SUPREME COURT OF INDIA
Harinarayan G. Bajaj
Vs
Rajesh Meghani
Appeal (Civil). 7890 of 2004, (Arising Out of Slp (C) No.24126 of 2003)
((Mrs.) Ruma Pal and Arijit Pasayat)
06/12/2004
RUMA PAL, J.
Leave granted.
The first named respondent is a share broker and was a member of the National
Stock Exchange of India Ltd. (referred as the 'NSE'). The NSE, which was
initially named as the second respondent, has been deleted from the array of
parties at the instance of the appellant. We will therefore refer to the first
respondent as the respondent. The appellant started trading in shares through
the respondent.
In March, 2001 three separate transactions were entered into between the
appellant and respondent for purchase of three separate lots of shares of Amara
Raja Batteries Ltd. The respondent's allegation is that the appellant did not
make payment for the shares bought by the respondent for and on behalf of the
appellant and that by reason of the non-payment for the shares, the NSE
declared the respondent as a defaulter on 19th June 2001. On 21st June 2001,
the respondent referred his claim against the appellant to Arbitration under
the Bye-laws of the NSE.
The appellant contested the claim and contended that the Arbitration reference
under the Bye-laws was not maintainable on the ground that the same was filed
after the respondent had been declared a defaulter. The appellant also filed a
counter claim against the respondent before the Arbitral Tribunal.
On 31st July 2002, the Arbitral Tribunal passed an award in favour of the
respondent for an amount of Rs. 3, 46, 89, 636/- after rejecting the
preliminary objection raised by the appellant as to the maintainability of the
arbitration proceedings. The Arbitral Tribunal held that the transactions in
question had been completed prior to the respondent being declared a defaulter
and that the respondent was not in any way debarred or prevented from pursuing
his claim to recover amounts due from the appellant in respect of such
transactions.
Challenging the award the appellant filed an application under Section 34 of
the Arbitration and Conciliation Act, 1996 in the
High Court. The learned Single Judge noted that the appellant had made only two
submissions in so far as the validity of the award was concerned. Firstly, it
was submitted that after the respondent had been declared a defaulter, the
respondent did not have the locus standi to refer the disputes to Arbitration
or to carry on the arbitration proceedings.
The second submission was that the Arbitrators had erred in holding that the
appellant was liable to pay the purchase price of the shares although the
appellant had specifically submitted before the Arbitrators that the respondent
was not in a position to effect delivery of the shares which were alleged to
have been purchased.
The learned Single Judge negatived the first submission but upheld the second
submission. Hearing of the petition under Section 34 of the 1996 Act was
adjourned and the Arbitral Tribunal was directed to give a finding specifically
on the aspect as to whether the respondent was in a position to deliver the
shares which were the subject matter of the reference. Because of the failure
of the appellant to make payment for the shares which had according to the
learned Single Judge resulted in "disastrous consequences" for the
respondent, the order was made conditional upon the appellant's depositing the
awarded amount in the Court within a period of four weeks failing which the
petition under Section 34 would stand dismissed.
The appellant preferred an appeal challenging the order passed by the Single
Judge. The Division Bench dismissed the appeal but set aside the direction of
the learned Judge directing the deposit of the awarded amount. The Division
Bench also directed that any amount which may be recovered by the respondent in
respect of the arbitration proceedings be made over to the Defaulters'
Committee to be dealt with in accordance with the provisions of the Rules and
Byelaws.
The respondent has not challenged this direction and has given an undertaking
that all amounts realised by him would be made over to the Defaulters'
Committee for clearing his default. The decision of the Division Bench has been
challenged only by the appellant. The basic issue to be resolved, therefore, is
whether a trading member of the NSE who has been declared a defaulter has the
right to initiate arbitration proceedings under the NSE Rules and Byelaws.
The appellant submitted that Rule 33 of the NSE Rules which were framed under
Section 8 read with Section 3(2) of the Securities Contract (Regulation) Act,
1956, provides for the cessation of a trading member's right of membership
immediately he is declared a defaulter. It is submitted that Rule 33 read with
Chapter XI of the Bye-laws would show that a defaulter member had no right to
refer a dispute to arbitration. Our particular attention was drawn to Byelaws 1
and 1-C in which the right of trading members to refer a dispute to arbitration
not only in respect of on going transactions but also in respect of
transactions prior to a member being declared a defaulter had been provided
for.
The appellant's contention is that although the dispute relating to a defaulter
member survived, the defaulter member loses his right to refer the dispute to
arbitration by reason of Rule 33. According to the appellant the dispute in
respect of such period could only be raised by the Defaulters' Committee in
terms of Byelaw 11 of Chapter XI.
