The term for repayment was one year. The rate of interest was 3% above PLR plus interest tax presently at 15.81% p.a.

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It is relevant to extract the conditions in Clause 11 (c) and (d) in initial Sanction Letter dated 03.01.2000, which is shown as conditions in Clause 11 (b) and (c) in the subsequent Sanction Letters, for better understanding of terms of contract;

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“11 . Other conditions, if any

a) ……………

b) ……

c) Branch should have a close watch on the fluctuation in the market value of the shares at least once in a month to arrive at the drawing power and to ensure that requisite margin is maintained either by deduction in limit or by covering the shortfall by additional securities. In case there is no response, action should be taken to sell the securities towards appropriation of liabilities with us.

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d) Bank’s lien should be noted on the shares pledged by the applicant and a confirmation to this effect obtained from bank’s designated depository participant in the prescribed format and retained in the file. Branch should release the loan only after receiving pledge confirmation report from Depository Participant. e) …..

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f) …”

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The condition in Clause 11 (c) mandates the Bank to have a close watch on the fluctuation in the market value of

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the shares at least once in a month to arrive at the drawing power and to ensure that requisite margin is maintained either by reduction in limit or by covering the shortfall by additional securities. That means, the loan can be offered only at margin of 25% on the market value of the shares pledged. The share market is always dynamic in nature and

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shares value is prone to fluctuate frequently and uncertainly. The shares may go sky high one day and hit rock bottom on the other day. That is the reason why the Bank had to have a close watch on the fluctuation in the value of the shares to maintain the loan limit within the margin of 25% on the market value. If the margin drops below 25% of market value of the shares, then the Bank is required to ask the Borrower to maintain the requisite margin either by reducing the limit of the loan or by covering shortfall by providing additional securities. Not only that, in case if the Borrower is not responding to the call of the Bank for reducing the loan limit or by covering the shortfall by providing additional securities, the Bank should take action to sell the securities for appropriation of liabilities.

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The condition in Clause 11 (d) reads that Bank’s lien should be noted on the shares pledged by the Applicant and a confirmation to this effect obtained from bank’s designated depository participant in the prescribed format, and only then, the Branch should release the loan. This condition

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makes it clear that once the shares are pledged as security for the loan, and a lien is created, the Borrower cannot independently deal with the shares without the consent and concurrence of the Bank. On the other hand, the Bank can sell the shares for realising the loan liability, in case the Borrower has not responded for reducing the limit or by covering the shortfall by providing additional securities, when the price falls below the margin. These conditions incorporated in the Sanction Letter, are obviously based on the RBI Circular dated 28.08.1998.

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With regard to the Bank offering finance against the shares and debentures, through RBI Master Circular dated 28.08.1998, and the Circular issued by the Respondent Bank through Circular No. 104/99 dated 13.05.1999, the Circular No. 126/99 dated 09.06.1999 and Circular No. 239/99 dated 15.10.1999, guidelines are issued. It is stated in para 3 (iii) of RBI Circular that, in case of shares/convertible debentures held in dematerialised form, a minimum margin of 25% should be maintained. In the

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Circular of Respondent Bank dated 13.05.1999, in para 8, it is stipulated “if the party fails to repay the loans/advances, the pledgee (The lender) will go in for invocation of the pledge. And on receipt of the request for invocation of pledge from the pledgee through its participant, the depository will act accordingly to enable them to dispose of the securities.”

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Para 9(5) of Circular dated 13.05.1999 stipules that “immediate transfer of securities in the Bank’s name in the event of default by the borrower, thereby giving an immediate opportunity for the bank to sell” . Similarly, in para 9(7), it is stipulated that “RBI has also clarified in regard to shares held in ‘demat form’ under the depository system, the

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shares/debentures need not be transferred in the name of Bank”

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In the Circular No.126/1999 dated 09.06.1999 of Respondent Bank, the revised guidelines with regard to advancing of loan against shares and debentures are issued.

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In condition No.18, it is mentioned that “Branches should

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have a close watch on the fluctuations in market value of shares/securities and ensure that the requisite margin should be maintained” . There is other condition, in internal page 14 in condition No.15 that “Branches should have a close watch on the fluctuations in market value of shares/securities and ensure that the requisite margin is maintained either by reduction in limit or by covering the shortfall by additional securities. In case, there is no response, immediate action should be taken to sell the securities towards appropriation of liabilities with Bank.” In procedural guidelines to be followed while lending against the demat shares, in para 7, it is stated that, “in the case of default by borrower, the bank should invoke the pledge in the prescribed form and make arrangements to sell those shares and appropriate the proceeds to the liability. No stamp duty is payable in case of transfer of shares in demat format” . Flow chart for invocation of pledge of shares, are at page 22 of this Circular.

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In the Circular No.239/1999 dated 15.10.1999 issued

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by the Bank, it is mentioned that “for arriving at the drawing

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power, shares and debentures should be valued at least once in a month - more frequently in a falling or wide fluctuation in the market” . Only based on the Circulars of RBI and Respondent Bank, the conditions in Clause 11 (c) and (d) in Sanction Letter have been incorporated.

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Combined reading of the conditions incorporated in Sanction Letter and Circulars of RBI and Respondent Bank, makes it abundantly clear that, the Bank should have a close watch on the fluctuation in the market value of the shares at least once in a month and more frequently when the value is on the decline to arrive at the drawing power and

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to ensure that requisite margin is maintained either by reduction in limit or by covering the shortfall by providing additional securities. In case there is no response from the Borrower or adopting one of these modes, when the market value falls below the limit, the Bank should take steps to sell the shares towards appropriation of liabilities.

