2015 (1) TMI 1516 - HC - Indian Laws

Jurisdiction of Arbitral Tribunal to entertain the disputes - Unauthorized transactions and allegations of fraud - lifting of Corporate Veil - HELD THAT - The AAT was of the view that the respondents had clearly established that they had made payment to the petitioner for the purpose of trading after they opened trading account with the petitioner. The transfer of securities to the petitioner and other director and employee of the petitioner was also pursuant to the opening of the trading account and was in pursuance of the respondents intention to trade with the petitioner. The AAT also holds that the petitioner has not denied the contention of the respondents that they gave instructions to the petitioner not to carry forward or roll over the trades and asked the petitioner to return the money which was admittedly not returned. The AAT justified the lifting of corporate veil to ascertain the real state of affairs particularly when the Tribunal found that there are serious allegations of fraud and serious misdemeanor against the petitioner. It relied upon the judgment of the Supreme Court in the case of Madan Mohan Rajgariha vs. Mahender R. Shah Brothers 2003 (7) TMI 589 - SUPREME COURT that even in the absence of a member constituent agreement the claims of a stock broker against the client/constituent would be arbitrable in accordance with the bye-laws of the stock exchange. The AAT was of the view that since the transactions have taken place between the petitioner and the respondents which can fully be attributable to the transactions between a trading member and a constituent and hence the bye-laws of NSE are applicable. The contention primarily being no contracts or transactions were entered into by the petitioner under the bye-laws of the Exchange. The said submission need to be rejected in view of the conclusion arrived at by the Arbitral Tribunal as well as AAT - The filing of a counterclaim by the petitioner presupposes the understanding of the petitioner that the Arbitral Tribunal and the AAT has jurisdiction to arbitrate the claims and counterclaim of the parties. It is a different issue that the Arbitral Tribunal as well as AAT has rejected the counterclaim of the petitioner on the ground that the counterclaim concerns the Exchange and the petitioner and the reliefs are not within the jurisdiction of the Arbitral Tribunal. The petitioner could not have challenged the very jurisdiction of the Arbitral Tribunal to which it has sought recourse. In fact there is no challenge in the counterclaim filed before the Arbitral Tribunal or in the appeal before the AAT to the vires of the said circular. Hence the contention of the learned counsel for the petitioner with regard to the jurisdiction of the Arbitral Tribunal to arbitrate the claims filed by the respondents need to be rejected. Appeal dismissed.

Summary

Issues Involved:
1. Jurisdiction of the Arbitral Tribunal.
2. Unauthorized transactions and allegations of fraud.
3. Lifting of the corporate veil.
4. Validity of the agreement dated September 24, 2011.
5. Counterclaim by the petitioner and jurisdiction of the Arbitral Tribunal.
6. Applicability of SEBI circular and the Investor Grievance Redressal Mechanism.

Detailed Analysis:

1. Jurisdiction of the Arbitral Tribunal:
The primary issue was whether the Arbitral Tribunal had the jurisdiction to entertain the disputes. The Tribunal referred to the agreement dated September 24, 2011, which was signed by Dr. Mayank Dubey on behalf of Sai Soft Securities. The Tribunal concluded that Sai Soft Securities was represented as a duly incorporated company for trading on the Exchange, and thus, the Tribunal had jurisdiction. The Tribunal relied on Clause 1 of Chapter 11 of the bye-laws of the Exchange, which provides that claims, disputes, or differences related to dealings, contracts, and transactions made subject to the bye-laws are within its jurisdiction.

2. Unauthorized Transactions and Allegations of Fraud:
The respondents alleged that the petitioner carried out unauthorized transactions fraudulently. The Tribunal found that the petitioner had received a cheque of Rs. 25 lacs from the respondents, which was intended as an initial margin for trading. The Tribunal held that the petitioner, as a trading member, could not accept deposits from the public, reinforcing the respondents' claim that the transactions were unauthorized.

3. Lifting of the Corporate Veil:
The Tribunal lifted the corporate veil to ascertain the real state of affairs, particularly in light of allegations of fraud. It concluded that Sai Soft Securities and Sai Soft Securities Ltd. were mirror images of each other, with the same directors and control. The AAT upheld this decision, relying on the judgment of the Supreme Court in LIC vs. Escorts Ltd., which allows lifting the corporate veil in cases of fraud or improper conduct.

4. Validity of the Agreement Dated September 24, 2011:
The petitioner argued that the agreement related to portfolio management and was of no consequence. However, the Tribunal rejected this contention, noting that the petitioner was not registered with SEBI for portfolio management services. The agreement was considered valid for establishing the Member-Constituent relationship between the parties.

5. Counterclaim by the Petitioner and Jurisdiction of the Arbitral Tribunal:
The petitioner challenged the order of the Investor Grievance Resolution Panel and the action of NSE in withholding its amount. The Tribunal and AAT rejected the counterclaim, stating that the claims concerned the Exchange and were not within their jurisdiction. The petitioner was estopped from challenging the jurisdiction, having submitted to it by filing a counterclaim.

6. Applicability of SEBI Circular and the Investor Grievance Redressal Mechanism:
The SEBI circular dated September 26, 2013, was pivotal in the proceedings. It outlined the Investor Grievance Redressal Mechanism, allowing the Trading Member to pursue arbitration. The Tribunal noted that the petitioner, by opting for arbitration, had submitted to its jurisdiction. The circular provided for monetary relief to investors during the pendency of proceedings, further supporting the respondents' claims.

The High Court dismissed the appeals, upholding the decisions of the Arbitral Tribunal and AAT, and emphasized the finality and binding nature of arbitral awards, as well as the limited grounds for annulment under Section 34 of the Arbitration and Conciliation Act, 1996.