Other bye-laws in Chapter XII were also referred to show that it is the
Defaulters Committee which was required to collect and distribute the moneys
payable to the defaulter. Byelaw 28 specifically empowers the Defaulting
Committee to initiate any proceeding in a Court of Law either in the name of the
Exchange or in the name of the defaulter for the purpose of recovering any
amount due to the defaulter.
It is contended that once a Trading Member was declared a defaulter he was
'dead' as far as the NSE was concerned and the defaulter's estate could be
represented by the Defaulters' Committee under Bye-law 26 of Chapter XII. It is
contended that similar provisions of the Bombay Stock Exchange Act had been
construed by this Court in Vinay Bubna V. Stock Exchange, Mumbai 6 and it was held that once a member was declared a
defaulter, his right of membership was forfeited and vested in the Exchange.
The defaulting member retained no interest in his membership card which could
be sold and the proceeds distributed amongst his creditors. The decision in BSE
Exchange V. Jaya I. Shah was relied upon for contending that the Bye-laws
of Exchanges being badly drafted should not be strictly construed but be read
harmoniously along with the Rules in order to give effect to the object of the
Rules. The appellant also relied upon the decision of the Bombay High Court in
Chandulal Laxminarayan Agarwal V. Ramdayal Onkarlal Agarwal 1996
ILR(Nagpur) 392 which held that under Section 28(2) of the Provincial
Insolvency Act, 1920 once the property of an insolvent vests in the
Insolvency Court or the receiver the insolvent is completely divested of the
property, and he can have no right to sue for any declaration in respect of
that property as the right to sue would also vest in the Insolvency Court or
the receiver.
The decision of Chiranjilal Ramchandra Loyalka V. Jatashankar N. Joshi (1942)
44 Bom LR 692 was also relied on to urge that the right to refer a dispute to
arbitration was granted to a member qua member of an Exchange.
The respondent has submitted that Rule 33 could not be construed to cover the
right to go to arbitration. It is said that the right was not part of the
privileges of membership but arose out of the contract between the respondent
and the appellant and that there was no question, therefore, of the respondent
being deprived of this right under Rule 33. It is also submitted that the
requirement of referring the dispute in the Bye-laws between the trading
members and their constituents to arbitration could not be said to be a right
simpliciter. Parties to the arbitration agreement were obliged to refer
disputes to arbitration. Rule 1C, according to the respondent clearly indicated
that the disputes arising out of a transaction prior to a trading member being
declared a defaulter survived and could be referred to arbitration only by the
parties to the arbitration agreement.
The Defaulters' Committee was not a party to the arbitration agreement. The
decisions cited by the appellant have been distinguished. It has been
emphasized that the provisions of the Provincial Insolvency
Act, 1920 relied upon by the appellant were vastly dissimilar with the
provisions of the Rules and the Byelaws of NSE. It is submitted that Byelaw 11
did not envisage a complete vesting of all assets of the defaulting member in
the Defaulters' Committee.
There was a limited vesting of certain assets which did not cover contractual
rights of a defaulting member against a non-member. It was finally submitted
that neither the Defaulters' Committee nor NSE had ever asserted the right to
refer the disputes of a defaulting member to arbitration nor had they
questioned the locus standi of the respondent to do so.
The fulcrum of the appellants' argument is Rule 33. The Rule reads:
"A trading member's right of membership shall lapse and vest with the
Exchange immediately he is declared a defaulter. The member who is declared a
defaulter shall forfeit all his rights and privileges as a member of the
Exchange, including any right to use of or any claim upon or any interest in
any property or funds of the Exchange, if any." *
The Rule speaks of the lapsing of a Trading Members right of membership and
forfeiture of his rights and privileges as a member of the exchange on a member
being declared as defaulter. The Rule further provides for the vesting of the
right of membership of the defaulting members with the NSE. The question is
whether these rights and privileges include the right to refer a dispute to
arbitration between the defaulting member and another party.
