Full Judgment Text
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CASE NO.:
Appeal (civil) 8297 of 1997
PETITIONER:
Bombay Stock Exchange
RESPONDENT:
Jaya I. Shah & Another
DATE OF JUDGMENT: 17/10/2003
BENCH:
CJI & S.B. Sinha.
JUDGMENT:
J U D G M E N T
S.B. SINHA, J :
Interpretation of Securities Contract (Regulation) Act, 1956
(hereinafter referred to as ’the Act’) vis-Ã -vis rules, bye-laws and the
regulations framed thereunder as regard the right of a third party to
realise his dues out of the corpus of the Defaulters’ Committee is the
question involved in this appeal which arises out of a judgment and
order dated 25th July, 1997 passed by the High Court of Judicature at
Bombay in Appeal No. 17 of 1996.
THE BACKGROUND FACT:
The appellant herein is Bombay Stock Exchange (Exchange). It is
recognized by the Central Government under the Rules, Bye-laws and
Regulations framed in the year 1957 pursuant to or in furtherance of the
provisions of ’the Act’. The said rules, bye-laws and regulations are
approved by the Central Government. Rights and obligations of the
members of the Exchange as also the constituents/investors dealing with
or through the members are governed by the Rules, Bye-laws and
Regulations framed under the Act.
One C.S. Shah was a registered broker. He was a member of the
Exchange. He carried on his business as a stock broker. He was
entitled to a personal privilege under the Rules of trading as a broker
member. The said privilege is inalienable. As he failed to fulfill his
obligations and liabilities, on or about 4th November, 1997 he was
declared a defaulter in terms of Bye-law No. 316 whereupon he ceased to
be a member of the Exchange under Rule 53. His membership vested in the
appellant-Exchange free of all rights, interests and claims. The
Defaulters’ Committee constituted in terms of the Rules, Bye-laws and
Regulations took charge of his assets as were within the control of the
Exchange.
The respondent herein had certain claims against the said C.S.
Shah. She invoked the arbitration clause in terms of the Bye-laws of
the Exchange pursuant to or in furtherance whereof an arbitration award
dated 10.8.1993 was made in her favour for a sum of Rs. 2,96,000/-
together with interest at the rate of 15% per annum. The said award was
filed in the High Court of Judicature at Bombay. The award was made a
rule of court and a decree in terms thereof was prepared on 15.2.1994.
In execution of the said decree a Warrant of Attachment purported to be
under Order 21, Rule 46 of the Code of Civil Procedure, 1908 was issued
on 27.7.1994 for attaching the debt owed by the Exchange to C.S. Shah.
A Garnishee Notice was also issued by the High Court on 7.12.1994 in
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terms whereof the Exchange was called upon to pay to the
respondent/Sheriff of Bombay a sum of Rs. 4,15,157.80.
Several affidavits were filed by the Exchange disclosing the
amount lying in its hands. In the first affidavit filed on 12.1.1995,
it was disclosed that sufficient fund is available to meet the claim of
the respondent. In an additional affidavit filed on 8.12.1995 it was
alleged that the total amount lying with the Exchange for distribution
amongst the constituent creditors of C.S. Shah was Rs. 53,56,159/-. It
was further contended that in addition to that amount each creditor
constituent was entitled to receive a maximum sum of Rs. 25,000/- from
the Petitioner’s Customer Protection Fund towards his/ her claim and the
said available sum of Rs. 53,56,159/- was required to be distributed on
a prorata basis in terms whereof the respondent would be entitled to
receive a sum of Rs. 1,16,530/- making an aggregate sum of Rs.
1,141,530/-.
A consolidated list setting out the names of the constituents who
had obtained Arbitration Awards along with the relevant details was
annexed to the affidavit. The respondent’s claim was set out at item
No. 72 of the list. The Exchange expressed its readiness and
willingness to pay the said sum of Rs. 1,41,530/- to the respondent
simultaneously with the payments to be made to the other creditor
constituents of C.S. Shah.
A further affidavit was filed on 14.12.1995 wherein it was
contended that the Defaulters’ Committee had collected and realised C.S.
Shah’s assets and distributed in full the proceeds thereof as provided
by the appellant’s Rules, Bye-laws and regulations. It was further
contended that as there still remained a deficiency, the Governing Board
of the Exchange had exercised the right of nomination of membership
relating to C.S. Shah and recovered a sum of approximately Rs.
1,25,00,000/- in that manner and as per Rule 16 of the Exchange Rules
out of the realisation from the nomination of membership of
approximately Rs. 1,24,00,000/-, a sum of approximately Rs. 70,00,000/-
was applied towards the payment of appellant’s Clearing House’s dues and
a balance sum of Rs. 53,56,159/- remained available for distribution on
a priority basis, under Rule 16(ii). Further contention of the Exchange
was that once a member was declared a defaulter, he at once ceases to be
its member whereupon the member’s right of membership lapses and
immediately vests in it, free of all claims and interests of such member
or any person claiming through such member and the Governing Body was
entitled to dispose of such membership right as it thought fit. It was
stated that when such right of nomination was exercised by the Governing
Board, the consideration received therefor belonged exclusively to the
Exchange and was to be applied in the manner provided by Rule 16. The
Exchange, therefore, set out that the balance of Rs. 53,56,159/- (which
was the balance remaining out of the consideration received by exercise
of the right of nomination of the membership), was required to be
applied prorata in accordance with the Rule 16(ii) and the said amount
did not belong to and was not payable to C.S. Shah, whether as a debt or
otherwise, and was not held by the Exchange on behalf of C.S. Shah. The
appellant, therefore, contended that the respondent was not entitled to
attach any part of the said amount.
