Wednesday, June 9, 2010

Can Pledged Shares Can by Gifted ?


Mr. A who is Director & Promoter of XYX Limited (Listed Company) want to Gift its entire holding to Mr. B who is the M.D. & Promoter of the same Company. Mr. A and Mr. B are real brothers. The Holding of Mr. A is pledged with Bank.


Whether Gift Deed can be executed before release of Pledge Shares?

When A have pledged the share with Bank , the original share certificates would have been deposited with the Bank. Further , in the case of pledge , voting rights are also vests with the bankers and if they desire , they can exercise the voting rights but they will not meddle in the ordinary course of business.

Pledging of shares means A have no right over the title of those shares until it is revoked. In such a scenario, no gift can be made and if made without the bank's consent , as you said ,it is void ab initio.

In case of pledged shares , the physical shares will be lodged with the Bank . In such a case , A cannot transfer the shares to B even with the consideration as A cannot produce the physical shares to B and to the Company for transfer.

In both the cases , bank's consent is essential and without that , according to me , any gift or transfer will be invalid and not possible.

A gift can be made if there is no encumbrance over it. When share are pledged with the Bank , the ownership of shares lies with the Bank and A is not a real owner in this case and he cannot gift the shares which as he is not presently owning these shares and if he has made any gift of shares to be effective on the future date , for this also he should take consent from the bank as there would be a clause in the loan agreement that sale or gift of shares is prohibited during the tenancy of the loan period. Can you suggest what would happen if the gift of shares are made at a future date and if loan has not been repaid , the bank has the every right to dispose the shares irrespective of gift made already to B.
As per Sec. 123 of Transfer of Property Act, a gift of immovable property, which is not registered, is bad in law and cannot pass any title to the donee. Any oral gift of immovable property cannot be made in view of the provisions of sec. 123. Mere delivery of possession without a written instrument cannot confer any title. This section speaks about immovable property only and as nothing has mentioned about movable property like Shares. Since the share is an intangible movable property , gift of such property is to be in written so as to avoid any future ambiguity.

Section 126 of the Transfer of Property provides for conditions where a gift may be revoked.The following are those conditions-

According to clause (4 of section 126) the condition should not be illegal, or immoral and should not be repugnant to the estate created under the gift. Section 126 is controlled by sec. 10. As such, a clause in the gift deed totally prohibiting alienation is void in view of the provisions contained in sec. 10. A gift, which was not based on fraud, undue influence or misrepresentation nor was an onerous one, cannot be canceled unilaterally. Such a gift deed can be canceled only by resorting to legal remedy in a competent court of law.

In the above scenario , if gift is made by A to B when there is encumbrance or charge in favour of a bank , whether registration is possible as per section 123 of Transfer of Property act without Bank's consent.

Further ,under section 10 , if a gift is a onerous one , it can be canceled by only resorting to legal remedy . Suppose , if loans are not paid , then such onerous gift will have to revoked by an order of court .

Though onerous gift can be made , my question is whether it can be made without bank's consent as mentioned in the question. Whether it can be registered under section 123 without bank's consent?

What I stress again and again , bank's consent is necessary for gifting of shares pledged with them and in the situation , both A and B do not want bank's consent or ( gift to be made without bank's knowledge ) , is it possible and will it be valid one both under section 10 and 123 of the Transfer of Property Act.

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