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It is stated in para 5 (G) of the Original Application that the value of the shares was fluctuating from 30.06.2000 and 03.11.2000, and same is extracted below for better understanding:-

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“G. The Applicant Bank further submits that subsequently, the value of the shares was fluctuating the following were the position of the value of the shares, at random.

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	High	Low
30, June 2000	Rs.3,122	Rs.2,676.35
7, July 2000	Rs.3,240	Rs.2,912.40
28, July 2000	Rs.2,598	Rs.2,022
18, August 2000	Rs.2,240	Rs.1,940
31, August 2000	Rs.2,864	Rs.2,635
8, September 2000	Rs.3,050	Rs.2,862
15, September 2000	Rs.3,222	Rs.2,694.75
22, September 2000	Rs.2,810	Rs.2,150
29, September 2000	Rs.2,570	Rs.2,251.50
6, October 2000	Rs.2,499	Rs.2,225
27, October 2000	Rs.2,321	Rs.1,925.25
3, November 2000	Rs.2,375	Rs.1,926.15”

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It is stated in para 5 (J) that, in view of falling of share price, the Bank wrote a Letter dated 23.02.2001 to Borrower and another Letter on 17.03.2001, to regularize the overdraft account or to bring in additional security. There was no immediate response for these Letters. Then, on 04.04.2001, the 1^st Defendant sent a letter stating that the Bank was solely responsible for the loss occurred to him and he is not liable to pay any amount to the Bank.

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In Reply Statement filed by the Borrower, it is stated that “the market price of shares of Technology companies like SSI Ltd. started falling around August/September, 2000. With the margin available to the bank was falling closer to the sanctioned margin levels of 50%, as per the sanction, the

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Bank must have sold at least such number of shares which would have helped them to liquidate the loan outstanding in the names of all defendants, thereby realising the loan utilized and release the balance number of shares from their lien. In fact, nothing further was required to be done by the defendants in respect of sale of the shares. Since the Bank

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had not sold the shares, at that point of time, it was brought to the attention of the Branch Manager, on various occasions, in 2000. This was pointed out to the Deputy General Manager, Mr. Hari Prakash Shetty. On 13.01.2001, 1^st Defendant called on the Deputy General Manager, Senior Branch Manager of Anna Salai Branch and the Chief Manager, at the Zonal Office of the Applicant Bank and expressed surprise at shares not being sold by the Bank even when the value of shares was below the loan amount outstanding. Only on 24.01.2001, the Bank sent a Notice and followed by Notices dated 23.02.2001 and 17.03.2001. If the shares have been sold when the margin started falling below 50% of market value, the Bank would have recovered its dues and the Appellants would have got the balance amount received out of the sale of shares.”

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It is the contention of the Appellants that, as on 23.02.2001, the value of 6000 shares was Rs.84 Lakhs; the outstanding was Rs.81 Lakhs. In January, 2001, the value

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of the shares was Rs.91 Lakhs. Had the shares been sold in

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January, 2001 itself, the Appellant would have received some money out of sale proceeds. Despite intimation regarding falling of price below 50% of margin in October/December, 2000, the Bank had not chosen to sell the shares.

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From the facts narrated above and the documents produced, it is clear that the Bank did not take any steps for the sale of shares, despite having sufficient opportunity to sell the shares for recovering the loan dues. It was not necessary to involve the Borrower in the sale of shares. Once the lien is created in favour of Bank, in respect of shares and when the Borrower defaults in making payments, it is always open to the Bank to sell the shares, subject to giving notice to the Borrower. The first Letter sent by the Bank to the Borrower was on 24.01.2001, informing about

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the depreciation of value of shares and erosion of margin with a request to bring down the outstanding levels or in the alternative to offer additional shares of requisite value to maintain prescribed margin. This Letter was followed by another Letter dated 23.02.2001 with the same contents. It

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is not known as to why the Bank had not chosen to sell the shares when it received no response from the Borrower for the Letter dated 24.01.2001. On the contrary, Bank had chosen to send another letter dated 23.02.2001 with the same contents.

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Only on 17.03.2001, the Bank sent a Letter to Borrower informing that the Bank had not received any response from the Borrower to the Letters already sent, therefore, the Bank will be constrained to sell the shares under lien to the account, without any further notice. It is also stated that any shortfall that may arise after the sale of the shares, will be solely at the risk and responsibility of the Borrower and the amount outstanding will be recoverable from the Borrower. Even thereafter, there was no immediate step for the sale of the shares. On 04.04.2001, the Defendant wrote a Letter to the Bank stating that the Defendant informed the Bank about his inability to provide additional shares to meet the shortfall in margin requirements. It was informed that the owners of the shares namely R. Srinivasan and Mrs. Viji

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Srinivasan, were prevented from dealing with the shares, and the letter of the Bank was only to cover up the latches on the part of Bank for not having sold the shares in time, at least, at the prices to cover the outstanding. Therefore, it was said that the Bank was solely responsible for the loss incurred to him, and for the shortfall, if any, that may arise, on account of proposed sale of shares to liquidate the outstanding, the Borrower is not responsible for such loss or shortfall.

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It is informed by Learned Senior Counsel for Appellants that the Bank had not taken any step for selling the shares even after the reply from the Borrower, on 04.04.2001, and filed OAs for recovery of the amount. Due to inaction on the part of Bank for selling the shares, the share prices had gone down to nil i.e. ‘zero’ value.

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One of the submissions made by Learned Senior Counsel appearing for the Respondent Bank is that, irrespective of the option available to the Bank for selling the shares for the loan amounts, the Bank can always resort to

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recover the loan due to it on the basis of the other loan documents executed by Appellants, such as, Demand Promissory Note, Undertaking Letters and Memorandum of Agreement, in favour of Bank.

