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TMI Blog2014 (10) TMI 368X X X X Extracts X X X X X X X X Extracts X X X X ..... ish common law doctrine of priority of Crown debts and has been given judicial recognition in British India prior to 1950 and was therefore law in force in the territory of India before the Constitution and was continued by Article 372 of the Constitution In the present case, as has been noted above, the lien possessed by the Stock Exchange makes it a secured creditor. That being the case, it is clear that whether the lien under Rule 43 is a statutory lien or is a lien arising out of agreement does not make much of a difference as the Stock Exchange, being a secured creditor, would have priority over Government dues. - Decided in favour of appellant. - Civil Appeal No. 4354 of 2003 - - - Dated:- 25-9-2014 - R. M. Lodha, CJI. Kurian Joseph And R. F. Nariman,JJ. JUDGMENT R. F. Nariman, J. The present matter arises as the result of a member of a Stock Exchange being declared a defaulter. The Income Tax Department claims that it has priority over all debts owed by the defaulter member, whereas the Stock Exchange, Bombay claims otherwise. 2. The facts necessary to appreciate the controversy are as follows: By a notice dated 29th June 1994, the Stock Exchange, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds in relation to the recovery proceedings initiated by the Respondents against Mr. Suresh D. Shah and after going through the same and examining the legality and validity thereof to quash and set aside the impugned notice dated 5th October, 1995 and the impugned order dated 10th May 1996, Impugned Notice/ letter dated 27th December 1996 being Exhibits D , F and H hereto; (b) that this Hon'ble Court may be pleased to issue a writ of mandamus or any other appropriate writ, order or direction under Article 226 of the Constitution of India ordering and directing the Respondents to withdraw forthwith the recovery proceedings initiated against in respect of the dues of Mr Suresh D. Shah and ordering and directing the Respondents to withdraw forthwith the impugned notice dated 5th October, 1995 and the impugned notice dated 5th October, 1995 and the impugned prohibitory Order dated 10th May, 1996, Impugned Notice/letter dated 27th December 1996 being Exhibits D , F and H hereto; (c) that this Hon'ble Court be pleased to permit the Petitioner to exercise the right of nomination in respect of the membership right of Suresh D. Shah in favour of such person as the pe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) in the case of the debt - the creditor from recovering the debt and the debtor from making payment thereof until the further order of the tax recovery officer; (ii) in the case of the share - the person in whose name the share maybe standing from transferring the same or receiving any dividend thereon; (iii) in the case of the other movable property (except as aforesaid) - the person in possession of the same from giving it over to the defaulter. (2) A copy of such order shall be affixed on some conspicuous part of the office of the tax recovery officer, and another copy shall be sent, in the case of the debt, to the debtor, in the case of the share, to proper officer of the corporation, and in the case of the other movable property (except as aforesaid), to the person in possession of the same. (3) A debtor prohibited under clause (i) of sub-rule (1) may pay the amount of his debt to the tax recovery officer, and such payment shall discharge him as effectually as payment to the party entitled to receive the same. Sections 8 and 9 of the Securities Regulation Act, 1956 deal with Rules, Regulations and Bye-Laws to be made in respect of Stock Exchanges. Sections 8 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, the passing on of delivery orders and the regulation and maintenance of such clearing house; (c) the submission to the Securities and Exchange Board of India by the clearing house as soon as may be after each periodical settlement of all or any of the following particulars as the Securities and Exchange Board of India may, from time to time, require, namely; (i) the total number of each category of security carried over from one settlement period to another; (ii) the total number of each category of security, contracts in respect of which have been squared up during the course of each settlement period; (iii) the total number of each category of security actually delivered at each clearing; (d) the publication by the clearing house of all or any of the particulars submitted to the Securities and Exchange Board of India under clause (c) subject to the directions, if any, issued by the Securities and Exchange Board of India in this behalf; (e) the regulation or prohibition of blank transfers; (f) the number and classes of contracts in respect of which settlements shall be made or differences paid through the clearing house; (g) the regulation, or prohibiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tered into otherwise than in accordance with the bye-laws void under sub-section (1) of section 14; (b) provide