PTC INDIA FINANCIAL SERVICES LIMITED v. VENKATESWARLU KARI & Anr.

Commissioner of Wealth Tax v. Mahadeo Jalan and Mahabir Prasad Jalan and Others Etc. (1973) 3 SCC 157 : [1973 ] 2 SCR 215; Bharat Hari Singhania and Others v. Commissioner of Wealth Tax (Central) and Others 1994 Supp. (3) SCC 46 : [1994] 1 SCR 1033; Md. Sultan and Others v. Firm of Rampratap Kannayalal, Hyderabad, by its partners AIR 1964 AP 201; Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (died) and others v. The Andhra Bank Ltd. Vijayawada and others AIR 1960 AP 273; Simla Banking and Industrial Co., Ltd., Simla (In Liquidation) v. Pritams AIR 1960 Punj 42; Arjun Prasad and others v. Central Bank of India, Ltd. 1954 SCC OnLine Pat 138; Lallan Prasad v. Rahmat Ali and Another AIR 1967 SC 1322 : [1967] 2 SCR 233; Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954 : [1965] 3 SCR 254; Bank of Bihar v. The State of Bihar and Others (1972) 3 SCC 196 : [1971 Suppl. SCR 299; Maharashtra State Cooperative Bank Limited v. Assistant Provident Fund Commissioner and Others (2009) 10 SCC 123 : [2009] 15 SCR 1; Karnataka Pawnbrokers’ Association and Others v. State of Karnataka and Others (1998) 7 SCC 707 : [1998] 2 Suppl. SCR 461; Standard Chartered Bank and Another v. Custodian and Another (2000) 6 SCC 427 : [2000] 3 SCR 81; Seth Motilal Hirabhai and Ors. v. Bai Mani 1924 SCC OnLine PC 81; M.R. Dhawan v. Madan Mohan and Others AIR 1969 Del 313; Balkrishan A B C D E F G H 1074 SUPREME COURT REPORTS [2022] 9 S.C.R. A B C D E F G H Gupta and Others v. Swadeshi Polytex Ltd. and Another (1985) 2 SCC 167 : [1985] 2 SCR 854; F. Nanak Chand Ramkishan Das of Hodel and Others v. Lal Chand and Others 1958 SCC OnLine Punj 6; Bank of Maharashtra v. M/s. Racmann Auto (P) Ltd. AIR 1991 Del 278; Rani Leasing & Finance Ltd. v. Sanjay Khemani 2015 SCC OnLine Cal 450; Hulas Kunwar v. Allahabad Bank Ltd. AIR 1958 Cal 644; Haridas Mundra v. National and Grind-Lays Bank Ltd. AIR 1963 Cal 132; Kunj Behari Lal v. The Bhargava Commercial Bank, Jubbulpore AIR 1918 All 363; Vimal Chandra Grover v Bank of India (2000) 5 SCC 122 : [2000] 3 SCR 587; The Official Assignee of Bombay v. Madholal Sindhu and Others AIR 1947 Bom 217; Wilson v. Mcintosh, 1894 A.C. P. 129; Corporation of the City of Tornoto v. John Russel, D. Jones & Smiths Reports 1908 Ac. 493; Selwyn v. Grafit 38 Ch. D.P. 273; Griffiths v. The Earl of Dudley 9, Q.B.D. P. 357; Vellayan Chettiar v. Government of the Province of Madras I.L.R. 1948 Mad. p. 214; Raja Chetty v. Jagannadhadas Govindas 1949 II M.L.J. P. 694; Soho Square Syndicate Ltd. v Poland & Co. 1940- 1 Ch 638 at p. C43; Krishna Bahadur v. Purna Theatre and Others (2004) 8 SCC 229 : [2004] 3 Suppl. SCR 833; The Co-Operative Hindusthan Bank, Ltd. v. Surendranath De 1931 SCC OnLine Cal 224; Park Street Properties Private Limited v. Dipak Kumar Singh and Another (2016) 9 SCC 268; Nabha Investment Pvt. Ltd. v. Harmishan Dass Lukhmi Dass 1995 SCC OnLine Del 239; Neikram Dobay v. Bank of Bengal ILR (1892) 19 Cal 322; Ramdeyal Prasad v. Sayed Hasan AIR 1944 Pat 135; S.L. Ramaswamy Chetty and Another v. M.S.A.P.L. Palaniappa Chettiar 1929 SCC OnLine Mad 62; Dhani Ram and Sons v. The Frontier Bank Ltd. and Another AIR 1962 P&H 321; Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. and Others (1987) 1 SCC 424 : [1987] 2 SCR 1; Vasudev Ramachandra Shelat v. Pranlal Jayanand Thakkar and Others (1974) 2 SCC 323 : [1975] 1 SCR 534; Kannambra Nayar Veetil Valia PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER 1075 Ammukutti Neithiar ’s Son Kunhunni Elaya Nayar Avargal (Deceased) and Another v. P.N. Krishna Pattar and Two Others AIR 1943 Mad 74; Pushpanjali Tie Up Pvt. Ltd. v. Renudevi Choudhary and Others 2014 SCC OnLine Bom 3661; Firm Thakur Das Marakhan Lal v. Mathura Prasad and Others AIR 1958 All. 66; Donald v. Suckling (1866) L.R. 1 Q.B. 585; GTL Limited v. IFCI Ltd. & Ors. 2011 SCC OnLine Del 3628; Liquid Holdings Private Limited v. The Securities Exchange Board of India (2011) SCC Online SAT 40 – referred to. JRY Investments Private Limited v. Deccan Leafine Services Ltd. and Others (2004) 121 Comp Cas 12 – partly overruled. Tendril Financial Services Pvt. Ltd. & Ors. v. Namedi Leasing & Finance Ltd. and Ors. 2018 SCC OnLine Del 8142 – disapproved. Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII P3 (1953), 10th Edition, Sweet & Maxwell, page 368 Case Law Reference [1973] 2 SCR 215 [1994] 1 SCR 1033 [1967] 2 SCR 233 [1965] 3 SCR 254 referred to referred to referred to referred to [1971] Suppl. SCR 299 referred to [2009] 15 SCR 1 referred to [1998] 2 Suppl. SCR 461 referred to [2000] 3 SCR 81 [1985] 2 SCR 854 [2000] 3 SCR 587 referred to referred to referred to Para 2.15 Para 2.15 Para 5.1 Para 5.1 Para 5.3 Para 5.4 Para 5.4 Para 6.1 Para 7.1 Para 7.5 [2004] 3 Suppl. SCR 833 referred to Para 7.10 A B C D E F G H 1076 SUPREME COURT REPORTS [2022] 9 S.C.R. A (2016) 9 SCC 268 [1987] 2 SCR 1 [1975] 1 SCR 534 referred to referred to referred to Para 7.10 Para 9.1 Para 9.1 CIVIL APPELLATE JURISDICTION : Civil Appeal No.5443 B of 2019. From the Judgment and Order dated 20.06.2019 of the National Company Law Appellate Tribunal, New Delhi in Company Appeal (AT) (Insolvency) No.450 of 2018. Maninder Singh, Sr. Adv., Sidharth Sethi, Ms. Pallavi Kumar, Advs. C for the Appellant. Sajan Poovayya, Sr. Adv., G. Ramakrishna Prasad, Byrapaneni, Suyodhan, Ms. Filza Moonis, K. Trinath, Pratibhanu S. K., John Mathew, Karthik S. D., Advs. for the Respondents. The Judgment of the Court was delivered by SANJIV KHANNA, J. The primary legal issue which arises for consideration in this appeal is whether the Depositories Act, 1996 read with the Regulation 58 of the Securities and Exchange Board of India (Depositories and Participants) Regulations, 19961 has the legal effect of overwriting the provisions relating to the contracts of pledge under the Indian Contract Act, 18722 and the common law as applicable in India. To facilitate analysis, this judgment has been divided into sections as follows: A. B. C. Factual background of the case Relevant provisions of the Contract Act Analysis of case laws under the Contract Act: (i) (ii) What is pledge and the legal difference between ownership, pledge and mortgage Pawnee has a special and not general right in the pledged property (iii) Accretion on pawned goods 1 For short, ‘1996 Regulations’. 2 For short, ‘Contract Act’. D E F G H PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER [SANJIV KHANNA, J.] 1077 D. E. F. G. (iv) Notice of sale by pawnor and his right to sale (v) Sale of the pledged goods by the pawnee to self Effect and Purpose of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation 1996 Effect of the Depositories Act, 1996 and the Securities and Exchange Board of India (Depositories and Participants) Regulation, 1996 on the pledge under the Contract Act, 1872 Four decisions Analysis of facts and application of law of pledge to the facts of this case Conclusion H. A. Factual background of the case 2.1 The appellant – PTC India Financial Services Limited,3 is an existing company under the Companies Act, 2013. It is a wholly-owned subsidiary of PTC India Limited, which in 1999 was promoted by four public sector undertakings, namely, NTPC Limited, Power Finance Corporation Limited, NHPC Limited, and Power Grid Corporation of India Limited. PIFSL is registered with the Reserve Bank of India4 as a Non-Banking Finance Company5and classified as an Infrastructure Finance Company.6 The principal business of PIFSL is to invest in power and energy sector projects in India.