The learned Single Judge rejected the aforementioned contention of
the Exchange and made the Garnishee Notice absolute pursuant whereto it
was directed to pay over to the respondent a sum of Rs. 4,14,977.80.
Aggrieved thereby the appellant preferred an appeal before the
Division Bench of the Bombay High Court wherein the contentions raised
before the learned Single Judge were reiterated and in particular it was
contended that the learned Single Judge erred in rejecting and refusing
to take on record the Exchange’s additional affidavit dated 14th
December, 1995.
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The Division Bench while admitting the appeal passed an order
taking on record the said additional affidavit and further granted leave
to the respondent to file a rejoinder thereto.
By reason of the impugned judgment the said appeal was dismissed.
Before us also the following chart has been placed to show that
even now the net shortfall is Rs. 70,00,000.00.
Collection
Distribution
1) Other assets collected
by and vested in
Defaulters’ Committee
under Bye-law 326
2) Sale proceeds of
Membership Right
vested in Stock
Exchange
Contribution by
Customers Protection
Fund
Rs. 68,00,000.00
Rs. 1,25,00,000.00
Rs. 38,00,000.00
1) To ’Creditor
Members’ under Bye-
law 326
2) To Exchange and
Clearing House Dues
(for members) under
Rule 16(i)
3) Net Balance available
for Distribution under
Rule 16(ii)
Plus CPF
Rs. 68,00,000.00
Rs. 70,00,000.00
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Rs. 55,00,000.00
Rs. 38,00,000.00
Rs. 93,00,000.00
PAYABLE
Pro rata to Large Body
of Creditors of Defaulter
(Over 150)
Total Claim:
Rs. 1,63,00,000.00
Net Short fall
Rs. 70,00,000.00
SUBMISSIONS:
Mr. Dushyant A Dave, learned senior counsel appearing on behalf of
the appellant would submit that the learned Single Judge as also the
Division Bench has committed a serious error insofar as they failed to
take into consideration the averments made in the additional and further
affidavits wherein it has clearly been stated that there was no surplus
amount available from securities deposited by the defaulter.
The learned counsel would contend that in terms of the scheme of
the Act, Rules, Bye-laws and Regulations, the dues of the Exchange,
Clearing House and Members would get priority. The Defaulters’
Committee has distributed the entire available amount to them from the
assets of the defaulting member other than the card money and the only
amount which was available for distribution to the members, non-members
etc. is the sale proceeds from the Card Membership/ right of nomination.
The rights of liabilities of the members and non-members being governed
by the Rules, Bye-laws, and Regulations made under the Act, the
respondent does not have any priority claim and the amount available at
the hands of the Defaulters’ Committee must be distributed to all the
claimants pro-rata.
The learned counsel would submit that a Garnishee proceeding is
not contemplated inasmuch as no debt was lying at the hands of the
Exchange or due to so far as the said C.S. Shah is concerned. Reliance
in this behlf has been placed on Kesoram Industries & Cotton Mills Ltd.
Vs. Commissioner of Wealth Tax (Central) Calcutta [1966] 2 SCR 688. If
the judgment of the High Court is sustained, Mr. Dave would urge, the
same would be contrary to the statutory rules as also the Bye-laws.
Reliance in this connection has been placed on Vinay Bubna Vs. Stock
Exchange Mumbai & Ors. [(1999) 6 SCC 215].
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Ms. Indu Malhotra, the learned counsel appearing on behalf of the
respondent would, on the other hand, submit that a Membership Card being
not a personal property of the Defaulter, when sold, the proceeds
thereof must be distributed amongst the creditors as ’liabilities
relating to contracts’ under Rule 16(ii) makes no distinction between
the claims of a member and non-member as Bye-law 219 defines a ’Contract
Note’ to include a contract between a member and a non-member. It was
argued that the other assets of the defaulting member do not vest in the
Exchange. The vesting of the other assets in the Defaulters’ Committee
is merely to a limited extent, viz as a trustee, for the benefit and on
account of the creditors members. Such vesting, Ms. Malhotra would
contend, would be co-terminus with the satisfaction of the claims of the
members and, thus, the surplus which remains at the hands of the
Defaulters’ Committee must be restored to the defaulting member in terms
of Rule 44 which would be available for discharge of his other dues.
As per the first affidavit of the Exchange, Ms. Malhotra would
argue, a large amount of surplus money was available at its hand, and,
thus, no illegality can be said to have been committed by both the
Single Judge and the Division Bench of the High Court in recording their
concurrent finding that what had been attached was the surplus from the
other assets of the defaulting member.
The learned counsel would submit that procedures laid down for
arbitration between members and non-members; and members and members are
absolutely different. Whereas in the case of the former the award is to
be filed before an appropriate court for being made a rule of the court;
no such procedure is contemplated in the arbitration proceeding between
a member and a member. An award in favour of a non-member and which had
not been made a rule of court would not be enforceable, contends Ms.
Malhotra.
