2004 (12) TMI 379 - SC - Indian Laws

Whether parties remain parties to arbitration agreement even when a trading member ceased to be a member when reference is made

Summary

Issues Involved:
1. Maintainability of arbitration proceedings initiated by a defaulter member of NSE.
2. Locus standi of the defaulter member to refer disputes to arbitration.
3. The right of the Defaulters' Committee to recover dues on behalf of the defaulter member.

Detailed Analysis:

1. Maintainability of Arbitration Proceedings Initiated by a Defaulter Member of NSE:
The core issue was whether a trading member of the National Stock Exchange (NSE) who has been declared a defaulter retains the right to initiate arbitration proceedings under the NSE Rules and Bye-laws. The appellant argued that Rule 33 of the NSE Rules, which leads to the cessation of a trading member's right of membership upon being declared a defaulter, also implies the loss of the right to refer disputes to arbitration. The appellant contended that the Defaulters' Committee should handle such disputes, as per Bye-law 11 of Chapter XI.

The respondent countered that Rule 33 does not cover the right to arbitration, which arises out of the contract between the trading member and the constituent. The respondent emphasized that disputes arising from transactions prior to being declared a defaulter should still be arbitrable by the parties involved, not the Defaulters' Committee.

The judgment clarified that Rule 33 speaks about the lapsing of membership rights and privileges but does not explicitly mention the right to arbitration. The Court concluded that the right to refer disputes to arbitration survives even after a member is declared a defaulter, as per Bye-law 1C, which allows disputes related to transactions before the declaration of default to be arbitrated by the original parties involved.

2. Locus Standi of the Defaulter Member to Refer Disputes to Arbitration:
The appellant argued that once a member is declared a defaulter, they lose the right to refer disputes to arbitration, and this right should vest with the Defaulters' Committee. The respondent maintained that the arbitration agreement is a contractual right that does not lapse with the declaration of default.

The Court observed that Bye-law 1C explicitly allows for the continuation of arbitration agreements for disputes arising from transactions before the declaration of default. The Court emphasized that the arbitration agreement remains enforceable by the original parties, including the defaulter member, and does not automatically transfer to the Defaulters' Committee.

3. The Right of the Defaulters' Committee to Recover Dues on Behalf of the Defaulter Member:
The appellant suggested that the Defaulters' Committee should have the authority to recover dues through arbitration on behalf of the defaulter member. The respondent argued that the Defaulters' Committee's powers are limited to specific assets and do not extend to contractual disputes requiring arbitration.

The judgment highlighted that Bye-law 11 grants the Defaulters' Committee the power to call in and realize specific assets like security deposits and margin money but does not extend to contractual disputes. The Court noted that the Defaulters' Committee is expressly empowered to initiate legal proceedings in court but not arbitration. Thus, the Defaulters' Committee does not have the authority to refer disputes to arbitration on behalf of the defaulter member.

Conclusion:
The Supreme Court affirmed the High Court's decision, concluding that a defaulter member of the NSE retains the right to initiate arbitration proceedings for disputes arising from transactions before the declaration of default. The Defaulters' Committee does not have the authority to refer such disputes to arbitration. The appeal was dismissed with costs.