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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 ..... member of the appellant, the company made a deposit of Rs. 1.1 crores, in terms of the bye-laws of the appellant. 4. On July 27, 2009 the company defaulted upon its obligations and accordingly was expelled by the appellant from membership. Accordingly, on the event of default happening, the deposit of Rs. 1.1 crores came to be vested with the Defaulters Committee of the appellant, under the bye-laws, for disbursement to the persons whose claims were found admissible by the Defaulters Committee. 5. On July 29, 2009 the Defaulters Committee invited claims in respect of the company. It received 151 claims and found 68 claims to be admissible for payment, and finally in its meeting dated June 30, 2011 the Defaulters Committee approved 68 claims found to be admissible for payment of Rs. 1,07,82,122.11. Out of Rs. 1,07,82,122.11, as on February 10, 2012, claims to the extent of Rs. 81,96,954.59 were settled from out of the Investor Protection Fund Trust and the balance from the deposit of Rs. 1.1 crores of the appellant. It further resolved for setting aside of balance Rs. 83,91,000/- from the deposits of the appellant, as in the meanwhile on September 06, 2010 the company had been or ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ii) Mrs. Uma Rani Gupta Admitted by NSEIL 11. Evidently, till date, the official liquidator has received only 8 claims by the investors and no claim by any workman has been received by the official liquidator. 12. Thereafter, the official liquidator was permitted to scrutinize the claims received by the appellant and pursuant thereto has filed reports dated May 13, 2015 and August 13, 2015 along with clarifications from a Chartered Accountant with regards to a report filed by the Chartered Accountant appointed to scrutinize the claims received by the appellant. 13. Mr.Arvind Nigam learned senior counsel on behalf of the appellant contended that the capital markets require and hence provide the certainty for conclusion of transactions on the stock exchange. Learned senior counsel explained 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 executed in the Futures and Options (F&O) segment through novation in accordance with statutory requirement. Since NSE operates an anonymous order driven market, all trades e ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... oard of India, make bye-laws for the regulation and control of contracts." 17. Learned senior counsel drew attention to Chapter V of the Bye-laws of the appellant which deal with the trading members. In terms of Bye-law 1(c) of Chapter V, the fees, security deposits, other monies and any additional deposits paid, whether in the form of cash, bank guarantee, securities or otherwise, with NSEIL, by a trading member from time to time are subject to a first and paramount lien for any sum due to the appellant and all other claims against the trading member for due fulfillment of engagements, obligations and liabilities of trading members arising out of or incidental to any dealing made subject to bye-laws, rules and regulations of the appellant. Bye-law 1(c) which reads as under was highlighted:- "(c) The trading member shall pay such fees, security deposits and other monies as may be specified by the Board or the relevant authority from time to time, on admission as trading member and for continued admission. The fees, security deposits, other monies and any additional deposits paid, whether in the form of cash, Bank Guarantee, Securities or otherwise, with the Exchange, by a tradin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t if:- (d) he failed to pay any sum due to the Exchange or to submit or deliver to the Exchange on the due date, delivery and receive orders, statement of differences and securities, balance sheet and such other clearing forms and other statements as the relevant authority may from time to time prescribe; (IA) Without prejudice to the foregoing, if a trading member is either expelled or declared a defaulter by any other recognized stock exchange on which he is a member or if the registration certificate is cancelled by SEBI, the said Trading Member may be expelled from the Exchange after providing an opportunity of being heard to such Trading Member. Notwithstanding anything contained in this Byelaw, the trading facility of the member shall be withdrawn immediately after the receipt of information of expulsion/default by any other stock exchange or cancellation of registration certificate by SEBI. (11) Vesting of assets in the Exchange:- The Defaulters Committee shall call in and 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, pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ational Securities Clearing Corporation Limited invoking any bank guarantee issued by the bank concerned to the Exchange or National Securities Clearing Corporation Limited as the case may be on behalf of the defaulter to fulfill his obligation of submitting bank guarantee, guaranteeing discharge of obligations under the Byelaws, Rules and Regulations of NSEIL/NSCCL. The claims of other persons should have arisen out of or incidental to the transaction done on the Exchange or requirements laid down by the Exchange, provided that if the amount available be insufficient to pay all such claims in full, they shall be paid pro rata, and (d) Dues to any other recognized stock exchange: After meeting the claims under (c) above, the remaining amounts, if any, shall be disbursed to any other recognized Stock Exchange for the purpose of meeting the obligations of the defaulter as a member of that Exchange. If the defaulter is a member of more 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 sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... absolutely to the Exchange free of all rights, claims or interest of such member or any person claiming through such member and the Governing Body shall be entitled to deal with or dispose of such right of membership as it may think fit." 25. Rule 16 of the Bombay Stock Exchange, Rules, Bye-laws and Regulations, 1957, which deals with the order of priority as under:- "Allocation in Order of Priority:- 16. (1) When as provided in these Rules the Governing Board has exercised the right of nomination in respect of a membership vesting in the Exchange the consideration received therefor shall be applied to the following purposes and in the following order of priority namely: Dues of Exchange and Clearing House (i) first-the payment of such subscriptions, debts, fines, fees, charges and other monies as shall have been determined by the Governing Board to be due to the Exchange, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 67 Lien on margin deposits - "The monies, bank deposits receipts and other securities and assets, deposited by a member by way of margin under the provisions of these Bye-laws and Regulations shall be subject to a first and paramount lien for any sum due to the Exchange or to the clearing house by him or by the partnership of which he may be a member and for the due fulfillment of his engagements, obligations and liabilities or of the partnership of which he 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." 