It was further submitted that the Defaulters’ Committee could not
entertain any such claim which was not preferred within the time
prescribed by the Governing Board in terms of Bye-Law 343(vii). Our
attention has been drawn to the fact that the Division Bench of the High
Court by an order dated 17.1.1996 directed the Stock Exchange to put the
entire surplus amounting to Rs. 55 lakhs in fixed deposit. In the said
account a huge amount of interest has accumulated but the same has not
been accounted for in the statement. The learned counsel would contend
that the funds available at its hands had been dealt with by the Stock
Exchange in a highly high-handed and inequitable manner and there are
severe discrepancies with regard to the account submitted by it. In
this connection our attention has also been drawn to the fact that the
respondent had been waiting for satisfaction of decree since 15.2.1994
and thus, there is no justifiable reason that this amount be not paid to
her as per the decree.
The learned counsel would submit that the Stock Exchange had made
a statement before this Court that it would deposit the entire decretal
amount to the Bombay High Court within one day, since it is a money
decree, as a condition for the Special Leave Petition to be entertained
which was permitted on 8.9.1997 and, therefore, in interest of justice
she be allowed to withdraw the said amount.
STAUTORY PROVISIONS:
The Exchange is recognized as a Stock Exchange within the meaning
of the said Act. The relevant provisions of the said Act are as
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follows:
"2 (a) ’Contract’ means a contract for or
relating to the purchase or sale of securities;
2 (e) ’prescribed’ means prescribed by rules
made under this Act;
2 (f) ’recognised stock exchange’ means a stock
exchange which is for the time being recognised
by the Central Government under section 4;"
Section 3 of the Act deals with Application for recognition of
Stock Exchanges which reads as under:
"3. Application for recognition of stock
exchanges.- (1) Any stock exchange, which is
desirous of being recognised for the purposes of
this Act, may make an application in the
prescribed manner to the Central Government.
(2) Every application under sub-section (1) shall
contain such particulars as may be prescribed,
and shall be accompanied by a copy of the bye-
laws of the stock exchange for the regulation and
control of contracts and also a copy of the rules
relating in general to the constitution of the
stock exchange, and in particular, to..
(a)the governing body of such stock
exchange, its constitution and powers
of management and the manner in which
the business is to be transacted;
(b)the powers and duties of the office
bearers of the stock exchange;
(c)the admission into the stock exchange
of various classes of members, the
qualifications for memberships, and the
exclusion, suspension, expulsion and
re-admission of members there from or
thereinto;
(d)the procedure for the registration of
partnerships as members of the stock
exchange in cases where the rules
provide for such membership; and the
nomination and appointment of
authorised representatives and
clerks."
Section 4 provides for Grant of recognition to stock exchanges.
Sub-section 1(a) of Section 4 is as under:
"(1) If the Central Government is satisfied, after
making such inquiry as may be necessary in this
behalf and after obtaining such other or further
information, if any, as it may require,â\200\224
(a) that the rules and bye-laws of a stock
exchange applying for registration are in
conformity with such conditions as may be
prescribed with a view to ensure fair
dealing and to protect investors;"
Section 9 of the Act deals with power of recognized stock
exchanges to make bye-laws. Sub-section 1 of Section 9 reads as under:
"(1) Any recognised stock exchange may, subject
to the previous approval of the Central
Government, make bye-laws for the regulation and
control of contracts."
Sub-section (2) of Section 9 reads thus:
"(2)In particular , and without prejudice to the
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generality of the foregoing power, such bye-laws
may provide forâ\200\224
... ... ...
(b) a clearing house for the periodical
settlement of contracts and differences
thereunder, the delivery of and payment
for securities, the passing on of delivery
orders and the regulation and maintenance
of such clearing house;
(k) the regulation of the entering into,
making, performance, rescission and
termination, of contracts, including
contracts between a member or between a
member and his constituent or between a
member and a person who is not a member,
and the consequences of default or
insolvency on the part of a seller or
buyer or intermediary, the consequences of
a breach or omission by a seller or buyer,
and the responsibility of members who are
not parties to such contracts;
(n) the method and procedure for the
settlement of claims or disputes,
including settlement by arbitration;"
Sub-Section 3(b) of Section 9 reads as under:
"(3) The bye-laws made under this section mayâ\200\224
(b) provide that the contravention of any of the
bye-laws shall render the member concerned
liable to one or more of the following
punishments, namely:â\200\224
(i) fine;
(ii) expulsion from membership;
(iii) suspension from membership for a specified
period;
(iv) any other penalty of a like nature not
involving the payment of money."
The Rules, Bye-laws and Regulations have been framed by the
Exchange known as ’the Stock Exchange Rules, Bye-Laws and Regulations,
1957. The same has received the approval of the Central Government.
The Rules so framed govern the relationship of the member and Exchange.
Rule 5 provides that a membership is a personal privilege. If a
member becomes a defaulter, the said privilege is put on auction and the
money is deposited to the Exchange. Rule 10 provides that when a right
of membership is forfeited to or vests in the Exchange, it shall belong
absolutely to the Exchange free of all rights, claims or interest of
such member or any person through such member and the Governing Board
shall be entitled to deal with or dispose of such right of membership as
it thinks fit.
Rule 11 deals with nomination by members. With regard to
nomination in case of defaulter sub-rule (c) provides as under :
Nomination in case of Defaulter
"The forfeited right of membership of a
defaulter shall be restored to him if he be re-
admitted as a member within six months from the
date of default but if an application by a
defaulter for re-admission be rejected by the
Governing Board or if no such application be
made within six months of the declaration of
default the Governing Board may at any time
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exercise the right of nomination in respect of
such membership."
