A finance company, when it transfers to itself shares offered as security for a loan by the borrower, only becomes ‘beneficial owner’ of shares
In a verdict in PTC India Financial Services (PIFSL) vs Venkateswarlu Karu the Supreme Court has said that every transfer (of property) is not a sale.
If a finance company transfers to itself the shares offered as security for a loan by the borrower, the finance company only becomes the ‘beneficial owner’ of the shares; the borrower still has the option of paying its debts and redeeming the shares.
The case in question is quite a complicated one. The facts are as follows: PIFSL lent ₹125 crore to NSL Nagapatnam Power and Infratech (NNPIL). As security for this loan, NSL Nagapatnam Power’s parent company, Mandava Holdings , pledged 39.8 lakh shares of another subsidiary of it, called NSL Energy Ventures (NEVPL).
NNPIL could not pay its dues. In November, it filed for bankruptcy under Section 10 of the Insolvency and Bankruptcy Code. Section 10 allows a defaulting company to file for insolvency.
Following this, PIFSL, after giving a notice, transferred the pledged shares of NEVPL to itself, becoming the ‘beneficial owner’ of the shares. No sooner than PIFSL declared itself the beneficial owner of the NEVPL shares that belonged to the parent company, MHPL, the parent company pulled an ace from its sleeve. It told its subsidiary NNPIL, the corporate debtor, “because of you I lost my shares in NEVPL, so I am your creditor”. It is quite another matter that both NNPIL and NEVPL are subsidiaries of MHPL.
This means that MHPL can still redeem the NEVPL shares. In this case PIFSL is the ‘pawnor’ and MHPL is the ‘pawnee’.
The apex court said that the mere exercise of the right of the pawnee to record himself as the ‘beneficial owner’ is not ‘actual sale’ and would not affect the rights of the pawnor of redemption under Section 177 of the Contract Act.
It follows from this verdict that the owner has the right of possession, right of enjoyment and the right of disposition, whereas a pawnee only has a limited right to retail possession till the debt if paid or a promise is performed. Even when the owner is in default of payment of debt, he has the right to redeem the assets until the ‘actual sale’ of the assets by the pawnee.
Published on June 05, 2022