that the contravention of any of the bye-laws shall render the member concerned liable to one or more of the following punishments, namely:- (i) fine; (ii) expulsion from membership; (iii) suspension from membership for a specified period; (iv) any other penalty of a like nature not involving the payment of money. (4) Any bye-laws made under this section shall be subject to such conditions in regard to previous publication as may be prescribed, and when approved by the Securities and Exchange Board of India, shall be published in the Gazette of India and also in the Official Gazette of the State in which the principal office of the recognised stock exchange is situate, and shall have effect as from the date of its publication in the Gazette of India; Provided that if the Securities and Exchange Board of India is satisfied in any case that in the interest of the trade or in the public interest any bye-law should be made immediately, it may, by order in writing specifying the reasons therefore, dispense with the condition of previous publication. 8. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l meeting may at its absolute discretion direct that such surplus be disposed of or applied in such other manner as it may deem fit. 37. Form of Security The security to be furnished by a member shall be provided either by a deposit of cash or it may be provided in the form of a Deposit Receipt of a Bank approved by the Governing Board or in Securities approved by the Governing Board subject to such terms and conditions as the Governing Board may from time to time impose. Deposits of cash shall not carry interest and the securities deposited by a member valued at the market price of the day shall exceed the sum for the time being secured thereby by such percentage as the Governing Board may from time to time prescribe. 38. Security How Held Deposits of cash shall be lodged in a Bank approved by the Governing Board and Bank Deposit Receipts and securities shall be transferred to and held either in the names of the Trustees of the Exchange or in the name of a Bank approved by the Governing Board and lodged with a Bank approved by the Governing Board. Such deposit shall be entirely at the risk of the member providing the security but it shall be held by the Bank solely for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y the partnership of which I may be a partner and for any sum due to any member of the Exchange for the due fulfillment of my engagements, obligations and liabilities or of the partnership of which I may be a member arising out of or incidental to any bargains, dealings, transactions and contracts made subject to the Rules, Bye-laws and Regulations of the Exchange or anything done in pursuance thereof. I hereby further declare and agree that the said Security and any cash, stock, shares or other securities that may be added to or substituted for the said Security by arrangement with you are to be held for you and on your account by the said Trustees and/or Bank(s) at your absolute discretion without any right whatever on the part of myself or those in my right to call in question the exercise of such discretion on any ground whatever so that you may at your absolute discretion as aforesaid apply and pay the same or the proceeds thereof (in case you shall as you shall be fully entitled to do sell the same) or cause the same to be applied and paid to or for behalf of the Exchange or the Clearing House to whom I or any partnership of which I may be a partner may be indebted or to or f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in the Rupee but without interest among the creditor members whose claims are admitted in accordance with these Bye-laws and Regulations. Application of Defaulters' Assets and Other Amounts 400. Subject to the provisions of Bye-law 398, the Defaulters' Committee shall realise and apply all the money, rights and assets of the defaulter which have vested in or which have been received by the Defaulters' Committee (other than the amount paid by the Governing Board to the Defaulters' Committee pursuant to Rule 16A in respect of the consideration received by the Governing Board for exercising the right of nomination in respect of the defaulter's erstwhile right of membership) and all other assets and money of the defaulter in the Exchange or the market including the money and securities receivable by him from any other member, money and securities of the defaulter lying with the Clearing House or the Exchange, credit balances lying in the Clearing House, security deposits, any bank guarantees furnished on behalf of the defaulter, fixed deposit receipts discharged or assigned to or in favour of the Exchange, Base / Additional Capital deposited with the Exchang ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in full they shall be paid and satisfied pro rata; (vii) Seventh - subject to the Rules, Bye-Laws and Regulation of the Exchange, including in particular Bye-Law 343, the balance, if any, shall be applied by the Defaulters' Committee for the payment of such unpaid debts, liabilities, obligations and claims to or of the