Rule 16 reads thus:
"16. ALLOCATION IN ORDER OF PRIORITY - When as
provided in these Rules the Governing Board has
exercised the right of nomination in respect of
a membership vesting in the Exchange the
consideration received therefor shall be applied
to the following purposes and in the following
order of priority namely -
Dues of Exchange and Clearing House
(i) first - the payment of such subscriptions,
debts, fines, fees, charges and other monies as
shall have been determined by the Governing
Board to be due to the Exchange or to the
Clearing House by the former member whose right
of membership vests in the Exchange;
Liabilities relating to Contracts
(ii) Second - the payment of such debts,
liabilities, obligations and claims arising out
of any contracts made by such former member
subject to the Rules, Bye-laws and Regulations
of the Exchange as shall have been admitted by
the Governing Board; provided that if the amount
available be insufficient to pay and satisfy all
such debts, liabilities, obligations and claims
in full they shall be paid and satisfied pro
rata; and
Surplus
(iii) third - the payment of the surplus if any
to the hands of the Exchange provided that the
Exchange in general meeting may at its absolute
discretion Airect that such surplus be disposed
of or applied in such other manner as it may
deem fit."
Rules 43 and 44 deal with the lien on security and return of
security and read as under:
LIEN ON SECURITY
"43. The security provided by a member shall be
subject to a first and paramount lien for any
sum due to the Exchange or to the Clearing House
by him or by the partnership of which he may be
a member and for the due fulfillment of his
engagements, obligations and liabilities or of
the partnership of which he may be a member
arising out of or incidental to any bargains,
dealings, transactions and contracts made
subject to the Rules, Bye-laws and Regulations
of the Exchange or anything done in pursuance
thereof."
RETURN OF SECURITY
"44. On the termination of his membership or on
his ceasing to carry on business on the Exchange
or on his working as a representative member or
on his death all security not applied under the
Rules, Bye-laws and Regulations of the Exchange
shall at the cost of the member be repaid and
transferred either to him or as he shall direct
or in the absence of such direction to his legal
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representatives."
Rules 53 and 54 deal with the effect of default and read as under
:
DEFAULT
"53. A member who is declared a defaulter shall
at once cease to be a member of the Exchange and
as such cease to enjoy any of the rights and
privileges of membership but the rights of his
creditor members against him shall remain
unimpaired.
LAPSE OF MEMBERSHIP RIGHT
54. A member’s right of membership shall lapse
to and vest in the Exchange immediately he is
declared a defaulter."
Rule 70 reads as under:
FAILURE TO PAY SUBSCRIPTION AND OTHERF FEES
"70. Save as otherwise provided in the Rules,
Bye-laws and Regulations of the Exchange if a
member fails to pay his annual subscription,
fees, charges or other monies which may be due
by him to the Exchange or to the Clearing House
within two months after notice in writing has
been served upon him by the Exchange he may be
suspended by the Governing Board until he makes
payment and if within a further period of six
months he fails to make such payment he may be
expelled by the Governing Body."
The following Bye-laws are also relevant for the purpose of
disposal of this matter :
"67. LIEN ON MARGIN DEPOSITS: The monies, Bank
Deposits Receipts and other securities and
assets deposited by a member by way of margin
under the provisions of these Bye-laws and
Regulations shall be subject to a first and
paramount lien for any sum due to the Exchange
or to the Clearing House by him or by the
partnership of which he may be a member and for
the due fulfillment of his engagements,
obligations and liabilities or of the
partnership of which he may be a member arising
out of or incidental to any bargains, dealings,
transactions and contracts made subject to the
Rules, Bye-laws and Regulations of the Exchange
or anything done in pursuance thereof.
226.(a) ALL CONTRACTS SUBJECT TO RULES, BYE-LAWS
AND REGULATIONS: All contracts made by a member
with a non-member for the purpose or sale of
securities in which dealings are permitted on
the Exchange shall in all cases be deemed made
subject to the Rules, Bye-laws, Regulations and
Usage of the Exchange shall be a part of the
terms and conditions of all such contracts and
they shall be subject to the exercise by the
Governing Board and the President of the powers
with respect thereto vested in it or him by the
Rules, Bye-laws and Regulations of the Exchange.
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251. APPOINTMENT OF UMPIRE: The arbitrators
appointed by the parties or by the Governing
Board or the President shall have the power to
appoint a member of the Exchange as an umpire at
any time and they shall do so if and when they
differ as to their award.
328. FRAUDULENT PREFERENCE: A member who shall
have received a difference on an account or
shall have received any consideration in any
transaction prior to the date fixed for setting
such account or transaction shall in the event
of the member from whom he received such
difference or consideration being declared a
defaulter refund the same to the Defaulters’
Committee for the benefit and on account of the
creditor members. Any member who shall have
paid or given such difference or consideration
to any other member prior to such settlement day
shall again pay or give the same to the
Defaulters’ Committee for the benefit and on
account of the creditor members in the event of
the default of such other member.
330. DISTRIBUTION: The Defaulters’ Committee
shall at the risk and cost of the creditor
members pay all assets received in the course of
realization into such bank and/ or keep them
with the Clearing House in such names as the
Governing Board may from time to time direct and
shall distribute the same as soon as possible
pro rata upto sixteen annas in the Rupee but
without interest among the creditor members
whose claims are admitted in accordance with
these Bye-laws and Regulations.