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Learned Senior Counsel for Appellants vehemently refuted this contention stating that the loans were advanced only on the basis of shares offered as security. The loans were not the personal loans, sanctioned only on the basis of execution of Promissory Note. When the Bank failed to sell the shares at appropriate time, when the Borrower had also incurred loss, it is not open to the Bank to contend that it can fall back upon the Promissory Notes and other loan documents executed by Appellants for recovery of loan amount. This Tribunal finds this submission of Learned Senior Counsel for Appellants has merits, to some extent, on factual and legal basis.

¶172

The Sanction Letter and Letter of Pledge of Shares executed by Defendants would clearly show that, the loans

¶173

¶174

were sanctioned against the pledge of shares. The Promissory Notes and other loan documents were executed only in support of loans sanctioned on the basis of pledge of

¶175

the shares. It has to be borne in mind that the initial sanction was against the pledge of 10,000 shares. When the said share price had increased, at the request of Borrower, the Respondent Bank released Rs.7500 shares from the lien. Again when the said share price had fallen down, at the request of the Bank, the Borrower pledged 3500 more shares making the total to 6000 shares. It shows that, both the Borrower and the Bank, when it was required to maintain the ratio, either by reducing the number of shares or by increasing the number of shares, exercised their right to maintain the margin level.

¶176

Admittedly, the shares’ price started falling down from September, 2000; first letter from the Bank was given to Borrower, only on 24.01.2001 for reducing the loan limit or to provide the additional shares of security to cover up the shortfall. The Bank had not taken any step to maintain the

¶177

¶178

ratio from September, 2000 to 24.01.2001. Bank claimed that it is the Borrower to take step to reduce the loan limit or offer the additional shares, as security to cover the shortfall. DW1 state that, he met the Bank Manager in this connection to sell the shares. There is no direct evidence available in proof of this claim.

¶179

It is a peculiar case of pledge. Unlike in other cases, where the movables such as jewellery and other movables are pledged for getting the loan, here the shares are pledged for getting the loan. The gold price would go up and come down, but the fluctuations are steady. There is no occasion that the gold price fall down to a ‘zero’ value, whereas, fluctuations of share price in the market are volatile and vaporescent. The price goes up like a rocket one day and nosedives on other day. That is the reason why, based on the circulars and guidelines issued by the RBI and Respondent Bank, the conditions are incorporated in the Sanction Letter that the Bank should have a continuous monitoring of the share price to ensure that the margin is

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maintained either by limiting the loan amount or by providing additional shares securing to cover the shortfall. This has not happened in this case, due to inaction of the Bank in selling the shares at right and appropriate time.

¶182

The value of one share of SSI Limited as on 04.09.2000 was Rs.2975.35p and the value of 6000 shares was Rs1,78,52,100/-. On 29^th of September, 2000, the value of one share was Rs.2412.65p and the value of 6000 was Rs.1,44,75,900/-. On 31^st of October, 2000, the value of one share was Rs.2111.60p and the value of 6000 shares was Rs.1,26,69,600/-. On 30^th of November, 2000, the value of one share was Rs.1639.30p and the value of 6000 shares was Rs.98,35,800/-. On 29^th December, 2000, the value of one share was Rs.1432.90p and the value of 6000 share were Rs.85,97,400/-. On 21^st of February, 2001, the value of one share was Rs.1370.45 and the value of 6000 shares was Rs.82,22,700/-. On 22^nd February, 2001, the value of one share was Rs.1343.30p and the value of 6000 shares was Rs.80,59,800/-. When the Notice was issued on

¶183

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24.01.2001, the value of one share was Rs.1480.10p and the value of 6000 shares was Rs.88,80,600/-. On 02.04.2001, the value of one share was Rs.622.45p and the value of 6000 shares was Rs.37,34,700/-.

¶185

Ld. Counsel for the Appellants relied on the judgement reported in (2022) 9 Supreme Court Cases 704 in PTC India Financial Services Limited Vs. Venkateswarlu Kari and

¶186

Another, with regard to Pawnee’s rights / remedies / obligations in case of pawnor’s default in payment of debt and defaulting pawnor’s right to redeem.

¶187

The primary legal issue considered in this case is whether the Depositories Act, 1996 read with Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 1996 has the legal effect of overwriting the provisions relating to the contracts of pledge under the Contract Act, 1872 and the common law as applicable in India.

¶188

PTC India Financial Services Limited, referred as “PIFSL” is an existing company under the Companies Act, 2013. It is a wholly-owned subsidiary of PTC India Ltd., which was promoted by NTPC Ltd., Power Finance Corporation Ltd., NHPC Ltd., and Power Grid Corporation of India Ltd. PIFSL is registered with Reserve Bank of India as a non-banking finance

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company and classified as infrastructure finance company. The principal business of PIFSL is immersed in power and energy sector projects in India.

¶191

PIFSL, by way of a bridge loan agreement dated 10.03.2014 had advanced a loan of Rs.125 crores to NSL, Nagapatnam Power and Infratech Ltd., referred as “NNPIL” or “Corporate Debtor”. As per the Clause 3.1.1 of the bridge loan agreement, the loan is required to be secured. In accordance with sub-clause (6) of Clause 3.1.1, on 10.03.2014 thereof, the second respondent, Mandava Holdings Private Limited, referred as “MHPL” executed a Pledge Deed in favour of PIFSL, thereby, pledging 31,80,678 shares, equivalent to 26% of the shares of NSL Energy Ventures Private Limited, referred as “NEVPL”.

