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TMI Blog2017 (4) TMI 5X X X X Extracts X X X X X X X X Extracts X X X X ..... k exchange. As per Rule 8(1)(f) a member of the Exchange has to sever all connections with other businesses upon being enrolled a member. The bye-laws of the appellant are statutory and deposits made by a member with the appellant is subject to a first and paramount lien for any sum due to the appellant or other trading member or to a third party for discharge of the liability of the member towards the third party. In the instant case there would be a lien of the appellant on the money deposited by the respondent company in liquidation when it became a member of the appellant and since there are no workmen dues the official liquidator has not to watch the interest of any workman. As a matter of fact other than persons who used the services of the respondent company to act as a broker on the stock exchange no one has any claim against the company. Therefore the manner of adjudication of the claims and disbursement in the instant case has to be as per the bye-laws of the appellant.The appeal is accordingly allowed. - CO.APP.16/2013 - - - Dated:- 1-3-2017 - MR, PRADEEP NANDRAJOG AND YOGESH KHANNA, JJ. For The Appellat : Mr.Arvind Nigam, Sr.Advocate instructed by Mr.Sanjay ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lant responded by asserting that no amount was due from the appellant to the company. 6. The official liquidator reiterated his request and on November 21, 2011 filed Co.App.No.4/2011 for a direction against the appellant. The appellant thereupon filed Co.App.No. 401/2012 for permission from the Company Court for the Defaulters Committee to deal with the amounts lying with the Defaulters Committee as per the bye-laws of the appellant. 7. These applications were heard and decided by the learned Company Judge. The application of the official liquidator was allowed and that of the appellant was dismissed with a direction to deposit ₹ 1.1 crores along with interest, if any, with the official liquidator. 8. In the course of hearing of this appeal, on April 10, 2013, a direction was issued to the official liquidator to invite claims qua the company in order, inter-alia, to ascertain whether there are any other claimants or not. The advertisement for the same was directed to be published in The Statesman‟ (English Edition) and Dainik Jagran‟ (Hindi Edition) and thereafter the official liquidator was directed to a file a status report. 9. Pursuant to the abo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cordance with statutory requirement. Since NSE operates an anonymous order driven market, all trades executed in the capital market, Futures and Options and Currency Derivatives segments are novated by the appellant. 14. As per the learned senior counsel, the appellant therefore becomes the buyer for every seller and seller for every buyer and acts as a legal counterpart to all deals on its platform. In this manner, the appellant assumes the counterpart risk of each member and guarantees settlement through a fine-tuned risk management system. Hence, if any counterpart to a trade fails to fulfill its obligation to settle the trade, the appellant is required to settle the trade in accordance with its bye-laws, rules and regulations. The inability of clearing corporation to carry out novation and eliminate counter-party risk will directly result in investors losing in capital markets, and the credibility of the capital market itself being eroded. 15. Learned senior counsel for the appellant further contended that appellant‟s functioning is wholly regulated by SEBI and under the Securities Contracts (Regulation) Act, 1956 and the Rules made thereunder. Under the Securities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dditional deposits paid, whether in the form of cash, Bank Guarantee, Securities or otherwise, with the Exchange, by a trading member from time to time, shall be subject to a first and paramount lien for any sum due to the Exchange and all other claims against the trading member for due arising out of or incidental to any dealing made subject to the Byelaws, Rules and Regulations of the Exchange. The Exchange shall be entitled to adjust or appropriate such fees, deposits and other monies for such dues and claims, to the exclusion of the other claims against the trading member, without any reference to the trading member . (emphasis supplied) 18. In this connection it would be relevant to highlight that Chapter V of the Bye-laws of the appellant stipulates that the trading member shall adhere to the bye-Laws, rules and regulations of the Exchange. Bye-law 2(a) reads as under:- Conditions 2(a) Trading members shall adhere to the Bye Laws, Rules and Regulations of the Exchange and shall comply with such operational parameters, rulings, notices, guidelines and instructions of the relevant authority as may be applicable. 