343. CERTAIN CLAIMS NOT TO BE ENTERTAINED: The
Defaulters’ Committee shall not entertain any
claim against a defaulter â\200\223
... ... ...
(vii) which is not filed with the Defaulters’
Committee within such time of the date of
declaration of default as may be prescribed by
the Governing Body."
The provisions for arbitration between a member and a non-member
and a member and a member are different and distinct.
The following Bye-laws provide for arbitration between member and
non-member:
"248(a) REFERENCE TO ARBITRATION: All claims
(whether admitted or not) differences and
disputes between a member and a non-member or
non-members (the terms "non-member" and "non-
members" shall include a remisier, authorized
clerk or employee or any other person with whom
the member shares brokerage) arising out of or
in relation to dealings, transactions and
contracts made subject to the Rules, Bye-laws
and Regulations of the Exchange or with
reference to anything incidental thereto or in
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pursuance thereof or relating to their
construction, fulfilment or validity or relation
to the rights, obligations and liabilities of
remisiers, authorized clerks, employees or any
other persons with whom the member shares
brokerage in relation to such dealings,
transactions and contracts shall be referred to
and decided by arbitration as provided in the
Rules, Bye-laws and Regulations of the Exchange.
249(a) APPOINTMENT OF ARBITRATORS: All claims,
differences and disputes required to be referred
to arbitration under these Bye-laws and
Regulations shall be referred to the arbitration
of two members of the Exchange one to be
appointed by each party.
254 AWARD BY ARBITRATORS: The arbitrators shall
make their award within four months after
entering on the reference or after having been
called upon to act by notice in writing from any
party or within such extended time as the
arbitrators may fix with the consent of the
parties to the reference or as the Governing
Body or the President may allow.
259 FILING OF AWARD: The arbitrators or umpire
shall at the request of any party to the
reference or any person claiming under such
party or if so directed by the Court and upon
payment of the fees and charges due in respect
of the reference and award and of the costs and
charges of filing the award cause the award or a
signed copy of it together with any depositions
and documents which may have been taken and
proved before the arbitrators or umpire to be
filed in Court."
The following Bye-laws provide for arbitration between member and
member:
"282. REFERENCE TO ARBITRATION: All claims,
complaints, differences and disputes between
members arising out of or in relation to any
bargains, dealings, transactions or contracts
made subject to the Rules, Bye-laws and
Regulations of the Exchange or with reference to
anything incidental thereto or anything to be
done in pursuance thereof and any question or
dispute whether such bargains, dealings,
transactions or contracts have been entered into
or not shall be subject to arbitration and
referred to the Arbitration Committee as
provided in these Bye-laws and Regulations.
284. APPLICATION FOR ARBITRATION: Whenever a
claim, complaint, difference or dispute which
under these Bye-laws and Regulations must be
referred to the Arbitration Committee arises
between members any member who is a party to
such claim, complaint, difference or dispute may
apply to the Arbitration Committee to inquire
into and arbitrate in the dispute.
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290. APPEAL TO ARBITRATION COMMITTEE: A party to
a reference who is dissatisfied with any award
of the arbitrators may appeal to the Arbitration
Committee against such award within seven days
of the receipt by him of such award.
292. HEARING OF APPEAL: When the deposit
certificate is annexed to the appeal the
Arbitration Committee shall itself proceed to
hear the appeal and arbitrate in the reference.
295. APPEAL TO THE GOVERNING BOARD: If the sum
involved in dispute is "ten thousand Rupees or
more" the party dissatisfied with the award of
the Arbitration Committee may appeal to the
Governing Board against such award within seven
days of the receipt by him of such award.
297. DECISION OF THE GOVERNING BODY FINAL: When
the deposit certificate is annexed to the appeal
the Governing Board shall proceed to hear the
appeal and the decision of the Governing Board
shall be deemed final and binding on the parties
to the appeal."
Rules, Bye-laws and Regulations are made by the Exchange. They
although are not made under a statute but having regard to the scheme as
also the purport and object thereof, have a statutory flavour. Bye-laws
are required to be made for regulation and control of contracts, whereas
rules relate to in general to the constitution and management of a stock
exchange.
A contract has been defined to mean a contract for or relating to
purchase or sale of securities. A contract note however, in terms of
Bye-law Note No.219 includes a contract between a member and a non-
member. It is not in doubt or dispute that membership conferred upon a
person is a personal privilege. He holds such privilege so long as he
complies with the rules, bye-laws and regulations framed by the
Exchange. In the event of a default committed by a member, having
regard to Rule 53 as also Bye-law 316, he would cease to enjoy any right
as such. His right in terms of Rule 54 lapses and vests in the Exchange
immediately upon a declaration that he has become a defaulter. His
right of nomination in view of Rule 9 ceases upon default and vests in
the Exchange. In terms of Rule 10, the membership belongs absolutely to
the Exchange free of all rights, claims or interests in such a manner as
it may think fit. Rule 16 provides for the order of priority in terms
whereof dues of the Exchange and clearing house would have priority,
whereafter all the liabilities relating to contract are required to be
discharged. Rule 16, however, does not make any distinction between the
claim of a member or a non-member. In the event there being any
surplus, the amount collected by the Exchange by auctioning the right of
membership is to be dealt with in such a manner as the Exchange may
think fit and proper. Rule 16, aforementioned, has been held to be
valid in Vinay Bubna (supra) by this Court holding :
"10. The order of priority laid down by the
aforesaid Rule 16 ensures that dues to the
exchange or to the clearing house have first to
be met before the balance amount can be utilised
for payment of debts, liabilities, obligations
etc. arising out of any contract made by the
former member. If the amount available is
insufficient to pay all such debts, liabilities,
etc. then the payment is to be made pro rata.