defaulter's constituents arising out of any contracts made by such defaulter 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; (viii) Eighth - the balance, if any, shall be paid into the Exchange's Customers' Protection Fund to the extent of any and all amounts paid out of the Customers' Protection Fund towards the obligations or liabilities of the defaulter and interest thereon at the rate of 2.5% per month (or such other rate as the Governing Board may specify) from the date of payment out of the Customers' Protection Fund to the date of repayment to the Fund; and (ix) Ninth - the surplus, if an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y possess under Rule 43 does not make it a secured creditor so that debts due to the Income Tax Department would have precedence. The judgment then goes on to say: 11. To sum up, we hereby declare: (a) That, the Other Assets (as described hereinabove) are attachable and recoverable under provisions of section 226(3)(i)(x) read with Rule 26(1)(a)(c) of Schedule-II to the Income Tax Act. (b) That, the Government and Other Creditors such as BSE, the Clearing House and Other Creditor-Members under Rules and Bye-laws of the Stock Exchange are creditors of equal degree and under Section 73(3), Civil Procedure Code, the Government dues shall have priority over other such creditors. (c) That, in the matter of application of Defaulters' Asset under bye-law 400, the Defaulters' Committee shall give priority to the debt due to the Government and the balance, if any, shall be distributed in terms of the Bye-laws 324 alongwith Bye-law 400 of the BSE. (d) That, a sum of ₹ 34,06,680 representing Balance Surplus lying with the Exchange out of sale proceeds of the nomination rights of the Defaulter-Member is attachable under the above provisions of the Income Tax Act r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be transferred and held either in the name of the trustees of the Stock Exchange or in the name of a Bank which is approved by the Governing Board. By operation of Rule 44, on termination of the membership of a broker, whatever remains by way of security after clearing all debts has to be transferred either to him or as he shall direct or in the absence of such direction to his legal representatives. The argument therefore is that what is contemplated is a transfer of these shares by virtue of which the member ceases to be owner of these shares for the period that they are transferred and this being so, the Income Tax Department cannot lay their hands on these shares or the sale proceeds thereof as the member ceases to have ownership rights of these shares. Shri Datar also argued that by virtue of Rule 43, the Stock Exchange has a first and paramount lien for any sum due to it, and that this made it a secured creditor so that in any case income tax dues would not to be given preference over dues to secured creditors. 12. Shri R.P.Bhat, learned senior counsel arguing on behalf of Revenue refuted these contentions and stated that on a conjoint reading of the Rules and the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... osed to publican, signified anything which regards persons considered individually; publicum being anything which regards persons considered collectively, and forming a society (See Austin's Jurisprudence, Vol. II, 5th ed. (1911) P. 519) The meaning of that word in jurisprudence has undergone considerable change after Austin wrote. According to Hohfeld: ... a privilege is the opposite of a duty, and the correlative of a 'no-right'. For instance, where X has a right or claim that Y should stay off the land (of X), he himself has the 'privilege' of entering on the land; or, in equivalent words, X does not have a duty to stay off. Fundamental Legal Conceptions (1923) pp. 38-39) Arthur L. Corbin writes: We say that B had a right that A should not intrude and that A had a duty to stay out. But if B had invited A to enter, we know that those results would not occur. In such case we say that B had no right that A should stay out and that A had the privilege of entering. (See Legal Analysis and Terminology , 29 Yale Law Journal 163) According to Kocourek: Privilege and inability are correlatives. Where there is a privilege there must be inab ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Contracts (Regulation) Act, 1956. There is no challenge to these Rules. The question whether right of membership confers upon the member any right of property is, therefore, to be examined within the framework of the Rules, Bye-laws and Regulations of the Exchange. On a plain and combined reading of the Rules, it is clear that right of membership is merely a personal privilege granted to a member, it is non-transferable and incapable of alienation by the member or his legal representatives and heirs except to the limited extent as provided in the Rules on fulfilment of conditions provided therein. The nomination wherever provided for is also not automatic. It is hedged by Rules. On right of nomination vesting in the Stock Exchange under the Rules, that right belongs to the Stock Exchange absolutely. The consideration received by the Stock Exchange on exercise of the right of nomination vesting in it, is to be applied in the manner provided in Rule 16. 