A stock exchange must refund purchase money when it annuls the underlying trade.

The Appellant, a member-broker of the Bombay Stock Exchange, purchased 44,600 shares of Energy Products India Ltd. on behalf of his clients in Settlement No. 14/96-97.

The purchase included 21,600 shares allegedly sold through member-broker K.F. Vora.

The Appellant deposited approximately Rs. 23,00,000 with the Exchange’s Clearing House, but received only 23,000 shares, resulting in a short delivery of 21,600 shares valued at Rs. 10,58,000.

Subsequently, the Exchange annulled certain transactions involving K.F. Vora and other brokers on the ground that they were fictitious, and the disputed shares were returned to the concerned brokers.

Despite the annulment, the Exchange repeatedly called upon the Appellant to accept delivery of the disputed shares.

The Appellant declined delivery and sought a refund of Rs. 10,58,000 with interest.

His suit for declaration and refund was dismissed by the Bombay City Civil Court, which held, inter alia, that the Exchange was only a facilitator, that K.F. Vora was a necessary party, and that the Appellant was not entitled to the refund.

The Appellant preferred the present First Appeal.

1. Whether the Respondent-Exchange was merely a facilitator and marketplace, or was liable to refund Rs. 10,58,000 with interest to the Appellant.

2. Whether there was privity of contract between the Appellant and member-broker K.F. Vora, and whether the Appellant’s remedy lay against K.F. Vora rather than the Exchange.

3. Whether, after the trade in the disputed shares was annulled, the Exchange was legally entitled to insist upon delivery of those shares to the Appellant.

4. What relief the Appellant was entitled to.

The Court applied the statutory Bye-Laws of the Stock Exchange, particularly Bye-Law 96, under which the Clearing House may deliver securities received from one member to another member entitled to receive securities, and members giving and receiving delivery may be deemed to have contracted as sellers and buyers even without a direct contract.

Bye-Law 315J, providing protection against proceedings concerning matters done under the Bye-Laws, was held applicable only to disputes referred under the relevant dispute-resolution provisions and not as a blanket immunity for the Exchange in the present circumstances.

Bye-Law 92, concerning the Clearing House’s non-liability for title, ownership, genuineness or validity of securities and documents, did not absolve the Exchange from refunding money paid towards an annulled trade.

On necessary parties, the Court applied the twin tests that there must be a right to relief against the proposed party and that no effective decree can be passed in that party’s absence, relying on Moreshar Yadaorao Mahajan v. Vyankatesh Sitaram Bhedi, 2022 SCC OnLine SC 1307, and the principles reiterated in Nak Engg. Co. (P) Ltd. v. Tarun Keshrichand Shah, (2026) 3 SCC 631.

Although Section 28 of the Indian Contract Act, 1872 was relied upon by the Appellant, the Court considered it unnecessary to decide its applicability because the dispute was resolved on the interpretation of Bye-Law 315J.

The Court held that the disputed transactions had been annulled by the Exchange itself and that the shares had consequently been returned to K.F. Vora.

Once the trade was annulled, there was no subsisting transaction under which the Appellant could be compelled to accept physical delivery; the Exchange’s subsequent insistence on delivery was therefore inconsistent with the annulment.

The Court rejected the Exchange’s contention that the Appellant refused delivery merely because the share price had declined, finding that the annulment independently explained why delivery could no longer serve any legitimate contractual purpose.

Since no effective remedy survived against K.F. Vora after annulment, and the Appellant sought only restitution of money paid to the Exchange rather than damages for trading losses, K.F. Vora was not a necessary party and the suit was not defective for non-joinder.

The Court further held that Bye-Law 315J did not bar the action because no arbitration or other reference under the relevant Bye-Laws had been initiated, and Bye-Law 92 did not cover the Exchange’s obligation to account for money received in respect of a transaction that it had annulled.

The Trial Court’s judgment and decree dated 29 April 2017 were set aside.

The Respondent-Exchange was directed to pay the Appellant Rs. 10,58,000 together with interest at 9% per annum from the date of filing of the suit until payment or realisation.

The Court held that the Exchange was liable to refund the amount paid for the annulled trade, that K.F. Vora was not a necessary party, and that the Exchange could not insist upon delivery of shares after annulment of the underlying transaction.

There was no order as to costs, and the request for stay of the judgment for four weeks was rejected.