If, however, any surplus still remains the same
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is to be disposed of or applied in such manner
as the exchange in general meeting may decide.
11. The High Court, in our opinion, was,
therefore, right in coming to the conclusion
that on a default being committed the
sharebroker ceases to become a member of the
Exchange and all his rights, privileges, etc. as
a member come to an end. If he does not clear
the dues within six months the governing body
then has a right of nomination in respect of
such membership. It will be incorrect to state
that on the stock broker ceasing to be a member,
he still retains any right or interest in the
permission which has been granted to him by the
exchange to carry on business as a member. The
membership card of a share broker is not his
personal property which, on default being
committed by him and his ceasing to be a member,
can be sold and the proceeds distributed amongst
his creditors. Rules 53 and 54 leave no manner
of doubt that the member’s right of membership
vests in the exchange after he is declared a
defaulter. This view, namely, that the
defaulting member can claim no interest in the
membership card and can pass none is in
consonance with the decision of the Privy
Council in Official Assignee of Bombay v. K. R.
P. Shroff & Ors. AIR 1932 PC 186. In that case a
member of the Bombay Stock Exchange had lost his
membership for being a defaulter. The main
question which arose for determination there was
whether a card or right of membership of a share
broker or the proceeds of sale thereof, when
sold, would pass to the assignee in insolvency
of the share broker’s estate after he had lost
his membership for being a defaulter. After
referring to the rules of the Stock Exchange in
this connection it was observed at p. 190 as
follows :
"But although the rules are badly drawn and
not in uniform phraseology their result in
the case of a member who has lost his
membership for being a defaulter clearly
enough is that he loses all interest both in
the property of the association and in his
card. In such a case no interest is reserved
in the defaulter’s card except to membership
of the Association who have suffered by his
lapse-in the rules sometimes called his
creditors-or to the association itself. This
seems to their Lordships to be the result of
Rules 18, 56, 57 and 62. The defaulting
member himself has no interest in the result
of the sale provided for under these rules
nor can he require a sale to be made. The
rules are there for the benefit of his
"exchange creditors" and are doubtless
enforceable at their instance."
Yet again in Stock Exchange, Ahmedabad vs. Assistant Commissioner
of Income Tax, Ahmedabad [(2001) 3 SCC 559], this Court upon following
the decision of the Privy Council in Official Assignee of Bombay vs.
K.R.P. Shroff [AIR 1932 PC 186] again held :
"10. In Official Assignee of Bombay v. K. R. P.
Shroff (AIR 1932 PC 186 : ILR 56 Bom 374) the
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Privy Council considering somewhat similar Rules
held that a member who has lost his membership
for being a defaulter loses all interests both
in the property of the association and in his
card. No interest is reserved in the defaulter’s
card except to members of the association who
have suffered by his lapse or to the association
itself. The contention urged on behalf of the
respondent that Rajesh Shah could not be
declared a defaulter after his death and,
therefore, on his purported default the question
of membership vesting in the Stock Exchange
would not arise need not be gone into in the
present case, for that Rule 9 stipulates that
both in case of death or default of a member his
right of nomination shall cease and vest in the
Exchange. In the case in hand, on the death of
Rajesh Shah his right of nomination ceased and
vested in the Exchange and his legal
representatives and heirs did not exercise the
right of nomination by expressing their
inability to meet the liabilities of the
deceased."
How the card money is to be dealt with has been provided under the
rules. A dichotomy, however, has been created under the rules and bye-
laws as regard the amount received by sale of membership card and amount
recovered from defaulter’s other assets. On a plain reading of the
rules and bye-laws it appeard that the authority to deal with the card
money and the liability of the members by the Defaulters’ committee is
different, but having regard to the scheme of distribution of the
liabilities of the Exchange, clearing house, members and non-members,
all the assets shall be placed at the hands of the Defaulters’
Committee. But as would appear from the discussions made hereinafter
the application thereof would be separate and distinct.
In terms of the bye-laws, a Defaulters’ Committee is to be
constituted which is a standing committee consisting of six members of
the Exchange. Such a committee is constituted in terms of Rule 170(a)
(ii) of the Stock Exchange Rules, Bye-laws and Regulations, 1957. It is
not a juristic person. It is merely an association of persons.
Bye-laws 316 to 353A deal with default. Bye-law 316 provides for
declaration of default on account of specified situations where as bye-
law 317 empowers the Governing Board to declare a member as a defaulter
if he fails to meet an obligation to a member or non-member arising out
of a Stock Exchange transaction. Bye-law 322 empowers the Defaulters’
Committee to take charge of all his books of accounts, documents, papers
and vouchers of such member so as to enable it to ascertain the state of
his affairs and require him to file with the committee a complete list
of his debtors and creditors. Bye-law 326 provides for vesting of
security and margin money and securities deposited by the defaulter and
recover all monies, securities and other assets due, payable or
deliverable to the defaulter by any other member in respect of any
transaction or dealing made subject to rules, bye-laws and regulations
of the Exchange and such assets shall vest in the Defaulters’ Committee
for the benefit and on account of the creditor members.
