2015 (4) TMI 1192 - HC - Indian Laws

Arbitration and Conciliation proceedings - bye-law providing a liberty to the broker to close out the transactions by selling the securities in case the clients failed to make the full payment to the broker for the execution of the contract - Held that - Whole purpose of such bye-laws in the Multi Commodity Exchange of India Ltd. is to provide safeguard that there is mitigation of loss and thus it makes mandatory for the broker to square off the transactions immediately upon there being a shortfall which according to the broker had not been paid by the constituent inspite of demand. If the petitioner would have squared off the open position when there was shortfall of margin money prior to 30th March 2013 the petitioner would not have faced the volatility in the market on 30th March 2013. In view thereof since the petitioner had not carried out their obligation by squaring up the transactions when there was a shortfall in the margin money and which according to the petitioner was not paid by the respondent though demanded the petitioner cannot be allowed to make any claim against the respondent constituent for such unauthorised transactions carried out by the petitioner in the account of the respondent. Considering the said bye-law which provided a liberty to the broker to close out the transactions by selling the securities in case the clients failed to make the full payment to the broker for the execution of the contract this court held that the said provision was not mandatory but was discretionary. In view thereof the said byelaw considered by this court and bye-laws which are the subject matter of this petition are totally different. Under bye-laws 8.6.5 to 8.6.6 of the Multi Commodity Exchange the broker is under an obligation to liquidate/close out any of the position of the constituent if the constituent default in paying the daily margin. Those bye-laws have been interpreted by this court at length in the judgment delivered by this court in case of M/s.BMA Commodities Pvt. Ltd. (2014 (12) TMI 1291 - BOMBAY HIGH COURT) which squarely applies to the facts of this case. The findings rendered by the learned arbitrator are also based on the interpretation of the agreement entered into between the parties which interpretation is a possible interpretation and thus cannot be substituted by another interpretation under section 34 of the Arbitration Act. Arbitration Petition dismissed.

Summary

Issues Involved:
1. Validity of the arbitral award rejecting the petitioner's claims.
2. Compliance with margin requirements and the legality of transactions.
3. Obligations of the broker to inform and demand margin money from the constituent.
4. Interpretation of Multi Commodity Exchange (MCX) bye-laws regarding margin requirements and squaring off positions.

Detailed Analysis:

1. Validity of the Arbitral Award Rejecting the Petitioner's Claims:
The petitioner challenged the arbitral award dated 25th February 2014, which rejected their claims. The court upheld the arbitral tribunal's decision, stating that the tribunal had considered the pleadings, documents, and agreements between the parties. The tribunal found that the petitioner could not have squared off the respondent's open position without first demanding additional funds, which was not done. The court concluded that the findings were in line with the MCX bye-laws and the agreement, and were not perverse, thus not warranting interference under section 34 of the Arbitration and Conciliation Act, 1996.

2. Compliance with Margin Requirements and the Legality of Transactions:
The court examined whether the petitioner complied with margin requirements. The petitioner argued that there was a margin shortfall as early as 20th March 2013, which continued despite a payment of Rs. 20 lacs by the respondent on 26th March 2013. The court noted that the petitioner should have squared off the open position immediately upon the shortfall. The tribunal found that the petitioner's action of squaring off the position on 30th March 2013 without a prior demand for additional funds was unjustified. The court supported this finding, emphasizing that the transactions carried out without compliance with margin requirements were unauthorized and could not form the basis for any claim against the respondent.

3. Obligations of the Broker to Inform and Demand Margin Money from the Constituent:
The court highlighted the broker's obligation to demand margin money from the constituent. The petitioner claimed to have sent SMS notifications regarding margin shortfalls, but the respondent denied receiving any such demands. The tribunal found that the petitioner did not make a proper demand for additional margin before squaring off the respondent's position. The court affirmed this finding, stating that the petitioner's failure to demand margin money in accordance with the MCX bye-laws rendered the transactions unauthorized.

4. Interpretation of MCX Bye-laws Regarding Margin Requirements and Squaring Off Positions:
The court interpreted the MCX bye-laws, particularly bye-laws 8.2.2, 8.6.5, and 8.6.6, which mandate brokers to collect margin money and allow them to close out positions if the constituent fails to comply with margin calls. The court referred to previous judgments, including M/s. BMA Commodities Pvt. Ltd. vs. Ms. Kaberi Mondal, which held that transactions carried out without demanding margin money were unauthorized. The court concluded that the petitioner's actions violated these mandatory bye-laws, and thus, the petitioner could not claim any amount from the respondent based on such unauthorized transactions.

Conclusion:
The court dismissed the petition, upholding the arbitral award that rejected the petitioner's claims. It ruled that the petitioner failed to comply with the MCX bye-laws regarding margin requirements and did not properly inform the respondent before squaring off the position. The court emphasized that transactions carried out in violation of these bye-laws were unauthorized, and the broker could not make any claims against the constituent based on such transactions.