2.2 PIFSL, by way of a Bridge Loan Agreement dated 10th March 2014, had advanced a loan of Rs. 125 crores to NSL Nagapatnam Power and Infratech Limited.7As per 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 10th March 2014 thereof, the second respondent, Mandava Holdings Private Limited,8 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.9 NNPIL and NEVPL are subsidiaries of MHPL. 3 Hereinafter referred to as “PIFSL”. 4 Hereinafter referred to as “RBI”. 5 Hereinafter referred to as “NBFC”. 6 Hereinafter referred to as “IFC”. 7 Hereinafter referred to as “NNPIL” or “Corporate Debtor”. 8 Hereinafter referred to as “MHPL”. 9 Hereinafter referred to as “NEVPL”. A B C D E F G H 1078 SUPREME COURT REPORTS [2022] 9 S.C.R. A B C D E F G H

2.3 On17th November 2017,the Corporate Debtor filed a petition invoking Section 10 of the Insolvency and Bankruptcy Code, 201610 before the National Company Law Tribunal, Hyderabad,11 initiating the corporate insolvency resolution process. The petition was admitted under Section 10(4) of the IBC on 18th January 2018. Mr. Venkateswarlu Kari, respondent No.1, was appointed as the Interim Resolution Professional.12

2.4 On 28th December 2017, PIFSL issued a notice under the Pledge Deed apprising MHPL on the default son the part of Corporate Debtor and that if the debt due was not discharged within seven days, PIFSL would exercise the rights in terms of the Pledge Deed.

2.5 On 16th January 2018, as the debt remained unpaid, PIFSL wrote to the Depository Participant invoking its rights in terms of Clause 6.1 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.

2.6 On 23rd January 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 Section 176 of the Contract Act.

2.7 On 17th January 2018, PIFSL filed an application before the Adjudicating Authority under Section 7 of the IBC as a financial creditor to whom Rs.167,29,23,507/- was due and payable by the Corporate Debtor.

2.8 On 30th January 2018, the Adjudicating Authority allowed PIFSL to withdraw the application with liberty to file proof of financial claim before the IRP in Form C.

2.9 On 6th February 2018, MHPL made a claim before the 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. 10 For short, ‘IBC’. 11 Hereinafter referred to as “Adjudicating Authority”. 12 Hereinafter referred to as “IRP”. PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER [SANJIV KHANNA, J.] 1079

2.10 Contrarily, on 10th February 2018, PIFSL submitted Form C with a financial claimof Rs.169,19,17,637/-, being the amount due and payable to PIFSL by the Corporate Debtor as of 18th January 2018, the date on which the Adjudicating Authority admitted the Section 10 application of the Corporate Debtor. The value of 31,80,678 pledged shares was not accounted for or reduced.

2.11 On 19th February 2018, the IRP, by two separate emails, informed that MHPL’s claim could not be crystalized as it was not possible to ascertain the value of 31,80,678 shares ‘transferred’ to PIFSL. Similarly, PIFSL’s claim cannot be crystalized 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.

2.12 PIFSL and MHPL preferred separate applications before the Adjudicatory Authority against the rejections of their claims.

2.13 By a common order dated 6thJuly 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 Regulation 58 of the 1996 Regulations. The Adjudicating Authority agreed with 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,16th January 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. The IRP was directed to appoint an independent valuer to assess the fair market value of 31,80,678 shares of NEVPL as on 16th January 2018.

