1. The question, raised in. this appeal is whether there can be a valid pledge of shares by the deposit of the share certificate when it is not accompanied by an instrument of transfer. The appellant instituted a suit in the Court of the District Munsif of Palghat to recover what was due on a promissory note executed by one Subramania Pattar in favour of one Ramakrishna Pattar, the instrument having been endorsed to the appellant. When the appellant demanded the amount due under the promissory note, the maker deposited with, him as security for payment a. share certificate in respect of shares held by him in the Parli Tile Works, Limited. The certificate was not accompanied by a deed transferring the shares to the appellant, but he claims that notwithstanding this there was a valid pledge of the shares. The suit was contested by the fourth defendant, who is the first respondent in this appeal. On a date subsequent to the deposit of the share certificate with the appellant the first respondent attached the shares by a prohibitory order issued under Order 21, Rule 46 of the Code of Civil Procedure. He denied that a valid pledge of the shares was created in favour of the appellant and maintained that he himself had obtained title to the shares by reason of the attachment and subsequent sale.
2. The District Munsif held that a valid pledge had not been created, but on appeal the Subordinate Judge of South Malabar reversed the District Munsif's decision. In his opinion, a valid pledge had been created by the deposit of the share certificate. The first respondent appealed to this Court. The appeal was heard by Venkataramana Rao, J., who agreed with the District Munsif and accordingly allowed the appeal. This appeal is from the judgment of Venkataramana Rao, J., under clause 15 of the Letters Patent.
3. In the opinion of Venkataramana Rao, J., 'shares' are not 'goods' within the meaning of Section 172 of the Indian Contract Act and there can be no valid security unless the scrip is accompanied by an instrument of transfer. When a share certificate is handed over by way of security to another with a deed of transfer duly executed, the transaction constitutes more than a pledge, because there is a transfer of the holder's rights in the property, subject of course to the right of redemption. We shall return to the meaning of 'pledge' in a moment. The learned Judge recognised that according to the English law the mere deposit of a share certificate by way of security is treated as an equitable mortgage, but in his opinion that did not help the appellant, because the deposit had not been made in the City of Madras. He regarded an equitable mortgage of movable property as being on the same basis as an equitable mortgage of immovable property and therefore an equitable mortgage of movable property could not be effected outside the towns specified in the Transfer of Property Act. It is not necessary for the Court to discuss this question because Mr. Kuttikrishna Menon, on behalf of the appellant, has been content to confine his case to the plea of pledge.
4. Now let us see what is implied by the expression 'pledge'. In Hallday v. Holgate (1868) L.R. 3 Exeh. Cases 299, Willes, J., placed a pledge between a simple lien and a mortgage. He pointed out that in the case of a lien there is no transfer of interest, but in the case of a mortgage the property passes. In the case of a pledge a deposit of goods is made security for a debt and the right to the property vests in the pledgee so far as it is necessary to secure the debt. Section 148 of the Indian Contract Act defines bailment as the delivery of goods by one person to another for some purpose upon a contract that they shall, when the purpose is accomplished, be returned or otherwise disposed of according to the directions of the person delivering them. Section 172 defines a pledge as the bailment of goods as security for the payment of a debt or the performance of an obligation. Section 176 provides that, if the pawnor makes default in payment of the debt, or performance of the contract at the stipulated time, the pawnee may bring a suit against the pawnor upon the debt or promise, and retain the goods pledged as collateral security; or he may sell them, on giving the pawnor reasonable notice of the sale. Therefore under Indian law as under English law a pledge is created by the delivery of goods as security.
5. In England a share is regarded as a chose in action. See Harrold v. Plenty (1901) 2 Ch. 314. In India a share is not a chose in action. Section 137 of the Transfer of Property Act says that nothing in Chapter VIII (which deals with transfers of actionable claims) applies to stocks and shares, and Section 28 of the Indian Companies Act states that shares constitute movable property. Section 2 (7) of the Sale of Goods Act, 1930, expressly includes shares in the definition given there of 'goods'. Before the passing of the Sale of Goods Act, 1930, sales of goods were regulated by the sections comprised in Chapter VII of the Contract Act, but the Sale of Goods Act repealed the whole of the chapter. Section 72 (one of the repealed sections) denned 'goods' as meaning every kind of movable property; and as shares are movable property, they were goods within the meaning of that section.