19. Chapter X of the Bye-laws of appella ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realize the security deposits in any form, margin money, other amounts lying to the credit of and securities deposited by the defaulter and recover all moneys, securities and other assets due, payable or deliverable to the defaulter by any other Trading Member in respect of any transaction or dealing made subject to the Bye-laws, Rules and Regulations of the Exchange and such assets shall vest ipso facto on declaration of any trading member as a defaulter, in the Exchange for the benefit of any dues of the Exchange, National Securities Clearing Corporation Limited, Securities and Exchange Board of India, other trading members, Constituents and registered sub-brokers of the defaulter, approved banks and any other persons as may be approved by the Defaulters‟ Committee and other recognized stock exchanges. Application of Assets (23) The Defaulters Committee shall apply the net assets remaining in its hands after defraying all such costs, charges and expenses as are allowed under the Rules, Bye-laws and Regulations to be incurred by the Exchange, in satisfying the claims in the order of priority provided hereunder :- (a) Dues to the Exchange, National ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore than one recognized stock exchange, then the remaining amounts shall be distributed amongst all such recognized stock exchanges and if the remaining amount is insufficient to meet the claims of all such stock exchanges, then the remaining amount shall be distributed pro rata among all such stock exchanges. (e) Surplus assets: Surplus assets, if any, may be released to the defaulter after a period of at least one year from the date of declaration of the trading member as defaulter or after satisfying the claims falling under Bye-law 23, whichever is later. 21. Attention of the Court was also invited to Chapter XIII of the Bye-laws of the appellant to show that the Stock Exchange also has created an Investor Protection Fund, to make good claims for compensation which may be submitted by a trading members constituent who suffers loss arising from the said trading member being declared as a defaulter by the exchange under Chapter XII ‟. In the event the deposits of a defaulting trading member fall short, the Exchange has at its disposal, these sums of monies to make good on its counter party risk and to assure the credibility of the capital markets. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the Clearing House 3 or to the Trade Guarantee Fund by the former member whose right of membership vests in the Exchange. Liabilities relating to Contracts (ii) second-the payment of such debts, liabilities, obligations and claims arising out of any contracts made by such former member 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; and Surplu s (iii) third-the payment of the surplus if any to the funds of the Exchange: Provided that the Exchange in general meeting may at its absolute discretion direct that such surplus be disposed of or applied in such other manner as it may deem fit. Rule 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 Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 57 came to be considered by the Supreme Court in the decision reported as (1999) 6 SCC 215 Vinay Bubna vs Stock Exchange of Mumbai Ors wherein the Supreme Court held as under:- 9. A bare perusal of the aforesaid and other rules clearly shows that the said rules provide that the membership of the Exchange constitutes personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the rules, bye-laws and regulations of the Exchange . According to Mr. Ashok H. Desai, learned Senior Counsel for the respondents, every contract notice issued to a constituent contains a specific provision that the contract is made subject to the rules, bye-laws and regulations and usages of the Stock Exchange, Bombay. The members of the Stock Exchange, namely, the stockbrokers are permitted to buy and sell the shares for their clients like the appellant. To secure due performance of his obligations the Exchange; takes security from each member upon which it has lien as provided by Rule 43. A member is declared defaulter if he fails to meet his obligation and the rules further show that thereafter his right of membership and nomination ceases and vests in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... form phraseology their result in the case of a member who has lost his membership for being a defaulter clearly enough is that he loses all interest both in the property of the Association and in his card . In such a case no interest is reserved n the defaulter‟s card except to members of the Association who have suffered by his lapse- in the rules sometimes called his creditors- or to the Association itself. This seems to their Lordships to be the result of Rules 18, 56, 57, and 62. The defaulting member himself has no interest in the result of the sale provided for under these rules nor can he require a sale to be made. The rules are there for the benefit of his Exchange creditor‟ and are doubtless enforceable at their instance In that case also a contention was sought to be raised that if the proceeds of the sale of the insolvent s card are not given to the official assignee the same would be regarded as being contrary to the law of insolvency. It was rightly observed that when the defaulting member is expelled from the exchange no interest in his membership card remains in him and none can pass to his assignee. Once the membership card ceases to be an asse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for two consecutive years, his name shall be struck off the roll of the member, his card shall be forfeited. 22. If the card of the broker has been forfeited for any reason, whatever, no certified broker shall dealing with him in any way, and if any broker will be found so dealing with him, his card also shall be forfeited. 