http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 1 of 6  

PETITIONER: VINAY BUBNA

       Vs.

RESPONDENT: STOCK EXCHANGE, MUMBAI AND ORS.

DATE OF JUDGMENT:       28/07/1999

BENCH: B.N.Kripal, S.Rajendra Babu

JUDGMENT:

KIRPAL,J.

Special leave granted.

     The  appellant in this appeal had dealings in sale and purchase  of shares with one Yogesh Mehta - respondent  No.3 [hereinafter  referred  to as ’the share broker’] who was  a member  of  Bombay  Stock Exchange until he was  declared  a defaulter by the said Exchange.

     According  to the appellant as on 10th May, 1995 a sum of  Rs.21,81,635.50  P.   was due and payable by  the  share broker  but  the  payment  was   not  made.   Thereupon  the appellant  filed  an arbitration petition against  the  said share  broker  before  the Bombay High Court.  In  the  said proceedings  an application was filed for appointing a court receiver.   The  court  did not grant to the  appellant  any relief in respect of the membership card of the share broker whereupon  an  appeal was filed and it was contended that  a court  receiver  should be appointed in respect of the  said membership  card.   This  appeal  was disposed  of  after  a statement  on  behalf of the Stock Exchange was recorded  to the  effect that it "shall not apply any amount received  by it  as consideration on nomination of the membership to  any person  falling  in  the same category for  the  purpose  of priority  as  the  appellant  under Rule  16  of  the  Stock Exchange  Rules  till  the  award  of  the  arbitration  was received".   It  may  here  be stated that in  view  of  the default having been committed by the share broker he was, on 10th December 1996, declared defaulter by the Stock Exchange and thereafter he ceased to be it’s member.

     The  appellant  wanted  Rules 16 and 43 of  the  Stock Exchange to be amended.  Letters were written by him to SEBI and  other  authorities including the Stock Exchange.   When efforts  in this behalf failed a writ petition was filed  in the  Bombay  High Court by the appellant with a prayer  that Rules  16  and 43 of the Stock Exchange Rules, Bye-laws  and Regulations  1957 should be declared as illegal, bad in  law and  ultra  vires  the Constitution of India.  It  was  also prayed  that  the Stock Exchange be directed to  amend/alter Rules  16 and 43 of the Stock Exchange.  The main reason for impugning these rules was that, according the appellant’ the membership  of the Stock Exchange was an asset of the  share broker  and  on its sale from the proceeds  thereof  payment should  first be made to creditors like the appellant of the

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 2 of 6  

share  broker and the proceeds should not be distributed  in the manner indicated by the said rules.

     The  Bombay  High Court dismissed the  writ  petition, inter alia, holding that it regarded the said rules as being fair,  just  and  reasonable.  It was further held  that  on default  being  committed  the share broker ceased to  be  a member  of  the  stock exchange and there  was  no  conflict between  the provisions of the said rules and the Insolvency Act.

     On  behalf of the appellant it was contended that  the membership of the Stock Exchange was an asset which belonged to respondent No.3 and on the sale of the same to distribute the  proceeds in the manner indicated by Rule 16 was unfair, unjust  and  arbitrary and was violative of Articles 14,  19 (1) and 300A of the Constitution of India.  It was submitted that a member who is declared as defaulter has to be treated in  the similar position to that of an insolvent because  he is unable to pay his debts and the Rules 16 and 43 framed by the  Bombay Stock Exchange are inconsistent with the laws of insolvency  as applicable in India which provide for  manner of  distribution  of the asset of the insolvent which is  at variance with the said rules.

     On  behalf of the Stock Exchange it was submitted that after  the respondent No.3 had been declared a defaulter  he ceased  to  be a member of the Stock Exchange whereupon  his rights  of  membership  vest  in the Exchange  free  of  all rights,  claims and interest and the Exchange was at liberty to  invite applications from other persons and to admit  any one  who offers to pay the highest amount.  The proceeds  so received  do  not belong to the ex-member and the  order  of priority  contained in Rule 16 was just and fair and is  not illegal, wrong or arbitrary.

     The  respondent  - Stock Exchange is  an  incorporated association   of  persons  and  is  recognised   under   the Securities  Contracts (Regulations) Act, 1957.  According to its constitution, rules and bye-laws the Exchange, from time to  time, admits members, popularly referred to as stock  or share  brokers.   It is they who constitute the Exchange  as per  Rule 2 of the said rules.  The Exchange is established, as  per Rule 4, with the object, inter alia, to support  and protect, in the public interest, the character and status of brokers  and  dealers and to further their interests and  to maintain  high standards of commercial honour and integrity. Rule  5  provides that the membership of the Exchange  shall constitute  a  personal  permission  from  the  Exchange  to exercise the rights and privileges attached thereto but this is  subject  to the Rules, Bye-laws and Regulations  of  the Exchange.   Rule  6 provides, inter alia, that the right  of membership  is  inalienable.  As per Rule 7, subject to  the provisions  of  the  Rules, a member shall have a  right  of nomination  which  shall be personal  and  non-transferable. Rule  9 stipulates that "on the death or default of a member his  right  of  nomination  shall  cease  and  vest  in  the Exchange."  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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 3 of 6  

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 exercise the right of nomination in respect of such membership."

