06 December 2004
Supreme Court


Case number: C.A. No.-007890-007890 / 2004
Diary number: 25519 / 2003



CASE NO.: Appeal (civil)  7890 of 2004

PETITIONER: Harinarayan G. Bajaj

RESPONDENT: Rajesh Meghani & Anr.

DATE OF JUDGMENT: 06/12/2004

BENCH: Ruma Pal, Arijit Pasayat & C. K. Thakker


(Arising out of SLP (C) No.24126 of 2003)


       Leave granted.

       The first named respondent is a share broker and was a  member of the National Stock Exchange of India Ltd. (referred  as the ’NSE’).  The NSE which was initially named as the  second respondent has been deleted from the array of parties  at the instance of the appellant.  We will therefore refer to the  first respondent as the respondent. The appellant started  trading in shares through the respondent.  In March, 2001 three  separate transactions were entered into between the appellant  and respondent for purchase of three separate lots of shares of  Amara Raja Batteries Ltd.  The respondent’s allegation is that  the appellant did not make payment for the shares bought by  the respondent for and on behalf of the appellant and that by  reason of the non-payment for the shares, the NSE declared  the respondent as a defaulter on 19th June 2001.  On 21st June  2001, the respondent referred his claim against the appellant to  Arbitration under the Bye-laws of the NSE.  The appellant  contested the claim and contended that the Arbitration  reference under the Bye-laws was not maintainable on the  ground that the same was filed after the respondent had been  declared a defaulter.  The appellant also filed a counter claim  against the respondent before the Arbitral Tribunal.         On 31st July 2002, the Arbitral Tribunal passed an award  in favour of the respondent for an amount of Rs. 3,46,89,636/-  after rejecting the preliminary objection raised by the appellant  as to the maintainability of the arbitration proceedings. The  Arbitral Tribunal  held that the transactions in question had  been completed prior to the respondent being declared a  defaulter and that the respondent was not in any way debarred  or prevented from pursuing his claim to recover amounts due  from the appellant in respect of such transactions.         Challenging the award the appellant filed an application  under Section 34 of the Arbitration and Conciliation Act, 1996 in  the High Court.  The learned Single Judge noted that the  appellant had made only two submissions in so far as the  validity of the award was concerned.  Firstly, it was submitted  that after the respondent had been declared a defaulter, the  respondent did not have the locus standi to refer the disputes to  Arbitration or to carry on the arbitration proceedings.  The  second submission was that the Arbitrators had erred in holding  that the appellant was liable to pay the purchase price of the



shares although the appellant had specifically submitted before  the Arbitrators  that the respondent was not in a position to  effect delivery of the shares which were alleged to have been  purchased.           The learned Single Judge negatived the first submission  but upheld the second submission.  Hearing of the petition  under Section 34 of the 1996 Act was adjourned and the  Arbitral Tribunal was directed to give a finding specifically on  the aspect as to whether the respondent was in a position to  deliver the shares which were the subject matter of the  reference. Because of the failure of the appellant to make  payment  for the shares which had according to the learned  Single Judge resulted in "disastrous consequences" for the  respondent, the order was made conditional upon  the  appellant’s depositing the awarded amount in the Court within a  period of four weeks failing which the petition under Section 34  would stand dismissed.         The appellant preferred an appeal challenging the order  passed by the Single Judge.  The Division Bench dismissed the  appeal but set aside the direction of the learned Judge directing  the deposit of the awarded amount. The Division Bench also  directed that any amount which may be recovered by the   respondent in respect of the arbitration proceedings  be made  over to the Defaulters’ Committee to be dealt with in  accordance with the provisions of the Rules and Byelaws.  The  respondent has not challenged this direction and  has given an  undertaking that all amounts realised by him would be made  over to the Defaulters’ Committee for clearing his default. The decision of the Division Bench has been challenged  only by the appellant. The basic issue to be resolved, therefore,  is whether a trading member of the NSE who has been  declared a defaulter has the right to initiate arbitration  proceedings under the NSE Rules and Byelaws.         The appellant submitted that Rule 33 of the NSE Rules  which were framed under Section 8 read with Section 3(2) of  the Securities Contract (Regulation) Act, 1956, provides for the  cessation of a trading member’s right of membership  immediately he is declared a defaulter.  It is submitted that Rule  33 read with Chapter XI of the Bye-laws would show that a  defaulter member had no right  to refer a dispute to arbitration.   Our particular attention was drawn to Byelaws 1 and 1-C in  which the right of trading members to refer a dispute to  arbitration not only in respect of on going transactions but also  in respect of transactions prior to a member being declared a  defaulter had been provided for.  The appellant’s contention is  that although the dispute relating to a defaulter member  survived, the defaulter member loses his right to refer the  dispute to arbitration by reason of Rule 33. According to the  appellant the dispute in respect of such period could only be  raised by the Defaulters’ Committee in terms of Byelaw 11 of  Chapter XI.          Other bye-laws in Chapter XII were also referred to show  that it is the Defaulters Committee which was  required to  collect and distribute the moneys payable to the defaulter.   Byelaw 28 specifically empowers the Defaulting Committee to  initiate any proceeding in a Court of Law either in the name of  the Exchange or in the name of the defaulter for the purpose  of recovering any amount due to the defaulter. It is contended  that once a Trading Member was declared a defaulter he was  ’dead’ as far as the NSE was concerned and the defaulter’s  estate could be represented by the Defaulters’ Committee  under Bye-law 26 of Chapter XII. It is contended that similar  provisions of the Bombay Stock Exchange Act had been  construed by this Court in  Vinay Bubna V. Stock Exchange,  Mumbai 1999 (6) SCC 215 and it was held that once a



