1993 (5) TMI 127 - HC - Companies Law

Contracts in notified areas illegal in certain circumstances - Plaintiff-company was established with main object of functioning as a stock exchange - It claimed that sections 13 and 19 of the Securities Contracts (Regulation) Act were brought in force in Ernakulam District under which no one other than the plaintiff was authorised to permit or organise dealings in securities in the Ernakulam District - Defendant-company had proposed to function as a parallel stock exchange - Plaintiff-company filed a suit for declaration that defendants were not entitled to carry on or establish or organise dealing in securities in any manner within Ernakulam District and for a decree of permanent injunction restraining defendants from establishing or carrying on or permitting dealing in stock, shares and securities from building of Corporation of Cochin within Ernakulam District - Whether plaintiff ought to have obtained sanction under Order 1, Rule 8, of Code of Civil Procedure so as to enable it to maintain suit - Held, no - Whether there is any express or implied bar created by Securities Contracts (Regulation) Act regarding maintainability of suit in civil court - Held, no - Whether plaintiff had made out a prima facie case for an injunction restraining defendant from carrying on business akin to that of a stock exchange within District of Ernakulam - Held, yes - Whether defendant was entitled to enter into spot delivery contracts - Held, yes

Issues Involved:
1. Maintainability of the suit.
2. Cause of action.
3. Prima facie case and balance of convenience.
4. Applicability of Sections 13, 18, and 19 of the Securities Contracts (Regulation) Act, 1956.
5. Locus standi of the plaintiff.

Issue-wise Detailed Analysis:

1. Maintainability of the Suit:
The defendants contended that the suit was not maintainable for various reasons, including the requirement for a representative capacity under Order 1, Rule 8 of the Code of Civil Procedure and the need for sanction under Section 91 of the Code of Civil Procedure. The court rejected these arguments, stating that the plaintiff, as a recognized stock exchange, was enforcing a right to prevent another organization from carrying on a similar business within its operational area. The court held that the plaintiff did not need to follow Order 1, Rule 8 or Section 91, as it was not claiming a public right but rather its exclusive right under the Securities Contracts (Regulation) Act, 1956.

2. Cause of Action:
The defendants argued that the plaint did not disclose a cause of action and that the plaintiff had not suffered any legal injury. The court found that the plaint adequately stated that the plaintiff was the only recognized stock exchange in Ernakulam District and that the defendants were attempting to function as a parallel stock exchange in violation of Sections 13 and 19 of the Act. The court concluded that the plaint did disclose a cause of action and that the plaintiff had a legal right to seek redress.

3. Prima Facie Case and Balance of Convenience:
The court examined whether the plaintiff had made out a prima facie case of violation of statutory provisions by the defendants. The court found that the plaintiff had shown that it was a recognized stock exchange and that Sections 13 and 19 of the Act had been extended to Ernakulam District, prohibiting any other person from carrying on business as a stock exchange. The court also considered the balance of convenience and found that it favored the plaintiff, as the statutory scheme intended to permit only one recognized stock exchange in a given area. The court held that the plaintiff had made out a prima facie case for an injunction.

4. Applicability of Sections 13, 18, and 19 of the Securities Contracts (Regulation) Act, 1956:
The court examined the applicability of Sections 13, 18, and 19 of the Act. Section 13 prohibits contracts in securities in a notified area unless they are between members of a recognized stock exchange. Section 18 excludes spot delivery contracts from the prohibition in Section 13. Section 19 prohibits the organization of stock exchanges other than recognized ones. The court found that the defendants' activities were prima facie in violation of Section 19, as they were attempting to function as a parallel stock exchange. The court clarified that while spot delivery contracts were not prohibited, the defendants could not permit their members to trade among themselves in their premises.

5. Locus Standi of the Plaintiff:
The defendants argued that the plaintiff had no locus standi to maintain the suit as it had not suffered any legal injury. The court rejected this argument, stating that the plaintiff had a legal right to function exclusively as a stock exchange in Ernakulam District and that the defendants' activities were in violation of the Act. The court held that the plaintiff had the locus standi to maintain the suit.

Conclusion:
The court modified the trial court's order to clarify that the first defendant could carry on spot delivery contract business but could not permit its members or others to trade among themselves in its premises. The court confirmed the order of injunction granted by the trial court, restraining the defendants from starting, functioning, or organizing dealings or business in securities, including establishing or conducting any trading floor in the specified buildings in Ernakulam District, until the disposal of the suit. The appeals were substantially dismissed, with no order as to costs.

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