HC reiterates Pawnor does become liable to pawnee for anything more than the value of the goods pledged

  

On 20^th July, a bench of Delhi High Court consisting of Justices Ravi Sahai Endlaw and Asha Menon, held that under Section 176 of the Contract Act, the pawnor, if not otherwise liable for the debt as a borrower or as a guarantor or otherwise, does not merely from the act of making a pledge, become liable to the creditor/pawnee, for anything more than the value of the goods pledged. Further, on literal interpretation of Section 176 also, the court was unable to hold it to be making a pawnor liable for more than the value of the pawned goods.

Facts of the case:

The legal question arising for consideration, in the present writ petition under Article 226 of the Constitution of India, is, whether by virtue of Section 176 of the Indian Contract Act, 1872 the pawnor, even if different from borrower or the principal debtor, becomes liable for payment of entire debt, even if has not furnished any guarantee for repayment of the entire debt i.e. over and above the value of the pawned goods. The aforesaid legal question has arisen in the following facts and circumstances:

The respondent no.1, Barclays Bank,  on the request of the petitioner and the respondent no.2 Company, had sanctioned credit facilities aggregating Rs.15,00,00,000/-, in favour of the respondent no.2 Company and the petitioner had agreed to pledge 2,00,000 shares held by him in the respondent no.2 Company as a collateral security for repayment of the said credit facilities to be granted by the respondent no.1 Bank to the respondent no.2 Company. The respondent no.2 Company did not adhere to the financial discipline and committed a breach of conditions agreed with the respondent no.1 Bank. Thereafter the respondent no.1 Bank, vide its letter dated 23rd March, 2010 called upon the respondent no.2 Company to repay the outstanding dues of Rs.9,44,58,836/- along with future interest, and informed the respondent no.2 Company that upon failure of the respondent no.2 Company, the respondent no.1 Bank would be constrained to sell the pledged shares and appropriate the sale proceeds thereof towards its dues; (x) however the pledged shares could not be sold, as the shares of the respondent no.2 Company were delisted from the Bombay Stock Exchange/National Stock Exchange.  Hence, the present suit was filed.

Contention of the petitioner:

 

The following contention has been submitted on behalf of the respondent:

1. It was pleaded that notice/summons of the aforesaid OA No.60/2011 filed by the respondent no.1 Bank before the Debt Recovery Tribunal (DRT) was not served on the petitioner.
2. It was submitted that the respondent no.2 Company also failing to appear before the DRT, both, the respondent no.2 Company and the petitioner were proceeded against ex parte, and the DRT directed the respondent no.2 Company and the petitioner, to pay to the respondent no.1 Bank, the amount aforesaid of Rs.11,14,85,036.86/- with pendente lite and future interest and costs, within two months.
3. It was further submitted that the petitioner, vide his letter dated 27th July, 2010 informed the respondent no.1 Bank that he had resigned as Managing Director of the respondent no.2 Company.
4. It was also argued that neither the documents executed at the time when the respondent no.1 Bank granted the credit facilities nor the pleadings or evidence of the respondent no.1 Bank before the DRT, reflect the petitioner to be the borrower/debtor of the respondent no.1 Bank.
5. It was also contended that the petitioner, in his personal capacity, only executed a Share Pledge Agreement, as pledgor and was liable to pay only in default of the respondent no.. 2 company.

Contention of the Respondent:

The counsel for the respondent no.1 Bank had argued on the following ground:

 

1. It was pleaded that notice/summons of the aforesaid OA No.60/2011 filed by the respondent no.1 Bank before the Debt Recovery Tribunal (DRT) was not served on the petitioner.
2. It was submitted that the respondent no.2 Company also failing to appear before the DRT, both, the respondent no.2 Company and the petitioner were proceeded against ex parte, and the DRT directed the respondent no.2 Company and the petitioner, to pay to the respondent no.1 Bank, the amount aforesaid of Rs.11,14,85,036.86/- with pendente lite and future interest and costs, within two months.
3. It was further submitted that the petitioner, vide his letter dated 27th July, 2010 informed the respondent no.1 Bank that he had resigned as Managing Director of the respondent no.2 Company.
4. It was also argued that neither the documents executed at the time when the respondent no.1 Bank granted the credit facilities nor the pleadings or evidence of the respondent no.1 Bank before the DRT, reflect the petitioner to be the borrower/debtor of the respondent no.1 Bank.
5. It was also contended that the petitioner, in his personal capacity, only executed a Share Pledge Agreement, as pledgor and was liable to pay only in default of the respondent no.. 2 company.

Contention of the Respondent:

The counsel for the respondent no.1 Bank had argued on the following ground:

1. It was submitted that the said admission of the petitioner read with Clause 2.1 aforesaid of the Share Pledge Agreement contains an agreement of the petitioner to be liable jointly and severally with the respondent no.2 Company for the dues of the respondent no.1 Bank.
2. It was contended that the additional affidavit filed by the petitioner has shied away from disclosing all the said particulars and the writ petition is liable to be dismissed on this ground as well.
3. It was argued that the petitioner, in his letter dated 27th July, 2010 only claimed to have resigned from the Managing Directorship of the respondent no.2 Company but did not plead that he was not liable for the dues.
4. It was also submitted that the petitioner is guilty of delay and laches at each and every stage as the preferred Review Application as well as appeal before the DRAT and even this writ petition has been filed after long delay from the impugned order of the DRAT.

Observation of the court:

The Hon’ble bench of the High Court observed the following:

1. The parties expressly agreed that in the event of any default by the borrower, the respondent no.1 Bank would be entitled to transfer or register in its name the pledged shares and to receive all amounts payable. However, there is no clause, that on any default or breach by the respondent no.2 Company as borrower, the petitioner would become personally liable for the borrowings of the respondent no.2 Company.
2. The court was unable to agree with the contention of the counsel for the respondent no.1 Bank, that the petitioner admitted his liability before the Recovery Officer.
3. The court was of the view that the respondent no.1 Bank was fishing for material, to fasten liability on the petitioner.

In the circumstances aforesaid, need was not felt by the court to go into the question of applicability of the provisions of the Contract Act to pledge of shares in DEMAT form. The court therefore held that the DRT, while pronouncing the ex parte order dated 29th August, 2013, had nothing before it to fasten liability of the dues of the respondent no.1 Bank on the petitioner.

 Read Judgment ;

 

 

 

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(With input from news agency language)

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