2.14 PIFSL challenged the orders before the National Company Law Appellate Tribunal, New Delhi,13 but the appeals were dismissed vide the impugned judgment dated 20thJune 2019. The Appellate Authority has held that PIFSL had exercised its rights under Clause 6.1 of the Pledge Deed on 16th January 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, 13Hereinafter referred to as ‘Appellate Authority’. A B C D E F G H 1080 SUPREME COURT REPORTS [2022] 9 S.C.R. A B C D E F G H 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 176of 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 of the IBC.

2.15 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 23rd December 2021 are 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 13th August 2018, the IRP has submitted a valuation report of an independent valuer who has valued the pledged shares at Rs.179 crores as of 16th January 2018. MHPL relies on the 2013 valuation report of Axis Capital and the annual report of MHPL for the financial year 2012-13. As per the annual report relied on by MHPL, shares of NEVPL as of 31st March 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 on31st March 2016,is only Rs.58.97. Thus, the total value of pledged shares comes to only Rs.18,75,64,582/-.14 B. Relevant provisions of the Contract Act

3.1 Chapter IX of the Contract Act deals with ‘Contracts of Bailment’. Sections 148 to 171 lay down the general law pertaining to bailments, while Sections 172 to 179 delineate specific provisions concerning pledges, which are a subset of bailments.

3.2 As per Section 151,a bailee is bound to take as much care of the goods bailed to him as a man of ordinary prudence would, under similar circumstances, take of his goods of the same bulk, quality and value as the goods bailed. Section 152 states that a bailee, in the absence of a special contract, will not be liable for any loss, destruction, or 14 There are different recognised and established methods for valuation of unlisted securities – See, (i)Commissioner of Wealth Tax v. Mahadeo Jalan and Mahabir Prasad Jalan and Others Etc., (1973) 3 SCC 157; and (ii) Bharat Hari Singhania and Others v. Commissioner of Wealth Tax (Central) and Others, 1994 Supp. (3) SCC 46. PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER [SANJIV KHANNA, J.] 1081 deterioration of the bailed goods if he acts in conformity with Section 151. As per Section 153, a contract for bailment is voidable at the option of the bailor if the bailee does any act with regard to the goods bailed, inconsistent with the conditions of the bailment. Section 154 lays down that the bailee shall be liable for damage arising from unauthorized use of the bailed goods. The bailee, with the consent of the bailor, can mix the goods bailed with his own goods, in which event, the bailor and the bailee will have interest in proportion to their respective shares in the mixture.15 However, if the bailee, without the bailor’s consent, mixes the bailed goods with his own, and the goods can be separated or divided, the property in the goods remain with the parties respectively.16 Further, the bailee is bound to bear the expense of separation or division of the goods, as well as any damage arising from the mixture. Section 157 provides that when the goods are so mixed without the bailor’s consent and cannot be separated, the bailor is liable to be compensated, and the bailee is liable for the loss. Under Section 160, the bailee has to return or deliver, as per the bailor’s directions, the goods, without demand, as soon as the time for which they were bailed has expired or the purpose for which they were bailed has been accomplished. Section 161 states that if there is a default by the bailee and the goods are not returned, delivered, or tendered at the proper time, the bailee is responsible to the bailor for any loss, destruction, or deterioration of the goods from that time. As per Section 163, in the absence of any contract to the contrary, the bailee is bound to deliver to the bailor, or in accordance with his directions, any increase or profit that may accrue from the goods bailed.

3.3 Section 172 of the Contract Act is reproduced as under: “172. ‘Pledge’, ‘pawnor’ and ‘pawnee’ defined – The bailment of goods as security for payment of a debt or the performance of the promise, is called a ‘pledge’. The bailor is in this case called the ‘pawnor’. The bailee is called ‘pawnee’”. As per Section 172, creating a valid pledge requires delivery of the possession of goods by the pawnor to the pawnee by way of security upon the promise of repayment of a debt or the performance of a promise, thereby, creating an estate that vests with the pawnee.