Reliance on Jaya Shah's case by the appellant was unnecessary. There is no
dispute that the NSE Rules and Bye laws have to be read harmoniously
particularly when: Rule (1) of the Rules provides:
"(1) The rights and privileges of a trading member shall be subject to
the Bye Laws, Rules and Regulations of the Exchange." *
The NSE Bye laws which have been framed by the Exchange under Section 9 of the Securities Contracts (Regulation) Act, 1956 contain a
separate chapter, (Chapter XI), which deals exclusively with arbitrations. Rule
2 of Chapter XI makes the provisions of the Byelaws and Regulations part of all
dealings, contracts and transactions. It says:
"In all dealings, contracts and transactions, which are made or deemed
to be made subject to the Byelaws, Rules and Regulations of the Exchange, the
provisions relating to arbitration as provided in these Byelaws and Regulations
shall form and shall be deemed to form part of the dealings, contracts and
transactions and the parties shall be deemed to have entered into an
arbitration agreement in writing by which all claims, differences or disputes
of the nature referred to in Bye laws (1), (1A), (1B) and (1D) above shall be
submitted to arbitration as per the provisions of these Byelaws and
Regulations". *
The arbitration proceedings as provided in the Byelaws and Regulations are
subject to the provisions of the Arbitration and
Conciliation Act, 1996 to the extent not provided for in the Byelaws and
Regulations (Byelaw 14). Byelaw 1 prescribes requirements for reference to
arbitration with regard to claims, differences and disputes inter alia between
Trading Members and Constituents in the following manner:
"(1) All claims, differences or disputes between the Trading Members
inter se and between Trading Members and Constituents arising out of or in
relation to dealings, contracts and transactions made subject to the Bye-Laws,
Rules and Regulations of the Exchange or with reference to anything incidental
thereto or in pursuance thereof or relating to their validity, construction,
interpretation, fulfillment or the rights, obligations and liabilities of the
parties thereto and including any question of whether such dealings,
transactions and contracts have been entered into or not shall be submitted to
arbitration in accordance with the provisions of these Byelaws and
Regulations". *
Rule 1(C) deals with disputes of defaulting members. It says: (1C) The
provisions of Byelaws (1), (1A) and (1B) shall become applicable to all claims,
differences, disputes between the parties mentioned therein for all dealings,
contracts and transactions made subject to the Bye laws. Rules and Regulations
of the Exchange provided such dealings, contracts and transactions had been
entered into between the parties mentioned therein prior or to the date on
which the Trading Member was either declared a defaulter or expelled or has
surrendered his trading membership.
Under these Byelaws the parties to the reference are the parties to the
agreement. This is also what is provided under Section 2(h) of the Arbitration and Conciliation Act, 1996 and a 'party' is
defined as “a party to an arbitration agreement".
Byelaw (1C) envisages claims, differences, disputes between the parties
mentioned in Bye-laws (1), (1A), (1B) in respect of dealings, contracts and
transactions entered into prior to the date on which a Trading Member was
either declared defaulter or expelled or has surrendered his trading
membership. The parties remain parties to the arbitration agreement despite the
fact that as far as the Trading Member is concerned, he may have ceased to be a
Member when the reference is made. Byelaw 1C does not in any way indicate that
an arbitration agreement between an ex-Trading Member and its constituent
cannot be enforced at the instance of the ex-Trading Members, or that a
defaulter member ceases to be a party to the arbitration agreement. #
The argument that all the rights of a Trading Member who has been declared
to be a defaulter vests in the Defaulters' Committee including the right to go
to arbitration appears to be incorrect. # For one this would amount to a
rewriting of Byelaw IC. For another it would necessitate a rewriting of the
arbitration agreement by substituting the Defaulters' Committee in place of the
Trading Member as a party to the agreement.
Furthermore even if one were to assume that the reference to arbitration is
part of the membership rights of a Trading Member which are forfeited under
Rule 33, in terms of that Rule the right lapses and vests in the Exchange and
if at all it would be the Exchange which could enforce the arbitration
agreement. However, Byelaw 18 of Chapter XI clearly states:
"For removal of doubts, it is hereby clarified that the Exchange shall
not be construed to be a party to the dealings, contracts and transactions
referred to under these Byelaws; and the provisions of this Chapter shall not
apply in case of claims, differences or disputes between the Exchange and a
Trading Member and no arbitration shall lie between the Exchange and a Trading
Member". *
Rule 33 does not provide for the vesting of any rights in the Defaulters'
Committee. The Exchange and the Defaulters' Committee are not the same. The
Defaulters' Committee is set up under Chapter XII Byelaw 30 and may be
constituted by the Board of Directors from time to time at any point of time.
Not less than 60% of the members of the Defaulters' Committee shall be from
among non-trading members who shall be nominated by the Exchange with the prior
approval of Securities and Exchange Board of India.