¶192

On 17.11.2017, the Corporate Debtor filed a petition invoking Section 10 of the Insolvency and Bankruptcy Code, 2016 before the National Company Law Tribunal, Hyderabad, by initiating the Corporate Insolvency Resolution Process. On 28.12.2017, PIFSL issued a notice under the Pledge Deed apprising MHPL on the defaults on the part of Corporate Debtor and that if the debt due was not discharged within 7 days, PIFSL would exercise the rights in terms of the Pledge Deed. Acting on the request, the Depository Participant has accorded PIFSL the status of ‘Beneficial Owner’ of 31,80,678 pledged shares of NEVPL.

¶193

On 23.01.2018, PIFSL wrote to MHPL informing that due to continued defaults in payment on the part of the Corporate Debtor, it had exercised the right under Clause 6.1, while reserving its right to sell the shares under Clause 6.2 of the Pledge Deed read with

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Section 176 of the Contract Act. On 17.01.2018, PIFSL filed an application before the Adjudicating Authority under Sec. 7 of the IBC as a financial creditor to whom Rs. 167,29,23,507/- was due and payable by the Corporate Debtor. On 30.01.2018 the Adjudicating Authority allowed PIFSL to withdraw the application with liberty to file proof of financial claim before the Insolvency Resolution Professional in Form C. On 06.02.2018, MHPL made a claim before IRP, inter alia, stating that PIFSL having been conferred status of ‘Beneficial Owner’, MHPL no longer has any title or right over 31,80,678 shares. Accordingly, MHPL had stepped into the shoes of PIFSL as a creditor of the Corporate Debtor to the extent of the value of 31,80,678 shares of NEVPL now owned by PIFSL.

¶196

On 10.02.2018, PIFSL submitted Form C with a financial claim of Rs.169,19,17,637/-, being the amount due and payable to PIFSL by the Corporate Debtor as of 18.01.2018, the date on which the Adjudicating Authority admitted the Sec.10 application of the Corporate Debtor. The value of 31,80,678 pledged shares was not accounted for or reduced. On 19.2.2018, the IRP, by two separate emails informed that MHPL’s claim could not be crystallized as it was not possible to ascertain the value of 31,80,678 shares transferred to PIFSL. Similarly, the PIFSL’s claim cannot be crystallized due to the settlement in whole/part of its claim and the need to arrive at the valuation at the time of transfer of shares to PIFSL. PIFSL and MHPL preferred separate applications before the Adjudicating Authority against the rejections of their claims.

¶197

By a common order dated 06.07.2018, the Adjudicating Authority disposed of the applications filed by PIFSL and MHPL, accepting the MHPL’s claim by primarily relying on the Depositories Act and

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Regulation 58 of the 1996 Regulations. The Adjudicating Authority agreed with the MHPL that PIFSL having exercised its right under the Pledge Deed to transfer 31,80,678 pledged shares, MHPL’s shareholding in NEVPL got reduced by 31,80,678 shares. Therefore, MHPL is a financial creditor of the Corporate Debtor to the extent of the value of 31,80,678 shares. Further, 16.01.2018, the date on which the pledge was invoked by PIFSL, is the crucial date for determining the extent to which PIFSL and MHPL are the financial creditors of the Corporate Debtor. IRP was directed to appoint an independent valuer to assess the fair market value of 31,80,678 shares of NEVPL as on 16.01.2018.

¶200

PIFSL challenged the orders before the National Company Law Appellate Tribunal, New Delhi, where the appeals were dismissed vide the impugned judgment dated 20.06.2019. The Appellate Authority held that PIFSL had exercised its rights under Clause 6.1 of the Pledge Deed on 16.01.2018 and consequently the pledged shares stood transferred in the name of PIFSL. The fact that PIFSL had not thereafter sold the shares under Clause 6.2 of the pledge deed would not matter. As PIFSL had become the 100% owner of the pledged shares, it could realize its dues in whole or part by sale and transfer of the shares according to the law. Once PIFSL has exercised right to become the owner of the shares, PIFSL cannot take advantage of Section 176 of the Contract Act to reclaim the debt. Section 176 of the Contract Act cannot be taken into consideration by the IRP for collating the financial claim of PIFSL under Section 18, IBC.

¶201

Other aspects which require to be noted are: (a) as per PIFSL, the principal and interest amount due to them by the Corporate Debtor as of 23.12.2021 are

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Rs.3,76,13,03,389/-; (b) the shares of NEVPL are unlisted, and there are no open market transactions, and (c) the value of the pledged shares is disputed. On 13.08.2018, IRP has submitted a valuation report of an independent valuer who has valued the pledged shares at Rs.179 crores as of 16.01.2018. MHPL relies on the 2013 valuation report of Axis Capital and the annual report of MHPL for the financial year 201213. As per the annual report relied on by MHPL, shares of NEVPL as of 31.03.2013 were valued at Rs.1229.66 crores. Accordingly, MHPL claims that the fair value of each of the 1,22,33,378 shares of NEVPL (100% of the total equity shares – all held by MHPL) was Rs.1,005.17p per share. Therefore, the total value of the 31,80,678 pledged shares was equivalent to Rs. 319 crores at the time of the creation of the pledge. On the other hand, PIFSL claims that the actual value per share of NEVPL, as calculated on 31.03.2016, is only Rs. 58.97. Thus, the total value of pledged shares comes to only Rs.18,75,64,582/-.

¶204

After analysing the law of pledge, the Indian Contract Act, 1872 and the Depositories Act, 1996, it was held that

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i. In the judgement of Lallan Prasad v. Rahmat Ali, reported in AIR 1967 SCC 1322, in case of default by the pawnor, the pawnee has the right under Section 176 of the Indian Contract Act,:

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a. The right to sue upon the debt and to retain the goods as collateral security;

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b. To sell the goods after reasonable notice of the intended sale to the pawner.

