Important Points
1. Rule 16 of the Bombay Stock Exchange Rules is not only not illegal, arbitrary or unjust but the same is, on the other hand, framed in such a manner that the hardship which may be caused by the default committed by th erstwhile member is mitigated. There is nothing unfair or unjust in Rule 16 providing that the first priority from out of the sale proceeds would be towards the amounts due to the Exchange itself.
2. Once a defaulting member ceases to be a member of the Stock Exchange no interest in his card remains and the same cannot be regarded as his asset and furthermore Rules 16 and 43 of Bombay Stock Exchange Rules are not illegal, arbitrary or void.

Headnote:Bombay Stock Exchange Rules, Bye-laws and Regulations, 1957-Rules 16 and 43-Order of Priority in allocating consideration received in respect of membership of defauted member-Constitutional validity-When defaulting member is expelled from Exchange no interest is his membership Card remains in himself and none can pass to his assignee-There is nothing unfair or unjust in Rule 16 providing first priority from out of sale proceeds would be towards amounts due to the Exchange itself-Rule 16 and 43 are not illeged, arbitrary or void.
       Held : The order of priority laid down by the aforesaid Rule 16 ensures that dues to the Exchange or to the Clearing House have first to be met before the balance amount can be utilised for payment of debts, liabilities etc. arising out of any contract made by the former member. If the amount available is insufficient to pay all such debts, liabilities etc. then the payment is to be mede pro rata. If, however, any surplus still remains the same is to be disposed of or applied in such manner as the Exchange in general meeting may decide. (Para 10)
       On a default being committed the share broker ceases to become a member of the Exchange and all his rights, privileges etc. as a member come to an end. If he does not clear the dues within six months the Governing Body then has a right of nomination in respect of such membership. It will be incorrect to state that on the stock broker ceasing to be a member, he still retains any right or interest in the permission which has been granted to him by the Exchange to carry on business as a member. The membership card of a share broker is not his personal property which, on default being committed by him and his ceasing to be a member, can be sold and the proceeds distributed amongst his creditors. Rules 53 and 54 leave no manner of doubt that the member’s right of membership vests in the Exchange after he is declared defaulter. When the defaulting member is expelled from the Exchange no interest in his membership card remains in himself and none can pass to his assignee. Once the membership card ceases to be an asset of the share broker the question of Rule 16 being contrary to the insolvency law does not arise. (Para 10)
       Not only is Rule 16 not illegal, arbitrary or unjust but the same is, on the other hand, framed in such a manner that the hardship which may be caused by the default committed by th erstwhile member is mitigated. There is nothing unfair or unjust in Rule 16 providing that the first priority from out of the sale proceeds would be towards the amounts due to the Exchange itself. The second priority is given to the debts, liabilities, obligations and claims arising out of the contracts made by the erstwhile member. Even though at the time when the nomination is made by the Stock Exchange of the vacancy which has been created the erstwhile member had no interest, in law, therein, nevertheless Rule 16 makes a provision by providing for payments being made for clearing the debts etc. of the erstwhile members. But for Rule 16, in other words, creditors like the appellant would not have a ray of hope of receiving any money realised by the Stock Exchange on the vacancy being created by reason of default of the stock broker. In view of this it is not possible to accept that the said Rule is in any way bad in law. Once a defaulting member ceases to be a member of the Stock Exchange no interest in his card remains and the same cannot be regarded as his asset and furthermore Rules 16 and 43 of Bombay Stock Exchange Rules are not illegal, arbitrary or void. (Para 11 & 13)

Judgment

Kirpal, J.-Special leave granted.

2. The appellant in this appeal had dealings in sale and purchase of shares with one Yogesh Mehta-respondent No. 3 [hereinafter referred to as ‘the share broker’] who was a member of Bombay Stock Exchange until he was declared a defaulter by the said Exchange.

3. According to the appellant as on 10th May, 1995 a sum of Rs. 21, 81, 635.50 P. was due and payable by the share broker but the payment was not made. Thereupon the appellant filed an arbitration petition against the said share broker before the Bombay High Court. In the said proceedings an application was filed for appointing a court receiver. The Court did not grant to the appellanat any relief in respect of the membership card of the share broker whereupon an appeal was filed and it was contended that a court receive should be appointed in respect of the said membership card. This appeal was disposed of after a statement on behalf of the Stock Exchange was recorded to the effect that it “shall not apply any amount received by it as consideration on nomination of the membership to any person falling in the same category for the purpose of priority as the appellant under Rule 16 of the Stock Exchange Rules till the award of the arbitration was received”. It may here be stated that in view of the defauit having been committed by the share broker he was, on 10th December 1996, declared defaulter by the Stock Exchange and thereafter he ceased to be it’s member.

4. The appellant wanted Rules 16 and 43 of the Stock Exchange to be amended. Letters were written by him to SEBI and other authorities including the Stock Exchange. When efforts in this behalf failed a writ petition was filed in the Bombay High Court by the appellant with a prayer that Rules 16 and 43 of the Stock Exchange Rules, Bye-laws and Regulations 1957 should be declared as illegal, bad in law and ultra vires the Constitution of India. It was also prayed that the Stock Exchange be directed to amend/after Rules 16 and 43 of the Stock Exchange. The main reason for impugning these rules was that, according the appellant’ the membership of the Stock Exchange was an asset of the share broker and on its sale from the proceeds thereof payment should first be made to creditors like the appellant of the share broker and the proceeds should not be distributed in the manner indicated by the said rules.

5. The Bombay High Court dismissesd the writ petition, inter alla, holding that it regarded the said rules as being fair, just and reasonable. It was further held that on default being committed the share broker ceased to be a member of the stock exchange and there was no conflict between the provisions of the said rules and the Insolvency Act.

6. On behalf of the appellant it was contended that the membership of the Stock Exchange was an asset which belonged to respondent No. 3 and on the sale of the same to distribute the proceeds in the manner lndicated by Rule 16 was unfair, unjust and arbitrary and was violative of Articies 14, 19(1) and 300A of the Constitution of India. It was submitted that a member who is declared as defaulter has to be treated in the similar position to that of an insolvent because he is unable to pay his debts and the Rules 16 and 43 framed by the Bombay Stock Exchange are inconsistent with the laws of insolvency as applicable in India which provide for manner of distribution of the asset of the lnsolvent which is at variance with the said rules.

7. On behalf of the Stock Exchange it wa submitted tht after the respondent No. 3 had been declared a defaulter he ceased to be a member of the Stock Exchange whereupon his rights of membership vest in the Exchange free of all rights, claims and interest and the Exchange was at liberty to invite applications from other persons and to admit any one who offers to pay the highest amount. The proceeds so received do not belong to the ex-member and the order of priority contained in Rule 16 was just and fair and

Click Here to Read the rest of this document

1999 Supreme(SC) 770

Cases Referred (1)