2003 (10) TMI 400 - HC - Companies Law

Issues Involved:
1. Maintainability of the arbitral proceedings after the declaration of the First Respondent as a defaulter.
2. Consideration of the specific defense by the Appellant regarding the delivery of shares.
3. Imposition of a condition to deposit the arbitral award amount by the Appellant.

Detailed Analysis:

Maintainability of Arbitral Proceedings:

The core issue was whether the First Respondent, after being declared a defaulter, had the locus standi to seek a reference to arbitration. The relevant Bye-laws of the National Stock Exchange (NSE) were examined:

- Clause (1) of Chapter XI: Mandates arbitration for all claims, differences, or disputes between Trading Members and Constituents arising out of dealings, contracts, and transactions made subject to the Bye-laws, Rules, and Regulations of the Exchange.

- Bye-law (1C): Confirms that arbitration provisions apply to all dealings, contracts, and transactions entered into before the Trading Member was declared a defaulter.

- Rule 33: States that a member's rights and privileges lapse and vest with the Exchange upon being declared a defaulter.

- Clause 28 of Chapter XII: Empowers the Defaulters' Committee to initiate proceedings in a court of law to recover amounts due to the defaulter or from the defaulter.

The court concluded that the rules and Bye-laws did not abrogate the right of a defaulter to pursue arbitral proceedings for transactions entered into before being declared a defaulter. Therefore, the First Respondent's arbitration claim was maintainable, and the Arbitral Forum's decision to allow the claim was upheld.

Consideration of Specific Defense:

The Appellant argued that the Arbitral Tribunal did not consider a crucial defense: the First Respondent's inability to deliver the shares, which should absolve the Appellant from paying the purchase price. The Learned Single Judge acknowledged this omission and directed the Arbitral Tribunal to resume proceedings to address this specific defense under Section 34(4) of the Arbitration and Conciliation Act, 1996.

Imposition of Condition to Deposit:

The Learned Single Judge imposed a condition that the Appellant must deposit the arbitral award amount (Rs. 3,46,89,636) in court before the Arbitral Tribunal resumed proceedings. This decision was challenged, and the court found it unjustified. The court noted that the purpose of Section 34(4) is to allow the Arbitral Tribunal to take further action that would eliminate grounds for setting aside the award, not to impose financial conditions on the Appellant.

The court held that the observations made by the Learned Single Judge on the merits of the defense were unwarranted at this stage and could unduly influence the Arbitral Tribunal. Consequently, the direction to deposit the amount was set aside.

Conclusion:

The appeal was partially allowed. The court confirmed the maintainability of the arbitration proceedings and directed the Arbitral Tribunal to resume proceedings to address the specific defense raised by the Appellant. However, the condition to deposit the arbitral award amount was set aside, and the Arbitral Tribunal was instructed to proceed uninfluenced by the observations of the Learned Single Judge. No order as to costs was made.

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