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This proposition was reiterated in the case of Balkrishan Gupta Vs. Swadeshi Polytex Ltd. , reported in (1985) SCC 167; Several High Courts in the case of F. Nanak Chand Vs. Lal Chand, reported in 1958 SCC OnLine Punj 6; Bank of Maharashtra Vs. Racmann Auto (P) Ltd., reported in 1991 SCC OnLine Del 232 and Rani Leasing and Finance Ltd. Vs. Sanjay Khemani, reported in 2015 SCC OnLine Cal 450, have held that while the pawnee has a right to sell the good after giving notice to the pawnor, he is not bound to sell at any particular time. The power of sale conferred on the pawnee is expressly for his benefit, and it is his sole discretion to exercise the power of sale or otherwise. If the pawnee does not exercise that discretion, no blame can be put on him. Even where the value of the goods deteriorates due to time, no relief can be granted to the pawnor against the pawnee as the pawnor is legally bound to clear the debt and obtain possession of the pawned goods. In Vimal Chandra Grover v Bank of India, reported in (2000) 5 SCC 122, it was held that “the bank as the pawnee was liable for negligence as it did not sell the pledged goods, after having agreed to do so.”

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ii. Section 176 of the Contract Act requires that the pawnee may sell the thing pledged on giving the pawnor reasonable notice of the sale. It does not prescribe any fixed form of notice or specify any fixed period of notice. The object and purpose of giving notice is to make the pawnor know about the pawnee’s intent to sell the pawn and give him an opportunity to exercise his statutory right of redemption, which as per Section 177 can be exercised till the date of ‘actual sale’. Whether or not a notice was given and the period of notice was reasonable would depend upon the facts of the case.

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In view of the above discussion, the pawnor can communicate his willingness and desire to the pawnee that the pledged goods may be sold. In case any such request is made, a pawnee may well act upon the request without violating Section 176 of the Contract Act. However, a pawnee, unless he also agrees, cannot be compelled by the pawnor to sell the pledged goods.

¶213

iii. In the context of present case, the contract of pledge envisages that PIFSL is entitled to get itself recorded as ‘beneficial owner’ without forfeiting its right in terms of Clause 6.2 to sell the shares. The contention of MHPL that Clauses 6.1 and 6.2 are in the alternative and once PIFSL has exercised option under Clause 6.1, the option under Clause 6.2 is closed must be rejected as absolutely untenable.

¶214

iv. Clauses 6.1 and 6.2 draw a clear distinction between a mere transfer of the pledged shares in the name of the pawnee or its nominee as a ‘beneficial owner’ and the ‘actual sale’ of the pledged shares. The right to sell is without prejudice to any other right under the applicable law. Thus, there are two stages before the pledge can be enforced by a sale. At the first stage, the pawnee must give notice to the pawnor under Clause 6.1 to exercise the rights to have the pledge shares transferred in its name or its nominees. This does not result in the discharge of the debt equal to the value of the shares. The discharge of debt in whole or part occurs when the pawnee exercises his right to sell the shares after giving five days’ notice to the pawnor in accordance with Clause 6.2 and sells the pawn. Upon the actual sale, the pawnee can apply the net proceeds of the sale or disposition in accordance with Clause 11 of the Pledge Deed.

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v. We would, without hesitation, therefore hold that on becoming the ‘beneficial owner’ in the records of the ‘depository’, the pawnee had complied with the procedural requirement of Regulation 58(8) to enforce the right to sell the shares. Thereafter, such a sale should be made according to Sections 176 and 177 of the Contract Act. Violation of the said provisions, if made by PIFSL, would have its consequences as per the law. Pawn has not been sold and there is no violation of the contract for that matters, the Depositories Act and the 1996 Regulations. PIFSL has not overlooked its obligations under Sections 176 and 177 of the Contract Act by relying upon sub-regulation (8) to Regulation 58, which has an entirely different object and purpose. Recording change in the register of the ‘depository’, whereby PIFSL as the pawnee has become the ‘beneficial owner’, is only to enable the pawnee to sell and transfer the shares in accordance with the Depositories Act and the 1996 Regulations. The object and purpose of sub-regulation (8) to Regulation 58 is not to nullify the obligation of MHPL i.e., the pawnor, and PIFSL i.e., the pawnee, under the Contract Act but to enable PIFSL to exercise its rights under Section 176. It also follows that MHPL is entitled to redeem the pledge before the sale to a third party is made.

¶217

vi. In view of the aforesaid findings, it has to be held that registration of the pawn, that is the dematerialised shares, in favour of PIFSL as the ‘beneficial owner’ does not have the effect of sale of shares by the pawnee. The pledge has not been discharged or satisfied either in full or in part. PIFSL is not required to account for any sale proceeds which are to be applied to the debt on the ‘actual sale’. The two options available to PIFSL as the pawnee under Section 176 of the Contract Act remain and are not exhausted.

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vii. Conclusion - For the aforesaid reasons, the present appeal must be allowed and the impugned order passed by the Appellate Authority dated 20th June 2019 upholding the orders of the Adjudicating Authority dated 6th July 2018 and the emails of the IRP dated 19th February 2018 are set aside. It is held that MHPL is not a secured creditor of the Corporate Debtor, namely NNPIL, to the extent of the value of the 31,80,678 shares. PIFSL has rightly made a claim as financial creditor of the Corporate Debtor without accounting for the value of 31,80,678 shares of NEVPL in its claim petition. Insolvency proceedings against the Corporate Debtor, namely NNPIL, will proceed accordingly.