member was declared a defaulter, his right of membership  was forfeited and vested in the Exchange.  The defaulting  member retained no interest in his membership card which  could be sold and the proceeds distributed amongst his  creditors.  The decision in BSE Exchange V. Jaya I. Shah  2004 (1) SCC 160  was relied upon for contending that the  Bye-laws  of Exchanges being badly drafted should not be  strictly construed  but be read harmoniously along with the  Rules in order to give effect to the object of the Rules. The  appellant also relied upon the decision of the Bombay High  Court in Chandulal Laxminarayan Agarwal V. Ramdayal  Onkarlal Agarwal ILR 1996 Nagpur 392 which held that  under Section 28(2) of the Provincial Insolvency Act, 1920  once the property of an insolvent vests in the Insolvency Court  or the receiver the insolvent is completely divested of the  property, and he can have no right to sue for any declaration  in respect of that property  as the right to sue would also vest  in the Insolvency Court or the receiver. The decision of  Chiranjilal Ramchandra Loyalka V. Jatashankar N. Joshi  (1942) 44 Bom LR 692 was also relied on  to urge that the  right to refer a dispute to arbitration was granted to a member  qua member of an Exchange.           The respondent has submitted that Rule 33 could not be  construed to cover the right to go to arbitration.  It is said that  the right was not part of the privileges of  membership but arose  out of the contract between the respondent and the appellant  and that there was no question, therefore, of the respondent  being deprived of this right under Rule 33.  It is also submitted  that the requirement of referring the dispute in the Bye-laws  between the trading members and their constituents to  arbitration could not be said to be a right simpliciter.   Parties to  the  arbitration agreement were obliged to refer disputes to  arbitration.  Rule 1C, according to the respondent clearly  indicated that the disputes arising out of a transaction prior to a  trading member being declared a defaulter survived and could  be referred to arbitration only by the parties to the arbitration  agreement.  The Defaulters’ Committee was not a party to the  arbitration agreement.  The decisions cited by the appellant  have been distinguished. It has been emphasized that the  provisions of the Provincial Insolvency Act, 1920 relied upon by  the appellant were vastly dissimilar with the provisions of the  Rules and the Byelaws of NSE.  It is submitted that Byelaw 11  did not envisage a complete vesting of all assets of the  defaulting member in the Defaulters’ Committee.  There was a  limited vesting of certain assets  which did not cover contractual  rights of a defaulting member against a non-member.   It was  finally submitted that neither the Defaulters’ Committee  nor  NSE had ever asserted the right to refer the disputes of a  defaulting member to arbitration nor had they questioned the  locus standi  of the respondent to do so.

The fulcrum of the appellants’ argument is Rule 33.  The  Rule reads: "A trading member’s right of  membership shall lapse and vest  with the Exchange immediately he  is declared a defaulter.  The  member who is declared a  defaulter shall forfeit all his rights  and privileges as a member of the  Exchange, including any right to  use of or any claim upon or any  interest in any property or funds of  the Exchange, if any."



