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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-à-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.