Byelaw 11 on which particular emphasis has been placed by the appellant to
support his argument that the Defaulters' Committee could refer the disputes of
a defaulting member to arbitration reads thus:
"The Defaulters' Committee shall call in and realize the security
deposits in any form, margin money, other amounts lying to the credit of and
securities deposited by the defaulter and recover all moneys, securities and
other assets due, payable or deliverable to the defaulter by any other Trading
Member in respect of any transaction or dealing made subject to the Bye-laws,
Rules and Regulations of the Exchange and such assets shall vest ipso facto, on
declaration of any trading member as a defaulter, in the Exchange for the
benefit of and on account of any dues of the Exchange, National Securities
Clearing Corporation Limited, Securities and Exchange Board of India, other
trading members, Constituents and registered sub- brokers of the defaulter,
approved banks and any other persons as may be approved by the Defaulters'
Committee and other recognized stock exchanges." *
This Rule gives the Defaulters' Committee limited powers to call in and realize
(i) security deposits (ii) margin money (iii) other amounts lying to the credit
of the defaulting member and (vi) securities deposited by the Defaulting
Member.
The Defaulting Committee has also the right to recover all moneys, securities
and other assets, due, payable or deliverable to the defaulters by any other
Trading Member. By expressly providing for these powers in the Committee, it would
follow that other powers are excluded on the principle "expressio unius
est exclusio alterius". Thus the assets which may be called in or realized
or recovered by the Defaulting Committee do not include monies payable under a
contract with a third party nor monies the recovery of which are yet to be
made. Chapter XI Rule 11 is markedly different from the provisions of Section
28(2) and Section 29 of the Provincial Insolvency Act, 1920
which expressly provide for the complete vesting of all assets of an insolvent
with the Insolvency Court or receiver.
Had the intention been to bring about the same consequence as far as the
Defaulting Members are concerned, the Rules or Bye-laws would have said so.
Instead particular assets have been picked out for the purpose of realization
by the Defaulters' Committee.
Doubtless, the Defaulting Committee has been given the power to distribute the
moneys collected according to the priorities mentioned in Bye law 23 after
defraying its expenses. But it is a very different proposition to infer from
this that it is the Defaulting Committee which is responsible for or entitled
to recover all such amounts that too by a reference to arbitration under Byelaw
(1C) of Chapter XI.
On the other hand the Defaulters' Committee is expressly empowered under Byelaw
28 of Chapter-XII to initiate proceedings in a Court of law in the name of the
Exchange or in the name of the defaulter for the recovery of the dues of the
defaulter. The words do not convey any intention to permit the Defaulters'
Committee to also refer disputes in the name of the defaulter to the arbitrator
under Rule 1C. The effect of the express empowerment of the Committee "to
initiate action in Courts of law" cannot be read as implying initiating a
reference to arbitration. # Had the intention behind the Bye laws been to
similarly authorize the Committee for the purposes of Byelaw 1C, it would have
been expressly so provided.
The plain language of the Byelaw precludes the Defaulters' Committee from referring
defaulters' claims to arbitration. This may be contrasted with Section 59(h) of
the Provincial Insolvency Act, 1920 which in terms
authorizes the Receiver of an insolvent's property to refer any dispute to
arbitration in order to realize the property of the insolvent.
The submission of the appellant then was that if the defaulter were left free
to pursue the arbitration to recover monies due to him, it would be possible
that he may misappropriate any amounts realized thereby. The argument is an argument
of desperation and is not based on any known principle of interpretation.
The provisions of Chapter XII would show that the amount which may be realised
by the defaulter in respect of the transactions covered by Rules (1C) cannot be
retained by him but must be made over by him to the Defaulters' Committee.
Bye-law 19 accordingly provides:-
"(19) The Defaulters' Committee shall keep a separate account in
respect of all monies, securities and other assets payable to a defaulter which
are received by him and shall defray there from all costs, charges and expenses
incurred in or about the collection of such assets or in or about any
proceedings it takes in connection with the default." *
Additionally, the Defaulters' Committee may take action independently against
the defaulter or his debtor or both under Bye law 28 in the name of the
Exchange. If any further protection is required by the Exchange it is a need
that must be met by the Exchange by framing an appropriate Bye law under
Section 9 of the Securities Contracts (Regulation) Act,
1956 and not an exercise for the Courts to undertake by convoluted
construction.
The decisions cited by the appellant are inapposite and do not either factually
or in law touch on the issues which call for resolution in this case. Vinay
Bubna's case deals with Byelaws of the Bombay Stock Exchange which differ in
form and substance with the Bye laws of NSE which we are called upon to
interpret. Furthermore the question in that case was whether the defaulting
member or the Assignee had any claim over the sale proceeds of the membership
card, an item which clearly pertains to the rights of membership which are
forfeited on default.
The other decisions of the High Court of Bombay are equally inapposite and turn
on the interpretation of the provisions of the Provincial
Insolvency Act, 1920 which are wholly disparate from the provisions
which are the subject matter of controversy in this appeal.
For the reasons aforesaid we affirm the decision of the High Court and dismiss
this appeal with costs.