28. Learned senior counsel for the appellant had also drawn our attention to the fact that Rules 16, 53 & 54 of Bombay Stock Exchange Rules, 1957 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... doubt that the member's rights of membership vests in the Exchange after he is declared a defaulter. This view, namely, that the defaulting member can claim no interest in the membership and can pass none in consonance with the decision of the Privy Council in Official Assistant of Bombay v. K.R.P Shroff, AIR 1932 PC 186. In that case a member of the Stock Exchange had lost his membership for being a defaulter. The main question that arose for determination there was whether a card or right of membership of share broker or the proceeds of sale thereof, when sold, would pass to the membership for being a defaulter. After referring to the rules of the Stock Exchange in this connection it was observed at p. 190 as follows: "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 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 it ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... insolvency of his estate and effects, held as under:- At Page 187 ...At all times material to these claims of the appellant, the relations between the Association and its members were regulated by a deed of association, dated December 3, 1887 and by rules subsequently made and adopted pursuant to its provisions. At Page 188.... Rules of the Exchange in that case were: DISPOSAL OF AN INSOLVENT BROKER'S CARD "18. If any of the brokers goes away from the market without paying the moneys claimable by another certified broker or is unable to pay the same, his card shall be sold and the sale proceeds thereof shall be distributed amongst the creditors. 21. If any broker does not pay the subscription in respect of his card of the deceased 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 associ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ge, Ahmedabad vs. Asstt. Commissioner of Income Tax, Ahmedabad (iii) (2004) 1 SCC 160 Bombay Stock Exchange vs. Jaya I Shah (iv) (2015) 2 SCC 1 Bombay Stock Exchange v V.S. Kandalgaonkar & Ors. 31. Accordingly, it was the submission of the learned senior counsel for the appellant that under the bye-laws, on a trading member being declared a defaulter, the security deposits in any form, margin money, other amounts lying to the credit of and securities deposited by the defaulter member and all moneys, securities and other assets due and payable or deliverable to the defaulter member by any other trading member ipso facto vest with the Defaulters Committee for the benefit and on account of any dues 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 learne ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... quo;all the property‟ to which the company is or appears to be entitled, submitted that admittedly, the Company under liquidation being a trading member was bound by the Bye-laws, Rules and Regulations of NSEIL. Even, in the event of its winding up the contractual obligations undertaken by it prior to liquidation do not get obliterated. In terms of its obligation under the bye-laws, it is evident that pursuant to the member having been declared as a defaulter, if as on date the said defaulter member itself was not entitled to touch the deposit by virtue of the same being automatically vested in the Defaulters Committee of the appellant, it was not available to the official liquidator. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a pari passu charge with the workers and thus on the facts of the instant case Section 529A of the Companies Act, 1956 is not attracted. 42. The legal position qua the appellant would be that its functioning is regulated under the Securities Contracts (Regulation) Act, 1956 and the Rules made thereunder. Under the Securities Contracts (Regulation) Rules, 1957 the Central Government has notified Rules and Rule 8 prescribes the qualifications for membership of a recognized stock 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. 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. As ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on that he has become a defaulter. His right of nomination in view of Rule 9 ceases upon default and vests in the Exchange. In terms of Rule 10, the membership belongs absolutely to the Exchange free of all rights, claims or interests in such manner as it may think fit. Rule 16 provides for the order of priority in terms whereof dues of the Exchange and clearing house would have priority, whereafter all the liabilities relating to the contract are required to be discharged. Rule 16, however, does not make any distinction between claim of a member or a non-member. In the event there being any surplus, the amount collected by the Exchange by auctioning 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... en‟ in favour of the Stock Exchange. The Court further noted that Subsection (3) of Section 30 of Securities Contracts (Regulation) Act, 1956 would require every rule made by the Stock Exchange under the said Act to be laid before Parliament, making it clear that the said rules are statutory in nature. As a consequence, the Court was of the opinion that the Stock Exchange would be a „secured creditor‟ in light of the statutory flavor of the bye-laws and rules. Further, the Court observed that the common law doctrine of priority of crown debts would be still applicable to India by virtue of Article 372 of the Constitution, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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