13. In the present case Rule 16 was properly applied by the Stock Exchange. The membership right in question was not the property of the assessee and, therefore, it could not be attached under Section 281-B of the Income Tax Act. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ary or involuntary, of disposing of or parting with property or with an interest in property, including retention of title as a security interest and foreclosure of the debtor's equity of redemption. It is clear therefore that the expression transfer can depending upon its context mean transfer of ownership or transfer of possession. It is clear that what is transferred is only possession as the member only deposits these securities. Further, as has been held in Vasudev Ramchandra Shelat v. Pranlal Jayanand Thakur Ors., 1975 (2) SCR 534 at 541, a share transfer can be accomplished by physically transferring or delivering a share certificate together with a blank transfer form signed by the transferor. The transfer of shares in favour of the Stock Exchange is only for the purposes of easy liquidity in the event of default. (iv) The expression transferred must take colour from the expression lodged in Rule 38 when it comes to deposits of cash. Understood in this sense, transfer only means delivery for the purposes of holding such shares as securities; (v) This is also clear from the language of Rule 38 when it says such deposit shall be entirely at the risk ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ards the amount received by sale of membership card and amount recovered from the defaulter's other assets. On a plain reading of the Rules and Bye-laws it appears that the authority to deal with the card money and the liability of the members by the Defaulters' Committee is different, but having regard to the scheme of distribution of the liabilities of the Exchange, clearing house, members and non-members, all the assets shall be placed at the hands of the Defaulters' Committee. But as would appear from the discussions made hereinafter the application thereof would be separate and distinct. 40. In terms of the Bye-laws, a Defaulters' Committee is to be constituted which is a Standing Committee consisting of six members of the Exchange. Such a Committee is constituted in terms of Rule 170(a)(ii) of the Stock Exchange Rules, Bye-laws and Regulations, 1957. It is not a juristic person. It is merely an association of persons. 46. Vesting of such assets of the defaulter in the Defaulters' Committee is not absolute. The Defaulters' Committee is merely a trustee. It holds the said amount vested in it for the benefit and on account of the creditor members. O ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, the Defaulters' Committee constituted in terms of Bye-laws would apply to the other assets, dues and payments of the members on a pro rata basis whereafter the dues of non-members can be disbursed. While doing so, however, such claims can be determined only having regard to the cut-off date which must be prescribed by the Governing Board in terms of clause (vii) of Bye-law 343. So far as card money is concerned, the same must be disbursed having regard to the priority clause contained in Rule 16, in which event, upon discharge of the dues of the Exchange and clearing house, the same has to be distributed according to the dues of members and non-members. It bears repetition to state that there does not exist any distinction between a member and a non-member in terms of Rule 16 and in the event the amount of the card money available in the hands of the Exchange is not sufficient to satisfy all the claims, the same has to be distributed on a pro rata basis. However, any amount remaining surplus even thereafter would be subject to a decision of the Governing Board. The Governing Board may in a given situation, having regard to the hardship which may be faced by the members and n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied. Rashbehary Ghose states in Law of Mortgage (TLL, 7th Edn., p. 386) - It seems a government debt in India is not entitled to precedence over a prior secured debt. What has been argued before us is that the moment the Stock Exchange has a lien over the member's securities, it would have precedence over income tax dues. We find there is force in this submission. The Provincial Insolvency Act defines secured creditor under Section 2 (e) as follows: (e) Secured creditor means a person holding a mortgage, charge or lien on the property of the debtor or any part thereof as a security for a debt due to him from the debtor; Similarly, the Securitisation and Reconsruction of Financial Assets and Enforcement of Security Interest Act, 2002 in Section 2 (z)(f) defines security interest as follows: Section 2(zf) security interest means right, title and interest of any kind whatsoever upon property, created in favour of any secured creditor and includes any mortgage, charge, hypothecation, assignment other than those specified in Section 31 In Triveni Shankar Saxena v. State of U.P. Ors., 1992 Suppl. 