Bye-law 327 obliges every member to pay all monies, securities and
other assets due, payable or deliverable to the defaulter, to the
Defaulters’ Committee within specified time.
Bye-law 338 obliges the Defaulters’ Committee to keep a separate
account in respect of all monies, securities and other assets payable to
a defaulter which are received by and defray costs, charges and expenses
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for such collection for the same.
Bye-law 340 provides that "all accounts kept by the Defaulters’
Committee in accordance with these bye-laws and Regulations shall be
open to inspection 77 any creditor member."
Bye-law 342 lays down the mode and manner as to how the net assets
remaining in the hands of the Defaulters’ Committee are to be applied.
Vesting of such assets of the defaulter in the Defaulters’
Committee is not absolute. Defaulters’ committee is merely a trustee.
It holds the said amount vested in it for the benefit and on account of
the creditor members. Once the liabilities of the creditors from the
defaulters are paid to the members, in terms of Rule 44.
The assets devolve upon the Defaulters’ Committee in terms of
bye-law 326 for a limited purpose and as contra-distinguished from the
rules, in terms whereof the card may vest in the Exchange, do not vest
in it absolutely.
The Defaulters’ Committee takes in its custody the amount realised
from other assets not as an owner thereof and the vestment thereof
would, thus, be co-terminus with the satisfaction of the claim of the
member. It, as soon as the purpose of Bye-law 326 is satisfied, comes
to an end.
The assets of a defaulting member can broadly be divided into two
categories, namely, card membership and other assets.
How the assets obtained from card membership are to be applied
would appear from Rules 5, 6, 7, 9 and 10, 53, 54, 54-A and 70 of the
Rules.
However, so far as other assets are concerned, the same are to be
applied and dealt with in terms of Rules 36, 43, 44 and Bye-Laws 316,
322, 326 and 338.
At this juncture, it may be necessary to look to the provisions
relating to distribution proceedings under the Bye-laws so as to
consider their effect on the distribution of the assets of the
defaulting member.
The bye-laws framed by the Exchange also provide the mode and manner
in which the arbitration proceedings can be taken recourse to both by
members and non-members against the defaulters. The rules in this
behalf, however, are distinct and separate.
Bye-laws 248(a), 249(a), 254 and 259 deal with arbitration between
member and non-member.
On the other hand, Bye-laws 282, 284, 290, 292, 295 and 296
provide for arbitration between members.
There lies a distinction between the two sets of arbitration - one
between a member and a non-member and another between the member and
member of the Exchange. A claim by a non-member against the defaulter
who was the member must be considered from a different angle having
regard to the fact that although the same relates to a contract, such
arbitration is governed by the provisions of the law of the country,
namely, the Arbitration Act, 1940 and the Arbitration and Conciliation
Act, 1996, as the case may be. For the said reasons, only Bye-law 259
mandates that the award shall be filed in the court so as to enable
either the defaulting member or the non-member to make such objections
in terms of the provisions of the Act, as may be permissible in law.
Once an opportunity to file such as objection is provided for and
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determined, the award shall be made a rule of court and, thus, becomes
enforceable in a court of law. The claim of a decree-holder, thus,
cannot be pari passu with the claim of the award-holder in the category
non-member as it is incumbent upon a non-member to have an award be made
a rule of the court before it becomes enforceable. A contract between a
member and a non-member is otherwise enforceable in a civil court. By
reason of existence of agreement clause only the suit filed by a non-
member against a defaulting member can be stayed and/or referred to
arbitration. A decree made pursuant to such an award, can also be
executed by taking action as against the personal assets of the
defaulting member.
The scheme of arbitration between a member and a defaulting
member, however, stand on a completely different footing. Not only it
is an internal matter of the Exchange, an award made in such a
proceeding is an appealable one. Only when determination is made in
relation to a claim by and between the member and the defaulting member,
the same becomes final and enforceable.
There cannot, however, be any doubt that so long as the claim of
the awardees both of members as also non-members are dealt with by the
Defaulters’ Committee, the Exchange or the Defaulters’ Commiittee would
not be a debtor in relation to an awardee. But once the Defaulters’
Committee determines such claims and surplus is available at the hands
of the Defaulters’ Committee, as the surplus amount would become payable
to the defaulting members, the same would become an assets of the
defaulting member. In other words, other assets continue to remain
assets of the defaulting members subject to the vesting thereof for the
purposes mentioned in Bye-law 326 and as soon as the purpose is
satisfied, the ownership which was under animated suspension or eclipsed
would again revive to the defaulting member. The awardees, however, so
long as the assets remain under the control of the Defaulters’ Committee
would be entitled to get their claim on a pro-rata basis and not in its
entirety.
If it is held that despite the fact that claims having regard to
the priority clause contained in Rule 16 remain in the hands of the
Defaulters’ Committee and an order of attachment would be enforceable,
the same would result in incongruity. Unfortunately no clear picture
emerges from the rules and bye-laws as there does not appear to be any
provision how the card money as also other assets belonging to the
defaulting member can be handled by the Defaulters’ Committee. But the
rules and bye-laws have to be read harmoniously. They have to be read
together so as to make them effective and workable. So read, the
Defaulters’ Committee constituted in terms of bye-laws would apply to
the other assets, dues, payments of the members on a pro-rata basis
whereafter the dues of the non-member can be disbursed. While doing so,
however, such claims can be determined only having regard to the cut-off
date which must be prescribed by the Governing Board in terms of clause
7 of Bye-law 343. So far as card money is concerned, the same must be
disbursed having regard to the priority clause contained in Rule 16, in
which event, upon discharge of the dues of the Exchange and clearing
house, the same has to be distributed to the dues of the members and
non-members. It bears repetition to state that there does not exist any
distinction between a member and a non-member in terms of Rule 16 and in
the event the amount of the card money available at the hands of the
Exchange is not sufficient to satisfy all the claims, the same has to be
distributed on a pro-rata basis. However, any amount remaining surplus
even thereafter would be subject to a decision of the Governing Board.
