TMI Blog2003 (10) TMI 659X X X X Extracts X X X X X X X X Extracts X X X X ..... rovisions 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. 3. 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 fulfil his obligations and liabilities, on or about 4th Nov., 1997, he was declared a defaulter in terms of Bye-law No. 318 whereupon he ceased to be a member of the Exchange under r. 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. 4. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ange had exercised the right of nomination of membership relating to C.S. Shah and recovered a sum of approximately ₹ 1,25,00,000 in that manner and as per r. 16 of the Exchange Rules out of the realisation from the nomination of membership of approximately ₹ 1,24,00,000, a sum of approximately ₹ 70,00,000 was applied towards the payment of appellant's clearing house's dues and a balance sum of ₹ 53,56,159 remained available for distribution on a priority basis, under r. 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 r. 16. The Exchange, therefore, set out that the balance of ₹ 53,56,159 (which was the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Total claim 1,63,00,000 Net shortfall 70,00,000 Submissions: 12. 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. 13. 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 member 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 Rule ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 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. 18. It was further submitted that the Defaulters' Committee would 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 dt. 17th Jan., 1996, directed the Stock Exchange to put the entire surplus amounting to ₹ 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and clerks. Sec. 4 provides for grant of recognition to Stock Exchanges. Sub-s. (1)(a) of s. 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 of further information, if any, as it may require,' (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; Sec. 9 of the Act deals with power of recognized stock exchanges to make bye-laws. Sub-s. 1 of s. 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-s. (2) of s. 9 reads thus : (2) In particular, and without prejudice to the generality of the foregoing power, such bye-laws may provide for : '.. ..' '.. (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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se 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 fulfilment 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 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 vest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ising 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 pursuance thereof or relating to their construction, fulfilment or validity of 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 m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the decision of the Governing Board shall be deemed final and binding on the parties to the appeal.' 23. 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. 24. 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 r. 53 as also Bye-law 316, he would cease to enjoy any right as such. His right in terms or r. 54 lapses and vests in the Exchange immediately upon a declaration that he has become a defaulter. His right of nomination in view of r. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ance with the decision of the Privy Council in Official Assignee of Bombay vs. 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 interests 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 rr. 18, 56, 57 and 62. The defaulting member himself has n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be constituted which is a standing committee consisting of six members of the Exchange. Such a committee is constituted in terms of r. 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. 28. Bye-laws 316 to 353A deal with default. Bye-law 316 provides for declaration of default on account of specified situations whereas 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 permissib ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Defautlers' 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 where after the dues of the non-member can be disbursed. While doing so, however, such claim can be determined only having regard to the cut-off date which must be prescribed by the Governing Board in terms of cl. 7 of Bye-law 343. So far as card money is concerned, the same must be disbursed having regard to the priority clauses contained in r. 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 r. 16 and in the event the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ld : The submission is devoid of any merit. Despite admission of the Exchange as contained in the said affidavit dt. 12th Jan., 1995, that the Defaulters' 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 of 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 hold ..... X X X X Extracts X X X X X X X X Extracts X X X X
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