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From the observations made above, the following proposition is clear:

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i. The pawnee may bring a suit against the

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pawnor upon the debt or promise, and retain the goods pledged as a collateral security, or pawnee may sell the thing pledged, on giving the pawnor reasonable notice of the sale;

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ii. The pawnee is not bound to sell at any particular time, but the pawnor is legally bound to clear the debt and obtain possession of the

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pawned goods. In the event of pawnee deciding to sell the shares, a reasonable notice should be given to pawnor to facilitate for redemption of the pledge of goods.

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iii. Unless agreed by the pawnee, the pawnor cannot compel to sell the pledged goods.

¶227

Here in this case, after the Respondent Bank informs the pawnor as well as the borrowers about reduction of sale price and make good the deficiency in margin, the pawnor has not immediately responded. Only after receipt of two communications from the Bank on 23.02.2001 and on 17.03.2001, the pawnor responded by reply dated 04.04.2001 stating that it is the Bank’s fault in not selling the shares for realizing the loan amount and borrowers cannot be made liable for the loan payment. By the time this reply was sent, the price of shares came down to rock bottom level.

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Learned Counsel for Appellant relied on the judgement of Mahrashtra State Electricity Distribution Company Ltd. Vs. M/S. Datar Switchgear Limited & Ors., reported in (2018) 3 SCC 133, for the proposition that once it is established that party was justified in terminating the contract on account of fundamental breach, the said party is entitled for entire contract i.e. for the part which performed and also for the part of the contract which was prevented from performance. It is observed in para 67 of the judgement as follows:

¶230

“67. In the aforesaid backdrop, we agree with the approach of the High Court in spelling out the proposition of law that once it is established that the party was justified in terminating the contract on account of fundamental breach thereof, then the said innocent party is entitled to claim damages for the entire contract, i.e. for the part which is performed and also for the part of the contract which it was prevented from performing. We may usefully refer to the following dicta laid down in Suisse Atlantique Societe d'Armament SA v. NV Rotterdamsche Kolen Centrale:

¶231

“...if facts of that kind could be proved I think it would be open to the arbitrators to find that the respondents had committed a fundamental or repudiatory breach. One way of looking at the matter would be to ask whether the party in breach has by his

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breach produced a situation fundamentally different from anything which the partiescould as reasonable men have contemplated when the contract was made. Then one would have to ask not only what had already 9 1966 A.C. 361 (pages 397-398) happened but also what was likely to happen in future. And there the fact that the breach was deliberate might be of great importance.

¶234

If fundamental breach is established the next question is what effect, if any, that has on the applicability of other terms of the contract. This question has often arisen with regard to clauses excluding liability, in whole or in part, of the party in breach. I do not think that there is generally much difficulty where the innocent party has elected to treat the breach as a repudiation, bring the contract to an end and sue for damages. Then the whole contract has ceased to exist, including the exclusion clause, and I do not see how that clause can then be used to exclude an action for loss which will be suffered by the innocent party after it has ceased to exist, such as loss of the profit which would have accrued if the contract had run its full term... (emphasis supplied)”.

¶235

Relying on this judgement, Learned Counsel for Appellants submitted that by not selling the shares at appropriate time,

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the Respondent Bank has committed breach of contract that resulted in non-recovery of the loan amount and also loss to the Appellant. Thus, he submitted that the Appellants are

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not entitled for paying the amount and entitled for Counter Claim as claimed in OA.

¶239

It is pertinent to refer to the relevant portions of the evidence of AW1 and DW1 for the better appreciation of evidence produced in this case. AW1, in his Proof Affidavit stated that upto November, 2000, there were ups and down in the price of shares. In December, 2000, the price further went down and in the first week of January, 2001, the price went down further. In the 3^rd week of January, 2001, there was rise in the price. The margin maintained by Defendants was lowered and value of the security became much less than the loan amount outstanding. Therefore, the Bank informed the Defendants about the margin stipulations of the pledged shares and advised the Defendants either to bring down the balance amount or to bring in additional security. On 24.01.2001, Bank has sent a letter to the Defendants on these lines.

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During the course of cross examination, when he was asked about the oral request made by the Defendant, he replied that, on 13.01.2001, various options were examined in the light of the fluctuations in the value of the shares and the discussion centered around the dilution of margin requirement and the need to maintain the margin as per the terms of sanction. From September, 2000 onwards, there were deviations in the margin requirements. The Bank is not bound by the oral requests, if any, made by the Defendants. He joined the Branch only in December, 2000 and it took some time for him to familiarise with this account and start monitoring the share price movement, however, monitoring of shares was started prior to 13.01.2001. When asked, if there is any specific number of notices required to be sent to the borrowers prior to invoking the lien, he answered that only after exhausting all other avenues for amicable recovery of dues, if the Bank decides to invoke pledge, it takes action. He cannot recollect the date or the month for seeking consent from the Regional Manager for invoking the lien. He

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did not require any consent from the owners of the share for

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the sale of shares. The guidelines and circular No. 126/1999 require that the Bank has to exhaust all other avenues for amicable recovery of dues and there is no time period fixed for enforcing the guidelines. He did not file any document to show that the permission was sought from the Regional Office for the sale of the shares. He admitted that during the entire period till 28.02.2001, the Bank could have sold the shares and would have been in a position to recover the entire amount or a substantial portion of it. The decision not to sell the shares was a conscious decision made by him to comply with the guidelines. He admitted that the owners of the shares would not unilaterally sell the shares when the

¶245

Bank’s lien is marked.