3.4 Sections 176, 177 and 179 of the Contract Act read thus: 15 Section 155, Contract Act. 16 Section 156, Contract Act. A B C D E F G H 1082 SUPREME COURT REPORTS [2022] 9 S.C.R. “176. Pawnee’s right where pawnor makes default.— If the pawnor makes default in payment of the debt, or performance; at the stipulated time or the promise, in respect of which the goods were pledged, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as a collateral security; or he may sell the thing pledged, on giving the pawnor reasonable notice of the sale. If the proceeds of the sale are greater than the amount so due, the pawnee shall pay over the surplus to the pawnor.” xx xx xx 177. Defaulting pawnor’s right to redeem. – If a time is stipulated for the payment of the debt, or performance of the promise, for which the pledge is made, and the pawnor makes default in payment of the debt or performance of the promise at the stipulated time, he may redeem the goods pledged at any subsequent time before the actual sale of them, but he must, in that case, pay, in addition, any expenses which have arisen from his default.” xx xx xx 179. Pledge where pawnor has only limited interest.–Where a person pledges goods in which he has only a limited interest, the pledge is valid to the extent of that interest.” As per Section 176, when a pawnor makes a default in payment of debt or performance of a promise, the pawnee may bring a suit against the pawnor upon such debt or promise and retain the goods pledged as collateral security, or he may sell the goods pledged upon giving the pawnor reasonable notice of the sale. If the pledged goods are sold, and the proceeds of such sale are less than the amount due in respect of the debt or promise, the pawnor is still liable to pay the balance amount to the pawnee. If the proceeds of such sale exceed the amount due, the pawnee will be liable to pay the surplus to the pawnor. Section 177 gives statutory right to the pawnor, who is at default in payment of the debt or performance of the promise, to redeem the pledged goods at any time before ‘actual sale’ by the pawnee. However, in such cases, the pawnor must pay in addition the expenses that have arisen from his default. A B C D E F G H PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER [SANJIV KHANNA, J.] 1083 Section 179 states that the limited interest that a pawnor has in A the goods can be validly pledged. Having understood the broad statutory contours of pledge, we would now examine the relevant opinio juris on the law of pledge. Legal jurisprudence relating to law of pledge is required to be examined in some detail for determining the issue before us. C. Analysis of law of pledge and case laws relating to pledge (i) What is pledge and the legal difference between ownership, pledge and mortgage.

4.1 Md. Sultan and Others v. Firm of Rampratap Kannayalal, Hyderabad, by its partners17 observes that a contract of pledge should satisfy the following conditions: (i) (ii) (iii) there should be a bailment of goods as defined in Section 148 of the Contract Act, that is, delivery of goods; the bailment must be by way of security; and the security must be for payment of debt or performance of a promise. The decisions in Md. Sultan (supra) and Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (died) and others v. The Andhra Bank Ltd. Vijayawada and others18 observe that hypothecation and mortgage of movables, though not specifically mentioned in the Contract Act, are valid and enforceable in India as the Contract Act is not an exhaustive law on the subject. Such transactions beyond the statutory framework are given effect to and interpreted by the courts according to the principles of justice, equity, and good conscience.There is no standard format and incidents in a contract of pledge can be different. A term mutually agreed by the parties is valid as long as it is not contrary to or inconsistent with any provision of the Contract Act. In the context of the present case, the aforesaid principles relating to the law of pledge reflecting flexibility are important in the milieu of a transitional and commercial environment wherein significant changes have occurred across the capital market with inter alia advent of institutional investors, regulatory mechanisms, and the new insolvency regime, albeit the fundamentals of the law of pledge, except when 17 AIR 1964 AP 201. 18AIR 1960 AP 273. B C D E F G H 1084 SUPREME COURT REPORTS [2022] 9 S.C.R. A B C D E F G H permitted or required to be eschewed, should be applied. This is the principle of interpretation which we have applied to answer the conundrum.

4.2 These two decisions highlight distinction between a pledge, which creates an estate or a right that vests with the pawnee, and a wider and general right of an owner; as well as mortgage or hypothecation.19An owner has: (a) right of possession; (b) right of enjoyment; and (c) the right of disposition. A pawnee does not have the right of ownership, but has limited right to retain possession till debt is paid or promise is performed. A pawnee’s right of disposition is limited to disposition of the pledge rights only, and the right to sell after reasonable notice. Even when the pawnor makes default in payment of debt or performance of the promise, the pawnor has the right to redeem the pawn till ‘actual sale’ of the pawn by the pawnee. However, the pawnor in addition to the debt, must pay to the pawnee expenses that have arisen because of the default.

