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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-Ã -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.