6. When the Sale of Goods Act was placed on the statute book Section 178 of the Contract Act was amended. Before the amendment the section read as follows:
A person who is in possession of any goods, or of any bill of lading, dock-warrant, warehouse-keeper's certificate, wharfinger's certificate, or warrant or order for delivery, or any other document of title to goods, may make a valid pledge of such goods or documents.: Provided that the pawnee acts in good faith, and under circumstances which are not such as to raise a reasonable presumption that the pawnor is acting improperly:
Provided also that such goods or documents have not been obtained from their lawful owner, or from any person in lawful custody of them, by means of an offence or fraud.
7. As a result of the amendment the expressions "mercantile agent" and "documents of title" are given the meaning assigned to them in the Sale of Goods Act. Section 1 (4) of that Act says:
Document of title to goods' includes a bill of lading, dock-warrant, warehouse-keeper's certificate, wharfinger's certificate, railway receipt, warrant o>r order for the delivery of goods and any other document used in the ordinary course of business as proof of the possession or control of goods, or authorizing or purporting to authorize, either by endorsement or by delivery, the possessor of the document to transfer or receive goods thereby represented.
The Court has not been asked to say that a share certificate comes within this definition, and we will assume that it does not.
8. In Lalit v. Haridas (1916) 24 C.L.J. 335 the Calcutta High Court held that share certificates are neither goods nor documents of title within the meaning of Section 178 of the Contract Act, but this decision was given before the enactment of the Sale of Goods Act and, therefore, before the amendment of the Contract Act. On the other hand, the Bombay High Court, long before 1930, held that the term 'goods' used in Section 178 of the Contract Act includes shares in joint stock companies and consequently recognised that there could be a valid pledge of shares. See B. D. Sethna v. National Bank (1910) 12 Bom.L.R. 870, Fazal v. Mangaldas (1921) 46 Bom. 489 and Jamshedji v. Maganlal (1925) 27 Bom.L.R. 514. It seems to us that even before the passing of the Sale of Goods Act the Bombay opinion was preferable to the Calcutta opinion, but as the result of the passing of the Sale of Goods Act and the amendment of the Contract Act we consider that the Bombay opinion is not open to dispute. We can see no valid reason for giving the word 'goods' a different meaning in the Contract Act from the meaning which it has in the Sale of Goods Act.
9. We now come to the question whether a pledge of shares can be created by the mere deposit of the share certificate. A share is not a tangible thing. It is a share in the share capital of the company and is so denned in Section 2 (16) of the Indian Companies Act. Consequently it is necessary for a company to issue 'to a shareholder a certificate showing the number of shares which he holds. As shares are goods and therefore pledgeable, they can only be pledged by the deposit of the share certificate. It appears to us that by including shares in the definition of goods in the Sale of Goods Act the Legislature must have associated shares with the share certificate which is marketable. Otherwise, it is difficult to see how shares can be goods and the subject of pledge, the essence of which is delivery. To say that there can only be a pledge of shares when the share certificate is accompanied by a deed of transfer is making the transaction something more than a pledge, as we have already pointed out. We think that when a person delivers a share certificate to another to be held by him as security, there is under the law of India a pledge which he can enforce, but unless the pledgee at the time of the deposit secures a deed of transfer which he can use in case of necessity or obtains one from his debtor at a later stage, he must have recourse to the Court when he wishes to enforce his security. There is nothing to prevent a pledgee suing on the debt and asking the Court to sell the goods for him. If the goods happen to be shares, the Court can confer a full title on the buyer by following the procedure laid down in Order 21, Rule 80 of the Code of Civil Procedure.
10. For these reasons we hold that the decision of the Subordinate Judge was correct and consequently we allow the appeal with costs of the hearing before Venkataramana Rao, J., and in this Court.