4.3 Where money is advanced by way of the loan upon the security of goods, the transaction may take the form of a mortgage or pledge. The difference between a pledge and a mortgage of movable property is that while under a pledge there is only a bailment, whereas under a mortgage there is transfer of the right of the property by way of security. The distinction is aptly brought out in the following passage in Halsbury’s Laws of England:20 “A mortgage of personal chattels is essentially different from a pledge or pawn under which money is advanced upon the security 19 In the context of the present case, we need not examine the difference between pledge and hypothecation. It is sufficient to note that in hypothecation possession does not transfer and remains with the debtor. Hypothecation has been defined as a right which a creditor has over a thing belonging to another, and which consists in the power to cause it to be sold in order to be paid his claims out of the proceeds. It is an act of pledging a thing as security for a debt or demand without parting with the possession. It follows as a consequence that although the property remains in the possession of the debtor, it cannot be transferred to a third party without the express consent or permission of the creditor (See, Simla Banking and Industrial Co ., Ltd., Simla (In Liquidation)v.Pritams, AIR 1960 Punj 42). In India, Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 defines it under Section 2(1)(n) as a charge in or upon any movable property, existing or future, created by a borrower in favour of a secured creditor without delivery of possession of the movable property to such creditor, as a security for financial assistance and includes floating charge and crystallisation of such charge into fixed charge on movable property. 20Hailsham Edn., (2nd Edn.), para 330, page 226 of Volume XXIII. PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER [SANJIV KHANNA, J.] 1085 of chattels delivered into the possession of the lender, such delivery of possession being an essential element of the transaction. A mortgage conveys the whole legal interest in the chattels; a pledge or pawn conveys only a special property, leaving the general property in the pledger or pawnor; the pledgee or pawnee never has the absolute ownership of the goods, but has a special property in them coupled with a power of selling and transferring them to a purchaser on default of payment at the stipulated time, if any, or at a reasonable time after demand and non-payment if no time for payment is agreed upon.” Therefore, unlike a pledgee, a mortgagee acquires general rights in the things mortgaged subject to the right of redemption of a mortgagor. In other words, the legal estate in the goods mortgaged passes on to the mortgagee. In comparison, a pawnee has only the special right in the goods pledged, namely, the right of possession as security and in case of default, he can bring a suit against the pawnor as well as sell the goods after giving a reasonable notice.21 Whether a particular transaction is a mortgage of moveable property or a pledge can only be determined by reference to the intention of the parties, and other surrounding circumstances.22 (ii) Pawnee has a special and not general right in the pledged property.

5.1 This Court, in Lallan Prasad v. Rahmat Ali and Another,23 observes that under the common law, a pledge is a bailment of personal property as security for payment of debt or engagement. The two essential ingredients of pledge are (i) the pawn i.e., the property pledged should be actually or constructively delivered to the pawnee24 and (ii) a pawnee 21Para 20, Sri Raja Kakarklhpudi Venkata Sudarsana Sundara Narasayamma Garu (supra) 22Arjun Prasad and others v. Central Bank of India, Ltd., 1954 SCC OnLine Pat 138. 23AIR 1967 SC 1322. 24See also Morvi Mercantile Bank Ltd. v. Union of India, AIR 1965 SC 1954: “20. In English Law a pledge arises when goods are delivered by one person called the ‘pledgor’ to another person called the ‘pledge’ to be held as security for the payment of a debt or for discharge of some other obligation upon the express or implied understanding that the subject-matter of the pledge is to be restored to the pledger as soon as the debt or other obligation is discharged. It is essential for the creation of a pledge that there should be a delivery of the goods comprised therein. In other words, a pledge cannot be created except by delivery of the possession of the thing pledged, either actual or A B C D E F G H 1086 SUPREME COURT REPORTS [2022] 9 S.C.R. has only special property in the pledge but the general property therein remains in the pawnor and wholly reverts to him on discharge of the debt. The right to property vests in the pawnee only as far as is necessary to secure the debt. A pawn or pledge is an intermediate between a simple lien and a mortgage, which wholly passes the property.A pawnor has an absolute right to redeem the pledged property upon tendering the amount advanced but that right would be lost if the pawnee in the meantime has lawfully sold the pledged property. If the pawnee sells, he must appropriate the proceeds of the sale towards the pawnor’s debt, for the sale proceeds are the pawnor’s monies to be so applied and the pawnee must pay the pawnor any surplus after satisfying the debt.