The Rule speaks of the lapsing of a Trading Members  right of membership and forfeiture of his rights and privileges   as a member of the exchange on a member being declared as  defaulter.  The Rule further provides for the vesting of the right  of membership of the defaulting members with the NSE.  The  question is whether these rights and privileges include the right  to refer a dispute to  arbitration between the defaulting member  and another party.       Reliance on Jaya Shah’s case by the appellant was  unnecessary.  There is no dispute that the NSE Rules and Bye  laws have to be read harmoniously particularly when:  Rule (1)  of the Rules provides: "(1) The rights and privileges of a  trading member shall be subject to the  Bye Laws, Rules and Regulations of the  Exchange."          The NSE Bye laws which have been framed by the  Exchange under Section 9 of the Securities Contracts       (Regulation) Act, 1956 contain a separate chapter, (Chapter  XI), which deals exclusively with arbitrations.  Rule 2 of Chapter  XI makes the provisions of the Byelaws and Regulations part of  all dealings, contracts and transactions. It says: "In all dealings, contracts and  transactions, which are made or deemed  to be made subject to the Byelaws, Rules  and Regulations of the Exchange, the  provisions relating to arbitration as  provided in these Byelaws and  Regulations shall form and shall be  deemed to form part of the dealings,  contracts and transactions and the parties  shall be deemed to have entered into an  arbitration agreement in writing by which  all claims, differences or disputes of the  nature referred to in Bye laws (1), (1A),  (1B) and (1D) above shall be submitted to  arbitration as per the provisions of these  Byelaws and Regulations".          The arbitration proceedings as provided in the Byelaws  and Regulations are subject to the provisions of the Arbitration  and Conciliation Act, 1996  to the extent not provided for in the  Byelaws and Regulations (Byelaw 14). Byelaw 1 prescribes  requirements for reference to arbitration with regard to claims,  differences and disputes inter alia between Trading Members  and Constituents in the following manner: (1)"All claims, differences or disputes  between the Trading Members inter se  and between Trading Members and  Constituents arising out of or in relation  to dealings, contracts and transactions  made subject to the Bye-Laws, Rules  and Regulations of the Exchange or with  reference to anything incidental thereto  or in pursuance thereof or relating to  their validity, construction, interpretation,  fulfillment or the rights, obligations and  liabilities of the parties thereto and  including any question of whether such  dealings, transactions and contracts  have been entered into or not shall be  submitted to arbitration in accordance  with the provisions of these Byelaws  and Regulations".



         Rule 1(C) deals with disputes of defaulting members. It  says: (1C)  The provisions of Byelaws (1),  (1A) and (1B) shall become applicable  to all claims, differences, disputes  between the parties mentioned therein  for all dealings, contracts and  transactions made subject to the Bye  laws. Rules and Regulations of the  Exchange provided such dealings,  contracts and transactions had been  entered into between the parties  mentioned therein prior or to the date on  which the Trading Member was either  declared a defaulter or expelled or has  surrendered his trading membership."

Under these Byelaws the parties to the reference are the  parties to the agreement.  This is also what is provided under  Section 2(h) of the Arbitration and Conciliation Act, 1996 and a  ’party’ is defined as " a party to an arbitration agreement".          Byelaw (1C) envisages claims, differences, disputes  between the parties mentioned in Bye-laws (1), (1A), (1B) in  respect of dealings, contracts and transactions entered into  prior to the date on which a Trading Member was either  declared defaulter or expelled or has surrendered his trading  membership.   The parties remain parties to the arbitration  agreement despite the fact that as far as the Trading Member is  concerned, he may have ceased to be a Member when the  reference is made.  Byelaw 1C does not in any way indicate  that an arbitration agreement between an ex-Trading Member  and its constituent cannot be enforced at the instance of the   ex-Trading Members, or that a defaulter member ceases to be  a party to the arbitration agreement.

The argument that all the rights of a Trading Member who  has been declared to be a defaulter vests in the Defaulters’  Committee including the right to go to arbitration appears to be  incorrect.  For one this would amount to a rewriting of Byelaw  IC.  For another it would necessitate a rewriting of the  arbitration agreement by substituting the Defaulters’ Committee  in place of the Trading Member as a party to the agreement.       Furthermore even if one were to assume that the  reference to arbitration is part of the membership rights of a  Trading Member which are forfeited under Rule 33, in terms of  that Rule the right lapses and vests in the Exchange and if at all  it would be the Exchange which could enforce the arbitration  agreement. However, Byelaw 18 of Chapter XI clearly states: "For removal of doubts, it is hereby  clarified that the Exchange shall not be  construed to be a party to the dealings,  contracts and transactions referred to  under these Byelaws; and the provisions  of this Chapter shall not apply in case of  claims, differences or disputes between  the Exchange and a Trading Member and  no arbitration shall lie between the  Exchange and a Trading Member".   Rule 33 does not provide for the vesting of any rights in  the Defaulters’ Committee. The Exchange and the Defaulters’  Committee are not the same. The Defaulters’ Committee is set  up under Chapter XII Byelaw 30 and may be constituted by the



Board of Directors from time to time at any point of time. Not  less than 60% of the members of the Defaulters’ Committee  shall be from among non-trading members who shall be  nominated by the Exchange with the prior approval of  Securities and Exchange Board of India. Byelaw 11 on which particular emphasis has been placed  by the appellant to support his argument that the Defaulters’  Committee could refer the disputes of a defaulting member to  arbitration reads thus: "The Defaulters’ Committee shall call in and  realize the security deposits in any form,  margin money, other amounts lying to the  credit of and securities deposited by the  defaulter and recover all moneys, securities  and other assets due, payable or deliverable  to the defaulter by any other Trading Member  in respect of any transaction or dealing made  subject to the Bye-laws, Rules and  Regulations of the Exchange and such assets  shall vest ipso facto, on declaration of any  trading member as a defaulter, in the  Exchange for the benefit of and on account of  any dues of the Exchange, National Securities  Clearing Corporation Limited, Securities and  Exchange Board of India, other trading  members, Constituents and registered sub- brokers of the defaulter, approved banks and  any other persons as may be approved by the  Defaulters’ Committee and other recognized  stock exchanges."

