Registration Of Shares In Favor Of The Pledgee As The "Beneficial Owner" Does Not Amount To A Sale Of Shares: Delhi High Court

The bench of Justice Neena Bansal Krishna held that the pledgee's right of redemption of shares remains alive until such actual sale takes place. It set aside an arbitration award wherein the arbitrator held that once the pledgee becomes the beneficial owner of the pledged shares, it becomes entitled to the credit of the value of the pledged shares.

Facts

The parties entered into an agreement dated 08.02.2012, wherein STCI Finance Ltd. (Petitioner) agreed to sanction a loan facility of Rs. 50 Crores to Sukhmani Technologies Pvt. Ltd. against the pledge of shares of Tulip Telecom Limited. This agreement was based on a request from Sukhmani Technologies Pvt. Ltd., through its Director Mr. H.S. Bedi (Respondents).

Pursuant to the agreement, the parties executed various loan/security documents, including a Facility Agreement, Irrevocable Power of Attorneys, Declarations, and post-dated cheques, to secure the loan amount. Pursuant thereto, the respondents pledged 1,37,13,000 equity shares of Tulip Telecom Pvt. Ltd. in favour of the petitioner.

Due to steep fall of the share price and due to the failure of the respondent to provide the shortfall security, the petitioner invoked the shares on different occasions, managing to recover only a portion of the outstanding amount. Upon the failure of the respondent to repay the remaining amount led the petitioner to invoke the arbitration.

The arbitrator passed a 'Nil Award' by observing that once the pledged shares were invoked by the petitioner, it became the beneficial owner entitled to the credit of the value of shares pledged. The Arbitrator noted that if the invoked shares had been promptly sold at the time of invocation, petitioner could have recovered the outstanding amount.

Aggrieved thereby, both the parties challenged the impugned award.

Submissions by the Parties

The petitioner challenged the award on the following grounds:

• The arbitrator erred in passing a 'Nil Award'. It failed to appreciate that mere invocation of pledged shares would not entitle the petitioner to the value of the of shares unless the shares are sold to a third party.
• The pledged shares are always redeemable by the pledger any time before they are sold.
• The value at which the shares are sold is to be credited to the account and not the value on the date on which the shares were invoked.

The respondent challenged the award on the following grounds:

• The arbitrator erred in passing a 'Nil Award' and it failed to determine the value of the invoked shares and failed to credit the surplus amount.

Analysis by the Court

The Court relied on the recent Judgment of the Supreme Court in PTC India Financial Services Limited vs. Venkateswarlu Kari and Anr. 2022 LiveLaw (SC) 475, which clarified the rights and obligations of parties in cases involving pledged shares. The Court emphasized that becoming the "beneficial owner" of pledged shares did not discharge the pledgee's obligation to account for any sale proceeds until the shares were actually sold to a third party.

The Court held that mere registration of shares in favor of the pledgee as the "beneficial owner" does not amount to a sale of shares, and the pledgee is not required to account for any sale proceeds until the shares are actually sold to a third party.

The Court held that the pledgee's right of redemption of shares remains alive until such actual sale takes place. Based on the law developed by the Supreme Court, the Court held that the 'Nil Award' was against the fundamental policy of law and set it aside.

Case Title: STCI Finance Ltd v. Sukhmani Technologies Pvt Ltd

Citation: 2024 LiveLaw (Del) 428

Date: 02.04.2024

Counsel for the Petitioner: Mr. Tanmay Mehta, Mr. Abhinav Mukhi and Mr. Shantanu Tomar, Advocates.

Counsel for the Respondent: Mr. Ashim Vachher, Mr. Abhilash Mathur and Mr. Kunal Lakra, Advocates.

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