1 SCC 524 at para 17 in an instructive passage the Sup ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trictly a right in or right to the thing itself but more properly constitutes a charge or security thereon. The word lien is defined in Stroud's Judicial Dictionary, third edition, at page 1644, as: A lien- (without effecting a transference of the property in a thing) - is the right to retain possession of a thing until a claim be satisfied; and it is either particular or general . Having regard to the foregoing definitions the question arises whether the holder of a lien, as the applicant company in the instant case, can be considered to be a secured creditor under the company law. Section 529 of the Act is important and it reads: 529. Application of the insolvency rules in winding up of insolvent companies.- (1) In the winding up of an insolvent company, the same rules shall prevail and be observed with regard to (a) Debts Probable; (b) The valuation of annuities and future and contingent liabilities; and (c) The respective rights of secured and unsecured creditors; As are in force from the time being under the law of insolvency with respect to the estates of persons adjudged insolvent. (2) All persons who in any such case would be entitled to p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that expression as: Secured creditor' includes a landlord who under any enactment for the time being in force has a charge on land for the rent of that land. The latter definition is an inclusive definition. According to the former definition even a person holding a lien on the property of a debtor is a secured creditor. In dealing with the question as to who a secured creditor is in company law, it is observed in Palmer's Company Law, 21st edition, at page 765.: Secured creditor is one, who has some mortgage, charge or lien on the company's property .A solicitor who holds a lien on documents of a liquidating company for his costs against the company is a secured creditor, and must mention his lien in his proof. On a consideration of Section 529 read with the relevant provisions of the insolvency law, I come to the conclusion that the holder of a statutory lien or the holder of a lien created by contract and registered as required by Section 125 is a secured creditor in the matter of winding up of the insolvent company with regard to, among other things, debts provable in the winding up proceedings. The applicant-company being the holder of a statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... les in exercise of powers conferred by the Securities Contracts (Regulation) Act are equally Rules and therefore subordinate legislation. This makes it amply clear that the lien spoken of by Rule 43 is a lien, conferred by Rules under a statute. 22. Mr. Bhat argued that only a lien that flows from the statute itself can be considered as a statutory lien and referred us to two judgments, one by the Bombay High Court and one by the Supreme Court. The Bombay High Court held in the case of Forwarding P. Ltd. and another v. Trustees, Port of Vizagapatnam, and Anr., [1987] 61 Company Cases 513 that the power of arrest and sale of vessel belonging to a company in winding up by the port authorities emanates directly from section 64 of the Major Port Trusts Act, 1963 and hence the question of obtaining leave of the company court under section 446 of the Companies Act, 1856 will not arise when an authority exercises independent statutory rights. This judgment was quoted with approval in Board of Trustees, Bombay v. Indian Oil Corporation, 1998 (4) SCC 302 where the Supreme Court set out Section 64 of the Major Port Trusts Act and held as under: 8. The Port authorities have a p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... winding up. In exercise of its right under Section 64 the appellant is, therefore, entitled to sell the vessel without the intervention of the court. In exercise of that paramount right which overrides the claims of all other creditors including secured creditors, the appellant has a right to arrest the vessel and sell it. Without the consent of the appellant, this right cannot be transferred to the sale proceeds of the vessel. It is no doubt true that the Supreme Court held that the statutory lien of a Harbour authority over a vessel is a paramount lien which overrides the claim of all other creditors including secured creditors. The question, however, in the present case is somewhat different. The question is whether the lien exercised under Rule 43 by the Stock Exchange can be said to be a superior right to income tax dues which may become payable by virtue of the Stock Exchange being a secured creditor. 23. It was argued that Black's Law Dictionary 5th Edition defines statutory lien as follows: Statutory lien: A lien arising solely by force of statute upon specified circumstances or conditions, but does not include any lien provided by or dependent upon an agr ..... X X X X Extracts X X X X X X X X Extracts X X X X
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