¶246

This part of his evidence clearly shows that though the price of shares was falling, the Bank has not taken any steps for selling the shares for finding out the other modalities for recovery of loans as per the guidelines referred to above. He has also not produced any evidence seeking permission from

¶247

the Regional Manager for sale of the shares. If there is no

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need to get consent of the owners of shares for the sale of the shares, the Bank could have exercised the option of right to sell the shares and could have recovered the entire dues or substantial amount on before 28.02.2001.

¶250

DW1, during the course of his cross examination admitted that a common security of pledge of shares in demat format with lien marked was created in favour of the Bank and he is the beneficiary of all the four loans. He further admitted that originally, 10,000 shares were pledged in December, 1999 and 7,500 shares were released in April,

¶251

2000, due to substantial increase in the price of the share. Depending upon the margin stipulation, the shares are to be increased or reduced to keep the margin. When the Bank increased the margin from 25% to 50%, an additional 3,500 shares were marked in favour favour of the Bank, in May 2000. The release of shares or pledge of additional shares had happened on the discussion between the Bank and himself. When he was asked as to whether the release of

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7,500 shares and pledge of additional 3,500 shares had

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happened on oral transactions, he replied stating the “he thinks so. Possibly he could have given letter for seeking the release.”

¶255

He stated that at the breach of margin, the Bank has to give notice to him and if there is no response from him, the shares ought to have been sold. The notice was issued to him only when the value of the security was below the loan outstanding. He received the first notice on 01.02.2001 from the Bank. He admitted that there was no correspondence between him and the Bank in September, 2000 and January, 2001. He pointed out at least on three occasions, the nonutilisation of security. On 13.01.2001, he had deliberations with Bank officials with regard to non- utilisation of security. When the Bank wanted his residential property to be offered as security, he refused the request and informed the Bank that he will not be responsible for the non-sale of shares. He cannot ratify the Banker’s negligence. The Bank’s Exhibits A24 and A25 letters dated 24.01.2001 and 23.02.2001

¶256

respectively, requesting the borrowers to bring down the

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outstanding levels in the OD limits, so as to comply with the stipulated margin or in alternative to offer additional shares of requisite value to maintain prescribed margin were received.

¶259

He responded to these letters through his reply dated 04.04.2001. In the said reply, he informed his inability to provide additional shares to meet the shortfall in margin requirements. Thus, he reiterated that the Bank is solely responsible for probable loss and shortfall, if any, on account of non-sale of shares. The borrower is not responsible for any loss or shortfall. However, there was no mention in his reply dated 04.04.2001 that he had pointed out to the Bank officials on 13.01.2001 or prior to that i.e. on 25/26^th of December, 2000 or on 01.01.2001 about the non utilisation

¶260

of security for sale to recover the outstanding amount.

¶261

He admitted that there was a meeting on 13.01.2001 in Regional Office at his instance. The purpose of the meeting

¶262

was with regard to non utilisation of security as per the

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terms of sanction. When asked whether he could have informed by sending a letter; he replied that he could have sent a letter, but considering the long relationship with Bank, he had chosen to speak personally. When a suggestion was put to him that considering the long relationship with the Bank, he wanted the Bank not to sell the shares, in a volatile market conditions and that was the purpose of meeting, he denied this suggestion.

¶265

He stated that it is the responsibility of the Bank to monitor the margin level. When he was asked about the responsibility of the borrower in respect of margin stipulations, he answered that when there was breach of margin below the agreed level, the borrower will respond to the notice received from the Bank, to exercise the option of either reducing the liability or improving the assets to satisfy the margin requirements.

¶266

When asked about the decision of borrower to make good the breach of margin either by reducing the liability or

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improving the asset, he answered that the borrower has either of the option, but if he does not exercise the option, it is the responsibility of the Bank to sell the share and recover the loan as per the terms of the sanction.

¶269

From his evidence, though it is claimed that he met the Bank’s official Mr. T. P. Joy and Mr. Haripraksh Shetty on 26.12.2000; Mr. T. P. Joy, on 01.01.2001 and Mr. T.P Joy and Mr. Hariprakash Shetty on 13.01.2001, all these meetings alleged by him is totally denied by the Bank. The Appellant has not produced any evidence in support of these meetings that said to have taken place. Of course, there is an admission of meeting held on 13.01.2001, however, the purpose of this meeting convened; according to the Appellant was with regard to non-utilisation of security, and according to the Bank, with regard to the request made by DW1 not to sell the shares in the volatile market condition. As already stated, there is no mention about the aforesaid meetings in DW1’s reply dated 04.04.2001. The evidence produced by

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both the sides, and as candidly admitted by DW1, initially

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¶272

10,000 shares were pledged, and then, 7,500 shares were released, when the share price has gone up, and due to increase in margin level, additional 3500 shares were pledged to maintain the margin level, making it to 6000 shares. As seen from the evidence of DW1, this increase or reduction of pledge of shares could have happened by mutual request. Most probably the reduction would have happened on the request made by him. This evidence clearly indicate that depending upon the increase or reduction in share price, either the shares have been released or additional shares have been pledged, to maintain the requisite margin level.

¶273

When this is the scenario, it is not known, as to why the Bank had taken time till 24.01.2001, when the share price was falling down from September, 2000, in requesting the borrower either to bring down the outstanding level or offer the additional securities to maintain the requisite margin. A similar letter was sent to the borrowers on 23.02.2001. The borrowers had not immediately responded

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to this letter. Only on 04.04.2001, a reply was sent by DW1 explaining his inability to provide additional shares to meet the shortfall in margin requirements. He held the Bank was solely responsible for the shortfall on account of its lapse in not selling the shares at appropriate time. When the reply was sent on 04.04.2001, the price of one share stood as Rs.622.45 p as on 02.04.2001. The value of 6000 shares was Rs.37,34,700/-. At least from January, 2001, the Bank had taken steps for reducing the OD limits to maintain stipulated margin or by getting the additional shares of requisite value through Exhibits A24 and A25 letters. As found earlier, the borrower had not sent an immediate reply and had sent reply only on 04.04.2001, refusing the request of the Bank.