62. On account of his having become a defaulter his card shall be cancelled in accordance with the rules of the association. If he fails to pay in full his creditors within a period of six months then his card shall be sold and the amount realized on the sale thereof shall be distributed among his creditors in proportion (to their claims) and if on such distribution being made any balance remains over then the same shall remain credited to the account of the fund in respect of the hall @Page 190 But, although the rules are badly drawn and not in uniform phraseology their result in the case of a member who has lost his membership for being a defaulter-clear enough is that he loses all interest both in the property of the Association and in his card except to members of the Association who have suffered by his lapse- in the rules sometimes ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ues of Exchange, National Securities Clearing Corporation Limited, Securities and Exchange Board of India, other trading members, constituents and registered sub-brokers and other recognized stock exchanges and only upon satisfaction of claims under Bye-law 23 of the surplus assets, if any are to released to the defaulter member. In the instant case only in the event of any surplus being found would the same be liable to be made over to the official liquidator. 32. Conversely, the learned counsel for the official liquidator placed reliance upon Section 446 of the Companies Act 1956 to contend that the Company Court alone under Section 446(2)(d) of the Companies Act, 1956 has the requisite jurisdiction to decide the question of priorities. 33. Further, with reference to Section 456 of the Companies Act, learned counsel for the official liquidator contended that the provisional liquidator shall take into his custody or control all the property‟ to which the company is or appears to be entitled. 34. With reference to Section 468 of the Companies Act, the learned counsel for the official liquidator contended that, any property of the company that prima-facie appears t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It was therefore submitted that the amount upon vesting was not an asset of the company in liquidation as on that date and therefore, the official liquidator is not entitled to lay its hands on the same without culmination of the entire process qua settlement of the liabilities of the company in liquidation by the Defaulters Committee in terms of the bye-laws, rules and regulations of the appellant. 39. Counsel for the appellant emphasizes the fact that capital markets require the certainty of settlement of claims of defaulting members within the time as prescribed by the byelaws for conclusion of transactions. This self-operating mechanism has withstood the test of time and has added robustness to the credibility of the capital markets. It is this certainty that creates confidence in the capital markets. The self-operating mechanism is a statutorily recognized complete code in itself and ought not to be set at naught. 40. Counsel for the appellant reiterated that the manner in which the appellant functions is that the National Stock Exchange through its clearing corporation guarantees the clearing and settlement for all deals executed on its platform, including deals execut ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber with the appellant is subject to a first and paramount lien for any sum due to the appellant or other trading member or to a third party for discharge of the liability of the member towards the third party. Chapter XII of the Bye-laws of the appellant make it apparent that deposits by a defaulting member are vested with the Defaulters Committee and has to be applied by the Committee as per Bye-law 23 of Chapter XII. 43. In the decision reported as AIR 2001 SC 1071 The Stock Exchange, Ahmedabad vs. Asstt. Commissioner of Income Tax, Ahmedabad , the Supreme Court whilst dealing with similar rules of the stock exchange held as under:- 9. The Stock Exchange Rules, Bye-Laws and Regulations have been approved by the Government of India under the Securities Contracts (Regulations) 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 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-transferabl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the right of membership is to be dealt with in such a manner as the Exchange may think fit and proper. 39. How the card money is to be dealt with has been provided under the Rules. A dichotomy, however, has been created under the Rules and Bye-laws as regards the amount received by sale of membership card and amount recovered from the defaulters 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 . 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 amount vested in it for the benefit and on account of the creditor members . Once the liabilities of the creditors from the defaulters are paid to the members, in terms of Rule 44 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... which would make crown debts subservient to the debts owed by secured creditors. Therefore, the Court concluded that the lien possessed by the Stock Exchange would make it a secured creditor by virtue of which, it would have priority over Government dues. 46. The position therefore would be that in the instant case there would be a lien of the appellant on the money deposited by the respondent company in liquidation when it became a member of the appellant and since there are no workmen dues the official liquidator has not to watch the interest of any workman. As a matter of fact other than persons who used the services of the respondent company to act as a broker on the stock exchange no one has any claim against the company. Therefore the manner of adjudication of the claims and disbursement in the instant case has to be as per the bye-laws of the appellant. 47. The appeal is accordingly allowed. Impugned order dated January 23, 2013 is set aside. Co.App.(C) No.4/2011 filed by the official liquidator is dismissed and Co.App.No.401/2012 filed by the appellant is allowed with a clarification. Should after settling the claims of investors any money remains surplus in the hand ..... X X X X Extracts X X X X X X X X Extracts X X X X
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