The Governing Board may in a given situation having regard to the
hardship which may be faced by the members and non-members in realising
their dues may direct that such amount would be available for
disbursement towards the said dues. It, however, we may hasten to add,
is free to apply the surplus for a different purpose which, evidently
cannot be de’ hors the purpose and object for which the Exchange has
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been constituted.
Unfortunately before the High Court, it has not been disclosed
that any date has been prescribed in terms of clause 7 of Bye-law 343.
In its first affidavit, the Exchange has categorically stated that they
had enough surplus at its hands wherefrom the claim of the respondents
could be satisfied. It, however, as noticed hereinbefore, filed an
additional affidavit as also a further affidavit taking a different
stand. As indicated hereinbefore, before us as also, a statement has
been filed for the purpose of showing that there exists a shortfall of
Rs.70 lakhs.
The manner in which the Exchange has dealt with the matter to say
the least is unfortunate.
The learned Single Judge noted the admission made by the Exchange
to the effect that the Defaulters’ Committee called in and realised the
security and margin money and securities deposited by the defaulted
member and recovered monies, securities and other assets due, payable or
deliverable to the defaulted member. It noticed that a sum of Rs.50
lakhs which the Defaulters’ Committee would distribute ratably on pro
rata basis amongst the creditor constituents of the deaulter member. It
also noted that till 12.1.1995, the Exchange had received around 100
claims from the creditor constituents of the defaulted member
aggregating to Rs.24 lakhs and in that view of the matter the Exchange
agreed to make part payment of Rs.2,96,000/- to the respondents. The
learned Single Judge while rejecting the contention of the Exchange that
the assets belonging to the defaulted member cannot be attached in
Garnishee proceedings since it is not a debt due by the Exchange to the
defaulted member, held :
"...The submission is devoid of any merit.
Despite admission of the Exchange as contained
in the said affidavit dated 12th January, 1995
that the Deaulters’ Committee did realise the
amount lying with it from the assets of the
defaulted member, part of which has been
utilized in defraying to the full extent the
liability of the defaulted member to the
Exchange, it is amusing that it is now contended
that the amounts so realised belong to the
Exchange and not to the defaulted member. No
doubt the Defaulters’ Committee of the Exchange
is having custody or possession of such amount
on behalf of the defaulted member but not the
ownership thereof. It is not the property
either of the Exchange or of the Defaulters’
Committee. The surplus amount lying with the
Defaulters’ Committee is, in the wider sense, a
debt due by the Exchange to the defaulted member
and has been justifiably attached to the extent
of the decretal amount payable by the defaulted
member to the claimant by serving the Garnishee
Notice upon the Exchange."
It was further held :
"...Such balance amount, in any event, is
available to the judgment creditors including
the claimant herein holding decree of competent
Court of Law against the defaulted member for
levy of attachment in execution of decree/s
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including by service of Garnishee Notice."
Before the Division Bench, the Exchange did not question the
factual statement of fact. It may be true that the additional affidavit
filed by the Exchange was taken on record by the Division Bench but in
its impugned judgment it refused to look thereinto on the ground that
the same was not filed within a reasonable time. Had the Exchange
disclosed the cut-off date for the purpose of entertaining the claims of
the members and non-members specified by the Governing Board such a
contingency would not have arisen. Furthermore, in the instant case by
reason of the orders of the court a sum of Rs.55 lakhs had been directed
to be deposited in a fixed deposit in January 1996. The amount of
interest earned therefrom has not been disclosed. In short, the Stock
Exchange has not disclosed :
"i) The number of claims received of non-member
within the period prescribed;
ii) The Number of enforceable Decrees that have been
passed with respect to the claims of non-
members;
iii) Amount of Interest available on the amount of
Rs.55 lacs deposited in a fixed deposit pursuant
to the Order dated 17.1.1996 of the Bombay High
Court."
For the reasons aforementioned, we are of the opinion that the
matter be considered afresh by the learned Single Judge of the High
Court. The High Court is requested to consider the claims of the
respondents in the light of the observations made hereinbefore as also
upon directing the Exchange to file a fresh statement of accounts, if it
is found meet and proper. In the event, any doubt or dispute arises, the
High Court would be entitled to appoint a competent person as
Commissioner to go into the said accounts and submit a report to it at
the cost of the Exchange. However, if it is found that the Governing
Board has not specified any date in terms of clause 7 of Bye-law 343, it
shall issue such direction/directions as it may deem fit and appropriate
for doing complete justice not only to the respondents but also to the
other creditors similarly situated.
In view of the fact that the respondents herein had obtained a
decree in her favour as back as on 15.2.1994, we would request the High
Court to consider the desirability of disposing of the matter as
expeditiously as possible preferably within four months from the date of
this order. This appeal is disposed of on the above terms with no order
as to costs.