¶276

As seen from the judgement relied on by the Appellants and extracted above, the first option available to the Bank, in case of default, is to file a Suit for recovery of the amount or to sell the goods on giving the borrower reasonable notice of the sale. It was also made clear that unless agreed by the

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Bank, the borrower cannot compel the Bank to sell the pledged goods. Had the borrower immediately responded to the Exhibit A24 letter, then the Bank would have been held responsible for not selling the shares, for realising the loan amount. Probably the Bank would have sold the shares in January, 2001 itself. The delay in sending the reply by the borrower had resulted in further reduction in share price. Of course, there is a lapse on the part of the Bank officials as well, in not taking timely action. Both were at fault i.e., the borrowers in not sending immediate reply to Exhibit A24 letter instructing the Bank to sell the shares and the Bank in not selling the shares, when there was no immediate response from the borrowers or at least after receiving the reply dated 04.04.2001. The price of shares started falling from September, 2000, as indicated in the inspection report of RBI officials. The lapse on the part of the Bank, in not selling the shares, cannot be the sole criterion for exonerating the Appellants. The Bank has to explore other options, before resorting to sale of the shares. The Appellants were very prompt, when the share price was on

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the raise, to ensure that security interest created in respect of 10,000 shares were reduced to 2500 shares by releasing 7500 shares. When the share price started falling from September, 2000, it appears that, the borrowers had not taken any steps to bring it to the notice of the Bank to sell the shares or offer additional security, to meet the shortfall and to maintain the margin level, by written communication.

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At the risk of repetition, it is stated that, first reply to Exhibits A24 and A25 letters was sent by Appellants only on 04.04.2001. Increase and decrease of shares to meet the margin level had happened on the basis of mutual discussions held between the Bank and the borrower. The meeting dated 13.01.2001 could have also happened at the instance of the borrowers with a request to the Bank not to sell the shares due to volatile market condition. The reason to arrive at this conclusion is based on the contents of the reply dated 04.04.2001, wherein no indication was given with regard to the alleged discussion DW1 had with Bank officials about their failure in non-utilising the security i.e.

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the non-sale of the shares. Probably, the Bank had acted on the request of the borrower in not selling the shares in the volatile market condition. However, the Bank cannot avoid selling the shares, once the intent of the borrower was made clear through letter dated 04.04.2001, that is, accusing the Bank for its negligence and omission in not selling the shares for realising the loan amount. If the borrowers had informed the Bank to sell the shares, when the share price was falling from September, 2000, at the earliest opportunity, their entire loan would have been wiped out and the Appellants would have also realised some amount. That had not happened primarily because of the inaction on the part of the Appellants/borrowers.

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In case of pledge of goods, the first option available to the pawnee is to file a Suit for recovery of the amount due and the next option is to sell the goods, subject to giving reasonable notice of sale to the pawnor. This can be applied strictly to other goods pledged, but not in case of shares. Share price will not remain constant. It fluctuates every day.

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Now it is informed that the shares pledged had no value at all. Both the Bank and borrower are responsible for this situation. Had the 6000 shares been sold immediately on receipt of DW1’s reply, the Bank would have recovered a sum of Rs.37,34,700/-. Non selling of the shares even after the clear indication by the borrower through reply dated 04.04.2001, that the borrowers are not responsible for any loss or shortfall of margin on account of non selling of shares, shows a gross negligence on the part of the Bank in its effort to recover the loan outstanding. Similarly, by not intimating the Bank at the earliest point of time from September, 2000, to sell the shares, the borrowers have lost their right to claim any money on the basis of their pledged shares.

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In the peculiar facts and circumstances of the case, and o n a overall consideration of contentions and rival contentions of both parties, and in view of my observations made above, I am of the considered view that the Bank is entitled to recover the amount claimed, after deducting

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Rs.37,34,700/- in proportion to the amounts claimed in the respective OAs, with interest at 10% p.a. (simple) from the date of filing of the OA till the date of order, and thereafter, at 6% p.a. (simple) from the date of order till the date of realisation of the amount. Further, in view of failure on the part of the Appellants in informing the Bank to sell the shares at right moment, the Appellants are not entitled for Counter Claim as prayed for.

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In the result the following order is passed:

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i. The Appeals in R.A : 18/2021, R.A : 28/2021, R.A : 29/2021 and R.A : 30/2021 are partly allowed modifying the Common Order dated 19.03.2010 passed by Learned Presiding Officer, DRT-I, Chennai;

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ii. The Bank is entitled to recover the amount claimed in the OAs after deducting a sum of Rs.37,34,700/-, in proportion to the amounts claimed in respective OAs, i.e., after deducting Rs.7,88,498/- from OA

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182/2006; Rs.9,83,391/from OA 183/2006;

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Rs.9,82,156/- from OA 185/2006 and Rs.9,80,655/from OA 186/2006, with interest at 10% p.a. (simple) from the date of filing of the OA till the date of order, and thereafter, at 6% p.a. (simple) from the date of order till the date of realisation of the amount.

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iii. The Appellants are not entitled for any Counter Claim.

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iv. Tribunal below shall issue modified Recovery Certificates, in terms of above.

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Accordingly, the Appeals are disposed of. Both parties shall bear their own costs. All pending IAs, if any, stand closed.

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[Dictated to Athistamani, PS, in open court, transcribed by her, corrected and signed by me this 17th of January, 2025]

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[ Justice G. Chandrasekharan] CHAIRPERSON

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