5.2 Accordingly, the judgment refers to Section 172, which states that a pledge is a contract for bailment of goods as security for payment of debt or performance of promise. Section 17325 entitles the pawnee to retain the goods pledged for the payment of the debt. Section 176, elucidating on the rights of the pawnee, states that in case of default by the pawnor, the pawnee has: (a) a right to sue upon the debt and to retain the goods as collateral security, and (b) sell the goods after constructive. It involved a bailment. If the pledger had actual goods in his physical possession, he could effect the pledge by actual delivery; but in other cases he could give possession by some symbolic act, such as handing over the key of the store in which they were. If, however, the goods were in the actual physical possession of a third person, who held for the bailor so that in law his possession was that of the bailor, this pledge could be effected by a change of the character of the possession of the third party, that is by an order to him from the pledgor to hold for the pledgee, the change being perfected by the third party attorning to the pledgee, thus acknowledging that he thereupon held for the latter. There was thus a change of possession and a constructive delivery: the goods in the hands of the third party came by this process constructively in the possession of the pledgee. But where goods were represented by documents the transfer of the documents did not change the possession of the goods, save for one exception, unless the custodian (carrier, warehouseman or such) was notified of the transfer and agreed to hold in future as bailee for the pledgee. The one exception was the case of bills of lading, the transfer of which by the law merchant operated as a transfer of the possession of, as well as the property in, the goods. This exception has been explained on the ground that the goods being at sea the master could not be notified; the true explanation was perhaps that it was a rule of the law merchant, developed in order to facilitate mercantile transactions, whereas the process of pledging goods on land was regulated by the narrower rule of the common law.” The quotation reflects flexibility. 25 173. Pawnee’s right of retainer.—The pawnee may retain the goods pledged, not only for a payment of the debt or the performance of the promise, but for the interest of the debt, and all necessary expenses incurred by him in respect of the possession or for the preservation of the goods pledged. A B C D E F G H PTC INDIA FINANCIAL SERVICES LTD. v. VENKATESWARLU KARI AND ANOTHER [SANJIV KHANNA, J.] 1087 reasonable notice of the intended sale to the pawnor. Once the pawnee, by virtue of his right under Section 176, sells the goods, the right of the pawnor to redeem them is extinguished. But, thereupon, the pawnee is bound to apply the sale proceeds towards satisfaction of the debt and pay the surplus, if any, to the pawnor. So long as the sale does not occur, the pawnor is entitled to redeem the goods on payment of the debt. Even when the pawnee files a suit for recovery of the debt, though he is entitled to retain the goods, the pawnee must return the goods on payment. Another significant observation in this judgment is that if the pawnee sues on the debt denying the pledge, and it is found that he was given possession of the goods pledged and had retained the same, the pawnor has the right to redeem the pledged goods on payment of the debt. If the pawnee is not in a position to redeliver the goods, the pawnee cannot benefit from the repayment of the debt and the goods pledged. Where the value of the pawned goods is less than the debt and the pawnee denies the pledge or is otherwise not in a position to return the pawned goods, the pawnee has to give credit for the value of the goods and would be entitled only to recover the balance.

5.3 In Bank of Biharv. The State of Bihar and Others,26 relying on the distinction between the right of ownership and the right of the pawnee under a pledge, this Court held that Section 173 of the Contract Act provides that the pawnee may retain the goods pledged only for payment of the debt, performance of the promise and also for interest on the debt, etc. The pawnee has a special property or interest in the thing pledged while the general property therein continues in the owner. The special interest exists in the pawnee so that the pawnee can compel payment of the debt or sell the goods when the right to do so arises. This special interest is distinguished from mere right of detention that the holder of lien possesses, since the pawnee may assign or pledge his special property or interest in the goods. Relying on Halsbury’s Law of England, 3rd Edition, Vol. 29, page 222, it is observed that on the bankruptcy of the pawnor, the pawnee is a secured creditor with respect to the things pledged before the date of receiving the order and without notice of a prior available act of bankruptcy.

5.4 In Maharashtra State Cooperative Bank Limited v. Assistant Provident Fund Commissioner and Others,27 a three Judges’