Pawnee does not become owner of pledged shares even if such shares are transferred to its account: Supreme Court

It is fundamental principle of contract law, that the pawnee of goods does not have the right to sell the pledged goods to itself.?

?In simple words, if A had pledged goods to B for repayment of a debt, and A defaults, then B cannot claim ownership of the goods in satisfaction of A's debts.

?As per the Contract Act, in case of default by A, B has only two options viz. (a) B can retain the goods pledged as collateral security;?or (b)?B may sell the pledged goods after giving A a reasonable notice of sale. (Sec.176)

?However, pledge of dematerialized shares involves some aspects which are unique and different from ordinary instances of pledge of goods.

?In case a pledge over dematerialized shares is invoked, the pledged shares are transferred from the demat account of the pawnor to the demat account of the pawnee and the pawnee is acknowledged to be the "beneficial owner" of such shares.?Sec.10 of the Depositories Act, 1996 provides that a beneficial owner shall be entitled to all the rights and benefits in respect of its securities.

?In such a case, does the pawnee becomes the owner of the pledged shares?

?The answer is NO.

?The Supreme Court in PTC India Financial Services Ltd. v. Venkateswarlu Kari and Another (Civil Appeal No.5443 of 2019) has ruled that transfer of dematerialized shares to the demat account of the pawnee does not have the effect of sale of shares by the pawnee to itself.?The pledge has not been discharged or satisfied either in full or in part by transfer of pledged shares to the demat account of the pawnee.?

?In other words, even after invocation of pledged shares, and transfer of pledged shares to the demat account of the pawnee, the pawnee cannot be said to have realized his debt, and the pawnee is free to either hold the pledged shares as security or sell them to any third party.

?Furthermore, the pawnor can at any point of time repay the debt and redeemed the pledged shares charged with the pawnee.

?The decision of the Supreme Court would also be helpful for avoiding tax exposure by pawnees on account of invocation of pledges as it is now settled position that pawnees do not become owners of pledged shares merely because the pledged shares have been transferred to demat account of the pawnees.

?The Supreme Court judgement can be accessed from the following link: https://main.sci.gov.in/supremecourt/2019/24185/24185_2019_14_1501_35710_Judgement_12-May-2022.pdf.?