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Intoduction
In the previous article we saw how a Guarantor can be paralysed for no fault of his. The principal loanee commits a default and it is the Guarantor who is the one everyone runs after. Then the question which should be asked is “Is the Guarantor so helpless?” “Can he be just left in the lurch by the Principal Debtor by not paying the loan amount?” The answer is a strict “No”.
A Guarantor has several avenues open to him which will be discussed in this article. He certainly cannot be called helpless if he knows how to approach the problem in the right manner.
So let’s see what are the abvomentioned avenues and how the Guarantor pursued those in this case.
Brief Facts Continued
It so happened that the Petitioner defaulted in its payment to M/s Celico due to which it invoked Arbitration Clause (when a party invokes an arbitration clause the Courts cannot take cognisance of the matter and parties have to necessarily settle their dispute in presence of an Arbitrator). In Arbitration, the final award declared that the Petitioner has defaulted in its obligations to M/s Celico and hence it is entitled to get Rs.1.2 Crores from the Principal Debtor i.e. M/s Apsom and Guarantor i.e. the Company and the Brother. As the Brother himself has given the personal guarantee and as the Arbitration Award was against him as well, he paid the total of 1.2 Crores, to avoid any future embarrassment. And as this money remained unpaid by the Petitioner to the Company and his Brother, they did not return the shares which have been pledged by the Petitioner with the Respondents.
The Company stated that if the money which they paid to M/s Celica is returned to them, the shares will also be delivered back to the Petitioner.
Be that as it may, based on these contentions the Petitioner moved to the National Company Law Tribunal (NCLT for short) by filing a Company Petition under Section 46 and 56 of the Companies Act 2013. The Petitioner requested for direction from the NCLT to the Company and his Brother, to return the share certificates to the Petitioner which was dismissed by the NCLT. Aggrieved the Petitioner approached the NCLAT.
The contention of the Respondents is that the shares are not stolen but validly pledged by the Petitioner to them. While the argument of the Petitioner was that even assuming the case of the Respondents, there is no valid pledge as the pledge of the Shares can only be effected by a written instrument (like a sale deed is a written instrument of sale of a flat). Secondly, as proper stamp duty under Stamp Duty Act, 1899 has not been paid, the transfer cannot be termed as pledge.
Pledge V/s Hypothecation
To answer this we have to understand what is a Pledge? When a Creditor takes a loan or debt from a creditor, he will ask for a security. This security can be in different forms. One of these forms is Pledge. In a pledge the person who takes the loan gives to the Creditor some security like share certificates, gold jewellery etc. Now in case of default of the Debtor (the person who takes the loan), the Creditor can after giving the notice to the Creditor can directly sell these. He does not have to even go to the court.
This is different from Hypothecation( or what is poularly called “Loan cum Hypothecation Agreements”. In hypothecation, the Debtor keeps the security with him. One of the most prominent examples of it is Vehicle loans. When a person takes a Car loan, he executes a Hypothecation Agreement with the Bank or NBFC, whereby till the payment of the loan the vehicle remains with him. But what if the person who took the loan defaults in its full payment. Here the other difference between a pledge and hypothecation is noticeable. The Bank or NBFC cannot just take the Car directly from the Loanee/Debtor and sell it. It has to first approach the Court under Order XL of Civil Procedure Code, 1908 to take the custody of the Car (but even now it cannot sell it till the case is decided in its favour). If there is Arbitration Clause in the Hypothecation Agreement then the Bank or NBFC cannot go even under Order XL of CPC, and they either have to approach the Court under Section 9 of Arbitration & Conciliation Act, 1996 or approach the Arbitrator under Section 17 of the Arbitration & Conciliation Act. (Kindly note that these concepts are explained only in relation to the movable properties. Mortgage in respect of the immovable properties is a vast topic, which I will explain in some article).
So we see that possession simplicitor is the only condition for a pledge and only possession is needed to be handed over. This position is substantiated by Section 46 of the Companies Act, which states that the possession of shares is prima facie proof of the title. This coupled with the fact that when the Pledger fails to pay the money, the Pledgee is entitled to sell the shares in open market (though this he can do only after due notice to the Pledger), only makes clear that a Pledge need not to be necessarily effected with a written instrument. And when a written instrument is redundant, the need to pay stamp duty under Stamp Duty Act is also obliterated (like in a case of Hiba meaning a Muslim Gift or a family settlement in a Hindu Undivided Family where no written instrument is needed to be effected). It is always open to the Pledger to get back his shares on payment of the principal and interest to the Pledgee. This is called Redeeming the Pledge.
Scope of Section 46 & 56 of Companies Act, 2013
Now let’s see as to whether in a case where the possession is given by the holder of the Share Certificate to someone else wilfully, (as finally borne out from the facts of the case) can a petition be filed before NCLT under Section 46 and 56 of the Companies Act, to force that someone else to return the share certificates?
For that we have to see what Section 46 and 56 of the Companies Act, 2013 states. Section 46 details the remedy in case the Share Certificates are lost, mutilated or torn. The remedy as per the above said section is the issuance of duplicate shares by the company.
Similarly Section 56 of the Companies Act states that in case the shares are to be transferred in the name of another person there should be a document of transfer through which the original transferor transfers his shares to the new transferee, this must be signed by both the seller/transferor of the shares and its purchaser/transferee. After both parties sign this transfer document the same should be handed over to the Company together with the Original Shares. But in the contingency where the instrument of transfer is lost, even then the shares can be transferred by the Board of the Company provided an indemnity of the transferee( seller) and transferor (purchaser) is given against any action which might be taken against the company.
From the reading of the above sections it is clear that:
Firstly when it is admitted by the Petitioner that the Shares were handed over by the Petitioner himself to avail a guarantee, Section 46 is inapplicable as it applies only when the shares are lost, torn or mutilated.
Secondly Section 56 makes it clear that without the instrument of the transfer the Board can transfer the shares in the name of another person (though only with their indemnity) and hence the argument of the Petitioner that there can be no valid pledge without a written document does not entirely square with law.
Therefore the prayer for delivery of the shares back to the Petitioner does not fall either within the Section 46 or 56 of the Companies Act, and hence the decision of the NCLT was upheld by the NCLAT and the Appeal against NCLT’s decision was dismissed by the NCLAT.
Conclusion
The combined reading of this and the previous article clearly indicates that the Guarantor is not a sitting duck who can be manipulated by the Principal Debtor. Guarantor can take a calculated risk of giving a Guarantee by asking for a sufficient security. If the Guarantor does not have the means of holding the security then he can ask the Principal Debtor to deposit it with the Bank or NBFC and in such a case it will be Bank’s, or for that matter NBFC’s duty, to liquidate that security first and then have any thoughts of squeezing the Guarantor.
Many people become Guarantor by innocence, thinking a friend or family member is in need of the money and that friend or family member will keep his promise of paying the bank loan. But if these close ones try to manipulate the Guarantor , then the Guarantor also has every right to go to Court against these people to save himself from future embarrassments.
Parveen Semwal
Advocate, High Court of Delhi and Supreme Court of India