     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."

     A  bare  perusal  of  the aforesaid  and  other  rules clearly  shows  that  the  said   rules  provide  that   the membership of the Exchange constitutes a personal permission from  the  Exchange  to exercise the rights  and  privileges attached  thereto  subject  to  the   Rule,  Bye-  laws  and Regulations  of  the Exchange.  According to Mr.   Ashok  H. Desai,  learned  senior counsel for the  respondents,  every contract  notice issued to a constituent contains a specific provision  that  "the contract is made subject to the  Rule, Bye-laws  and Regulations and usages of the Stock  Exchange, Bombay".   The  members of the Stock Exchange,  namely,  the stock  brokers are permitted to buy and sell the shares  for their clients like the appellant.  To secure due performance of  his  obligations the Exchange takes security  from  each members  upon which it has a lien as provided by Rule 43.  A member  is  declared  a defaulter if he fails  to  meet  his obligation  and  the Rules further show that thereafter  his right  of membership and nomination ceases and vests in  the Exchange  and  belongs  to the Exchange.  The  vacancy  thus created  by  the termination of the membership is filled  by the  admission of another person, who generally is a  person who  offers  to pay the highest amount.   The  consideration which  is  received  by  the  Exchange  on  making  a  fresh nomination  after the termination of the membership is  then allocated according to Rule 16 which reads as follows:

     "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

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 4 of 6  

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 funds  of  the  Exchange:   provided that  the  Exchange  in general  meeting may at its absolute discretion direct  that such  surplus be disposed of or applied in such other manner as it may deem fit.

     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 is  to  be disposed  of  or applied in such manner as the  Exchange  in general meeting may decide.

     The  High Court, in our opinion, was, therefore, right in  coming  to  the  conclusion  that  on  a  default  being committed  the share broker 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 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 Vs.  K.R.P.  Shroff and Ors.  [AIR 1932 Privy Council 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 page 190 as follows:

     "But  although  the rules are badly drawn and  not  in uniform phraseology their result in the case of a member who

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 5 of 6  

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 members 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 R.  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."

     In that case also a contention was sought to be raised that if the proceeds of the sale of the insolvent’s card are not  given  to  the  official assignee  the  same  would  be regarded as being contrary to the law of insolvency.  It was rightly observed that when the defaulting member is expelled from the Exchange no interest in his membership card remains in  himself  and  none can pass to his assignee.   Once  the membership  card  ceases to be an asset of the share  broker the question of Rule 16 being contrary to the insolvency law does not arise.

     As  we  see  it  not  only is  Rule  16  not  illegal, arbitrary  or  unjust  but the same is, on the  other  hand, framed  in  such  a manner that the hardship  which  may  be caused  by the default committed by the erstwhile member  is mitigated.   There  is nothing unfair or unjust in  Rule  16 providing  that  the  first priority from out  of  the  sale proceeds  would  be towards the amounts due to the  Exchange itself.   The  second  priority  is   given  to  the  debts, liabilities,  obligations  and  claims arising  out  of  the contracts  made by the erstwhile member.  Even though at the time  when  the nomination is made by the Stock Exchange  of the  vacancy which has been created the erstwhile member had no  interest, in law, therein, nevertheless Rule 16 makes  a provision  by providing for payments being made for clearing the  debts etc.  of the erstwhile members.  But for Rule 16, in  other words, creditors like the appellant would not have a  ray of hope of receiving any money realised by the  Stock Exchange  on the vacancy being created by reason of  default of  the stock broker.  In view of this it is not possible to accept that the said Rule is in any way bad in law.

     Learned  counsel for the appellant placed reliance  on the  decision  of  Gujarat  High Court  in  Stock  Exchange, Ahmedabad  Vs.  Assistant Commissioner of Income-tax [(1998) 18 SCL 135].  In that case after the death of a stock broker he  was  declared a defaulter and the income tax  department sought  to attach the membership card.  It was contended  by the Stock Exchange that on the stock broker being declared a defaulter   no  right  existed   which  could  be  attached. Reliance  was  placed  on the Privy  Council’s  decision  in Shroff’s  case.   The  High   Court  rightly   distinguished Shroff’s  case by observing that after the death of a  stock broker he should not be declared as a defaulter.  It appears to  us,  without  going  into the correctness  of  the  said decision  of the Gujarat High Court, that the same is of  no relevancy  in  the present case because the validity of  the action  in  declaring  a member as defaulter  has  not  been challenged  in the present case whereas in the Gujarat  case the Court had held that after the death of a stock broker he could not have been declared as a defaulter.  This being so,

http://JUDIS.NIC.IN SUPREME COURT OF INDIA Page 6 of 6  

the  consequences which follow on a member being declared as a  defaulter did not really come up for consideration in the Gujarat case.

     In  our  opinion, the High Court rightly came  to  the conclusion  that  once  a defaulting member ceases to  be  a member of the Stock Exchange no interest in his card remains and the same cannot be regarded as his asset and furthermore Rules 16 and 43 are not illegal, arbitrary or void.  For the aforesaid  reason the appeal is dismissed but with no  order as to costs.