This Rule gives the Defaulters’ Committee limited powers  to call in and realize (i) security deposits (ii) margin money (iii)  other amounts lying to the credit of the defaulting member and  (vi) securities deposited by the Defaulting Member.  The  Defaulting Committee has also the right to recover all moneys,  securities and other assets, due, payable or deliverable to the  defaulters by any other Trading Member.  By expressly  providing for these powers in the Committee, it would follow  that other powers are excluded on the principle "expressio  unius est exclusio alterius".  Thus the assets which may be  called in or realized or recovered by the Defaulting Committee  do not include monies payable under  a contract with a third  party nor monies the recovery of which are yet to be made.  Chapter XI Rule 11 is markedly different from the provisions of  Section 28(2) and Section 29 of the Provincial Insolvency Act,  1920 which expressly provide for the complete vesting of all  assets of an insolvent with the Insolvency Court or receiver.   Had the intention been to bring about the same consequence  as far as the Defaulting Members are  concerned, the Rules or  Bye-laws would have said so.  Instead particular assets have  been picked out for the purpose of realization by the Defaulters’  Committee.          Doubtless, the Defaulting Committee has been given the  power to distribute the moneys collected according to the  priorities mentioned in Bye law 23 after defraying its expenses.   But it is a very different proposition to infer from this that it is the  Defaulting Committee which is responsible for or entitled to  recover all such amounts that too by a reference to arbitration  under Byelaw (1C) of Chapter XI.  On the other hand the Defaulters’ Committee is expressly  empowered under Byelaw 28 of Chapter-XII  to initiate  proceedings in a Court of law in the name of the Exchange or in  the name of the defaulter for the recovery of the dues of the  defaulter. The words do not convey any intention to permit the



Defaulters’ Committee to also refer disputes in the name of the  defaulter to the arbitrator under Rule 1C.  The effect of the  express empowerment of the Committee "to initiate action in  Courts of law" cannot be read as implying initiating a reference  to arbitration. Had the intention behind the Bye laws been to  similarly authorize the Committee for the purposes of Byelaw  1C, it would have been expressly so provided. The plain  language of the Byelaw precludes the Defaulters’ Committee  from referring defaulters’ claims to arbitration.  This may be  contrasted with Section 59(h) of the Provincial Insolvency Act,  1920 which in terms authorizes the Receiver of an insolvent’s  property to refer any dispute to arbitration in order to realize the  property of the insolvent.         The submission of the appellant then was that if the  defaulter were left free to pursue the arbitration to recover  monies due to him, it would be possible that he may  misappropriate any amounts realized thereby.  The argument is  an argument of desperation and is not based on any known  principle of interpretation.       The provisions of Chapter XII would show that the  amount which may be realised by the defaulter in respect of the  transactions covered by Rules (1C) cannot be retained by him  but must be made over by him to the Defaulters’ Committee.   Bye-law 19 accordingly provides:-

"(19) The Defaulters’ Committee shall  keep a separate account in respect of all  monies, securities and other assets  payable to a defaulter which are  received by him and shall defray  therefrom all costs, charges and  expenses incurred in or about  the  collection of such assets or in or about  any proceedings it takes in connection  with the default."

        Additionally, the Defaulters’ Committee may take action  independently against the defaulter or his debtor or both under  Bye law 28 in the name of the Exchange.  If any further  protection is required by the Exchange it is a need that must be  met by the Exchange by framing an appropriate Bye law under  Section 9 of the Securities Contracts (Regulation) Act, 1956  and not an exercise for the Courts to undertake by convoluted  construction.         The decisions cited by the appellant are inapposite and  do not either factually or in law touch on the issues which call  for resolution in this case.  Vinay Bubna’s case deals with  Byelaws of the Bombay Stock Exchange which differ in form  and substance with the Bye laws of NSE which we are called  upon to interpret.  Furthermore the question in that case was  whether the defaulting member or the Assignee had any claim  over the sale proceeds of the membership card, an item which  clearly pertains to the rights of membership which are forfeited  on default. The other decisions of the High Court of Bombay  are equally inapposite and turn on the interpretation of the  provisions of the Provincial Insolvency Act, 1920 which are  wholly disparate from the provisions which are the subject  matter of controversy in this appeal. For the reasons aforesaid we affirm the decision of the High  Court and dismiss this appeal with costs.