Harinarayan G. Bajaj vs Rajesh Meghani

Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2004 Supreme(SC) 1527

2004(8) Supreme 803
SUPREME COURT OF INDIA
(From Bombay High Court)
Mrs. Ruma Pal, Arijit Pasayat and C.K. Thakker, JJ.
Harinarayan G. Bajaj -Appellant
versus
Rajesh Meghani and Anr. -Respondents
Civil Appeal No. 7890 of 2004
(Arising out of SLP (C) No. 24126 of 2003)
Decided on 6-12-2004
Counsel for the Parties :
For the Appellant : R.F. Nariman, Sr. Advocate, Dhruv Mehta, Anurag Jain, Sriraj, Mohit Chaudhary and P.N. Puri, Advocates.
For the Respondents : S. Ganesh, Sr. Advocate, C. Mukund, Ms. Sudha Sharma, G.K. Singh, Neeraj Kaseva and Bijoy Kumar Jain, Advocates.

Headnote:Arbitration and Conciliation Act, 1996-Section 34-Securities Contract (Regulation) Act, 1956-Sections 3(2) and 9-NSE Rules-Rule 33-Arbitrations-Defaulter-Right to initiate arbitration proceedings-Cessation of a trading member s right of membership immediately he is declared a defaulter-Appellant trading in shares through respondent, a share broker-In March, 2001 three separate transactions were entered into between appellant and respondents for purchase of three separate lots of shares-Non payment of shares-NSE declared respondent as a defaulter-Respondent referred his claim against appellant to Arbitration under the Bye-laws of NSE-Appellant contended that Arbitration reference was not maintainable on the ground that the same was filed after the respondent had been declared a defaulter-Award passed by Arbitral Tribunal challenged alleging that respondent did not have locus standi to refer the disputes to Arbitration and that Arbitrators had erred in holding that appellant was liable to pay the purchase price of the shares-Whether a trading member of the NSE who has been declared a defaulter has the right to initiate arbitration proceedings under the NSE Rules and Bye-laws-(Yes).
       Held : The Rule speaks of the lapsing of a Trading Members right of membership and forfeiture of his rights and privileges as a member of the exchange on a member being declared as defaulter. The Rule further provides for the vesting of the right of membership of the defaulting members with the NSE. The question is whether these rights and privileges include the right to refer a dispute to arbitration between the defaulting member and another party. (Para 12)
       The NSE Bye laws which have been framed by the Exchange under Section 9 of the Securities Contracts (Regulation) Act, 1956 contain a separate chapter, (Chapter XI), which deals exclusively with arbitrations. (Para 14)
       The arbitration proceedings as provided in the Bye-laws and Regulations are subject to the provisions of the Arbitration and Conciliation Act, 1996 to the extent not provided for in the Byelaws and Regulations (Byelaw 14). Byelaw 1 prescribes requirements for reference to arbitration with regard to claims, differences and disputes inter alia between Trading Members and Constituents. (Para 15)
       Under these Byelaws the parties to the reference are the parties to the agreement. This is also what is provided under Section 2(h) of the Arbitration and Conciliation Act, 1996 and a party is defined as "a party to an arbitration agreement". (Para 17)
       The argument that all the rights of a Trading Member who has been declared to be a defaulter vests in the Defaulters Committee including the right to go to arbitration appears to be incorrect. For one this would amount to a rewriting of Byelaw IC. For another it would necessitate a rewriting of the arbitration agreement by substituting the Defaulters Committee in place of the Trading Member as a party to the agreement. (Para 19)
       Rule 33 does not provide for the vesting of any rights in the Defaulters Committee. The Exchange and the Defaulters Committee are not the same. The Defaulters Committee is set up under Chapter XII Byelaw 30 and may be constituted by the Board of Directors from time to time at any point of time. Not less than 60% of the members of the Defaulters Committee shall be from among non-trading members who shall be nominated by the Exchange with the prior approval of Securities and Exchange Board of India. (Para 21)

JUDGMENT

Ruma Pal, J.-Leave granted.

2. The first named respondent is a share broker and was a member of the National Stock Exchange of India Ltd. (referred as the NSE ). The NSE which was initially named as the second respondent has been deleted from the array of parties at the instance of the appellant. We will therefore refer to the first respondent as the respondent. The appellant started trading in shares through the respondent. In March, 2001 three separate transactions were entered into between the appellant and respondent for purchase of three separate lots of shares of Amara Raja Batteries Ltd. The respondent s allegation is that the appellant did not make payment for the shares bought by the respondent for and on behalf of the appellant and that by reason of the non-payment for the shares, the NSE declared the respondent as a defaulter on 19th June 2001. On 21st June 2001, the respondent referred his claim against the appellant to Arbitration under the Bye-laws of the NSE. The appellant contested the claim and contended that the Arbitration reference under the Bye-laws was not maintainable on the ground that the same was filed after the respondent had been declared a defaulter. The appellant also filed a counter claim against the respondent before the Arbitral Tribunal.

3. On 31st July 2002, the Arbitral Tribunal passed an award in favour of the respondent for an amount of Rs. 3,46,89,636/- after rejecting the preliminary objection raised by the appellant as to the maintainability of the arbitration proceedings. The Arbitral Tribunal held that the transactions in question had been completed prior to the respondent being declared a defaulter and that the respondent was not in any way debarred or prevented from pursuing his claim to recover amounts due from the appellant in respect of such transactions.

4. Challenging the award the appellant filed an application under Section 34 of the Arbitration and Conciliation Act, 1996 in the High Court. The learned Single Judge noted that the appellant had made only two submissions in so far as the validity of the award was concerned. Firstly, it was submitted that after the respondent had been declared a defaulter, the respondent did not have the locus standi to refer the disputes to Arbitration or to carry on the arbitration proceedings. The second submission was that the Arbitrators had erred in holding that the appellant was liable to pay the purchase price of the shares although the appellant had specifically submitted before the Arbitrators that the respondent was not in a position to effect delivery of the shares which were alleged to have been purchased.

5. The learned Single Judge negatived the first submission but upheld the second submission. Hearing of the petition under Section 34 of the 1996 Act was adjourned and the Arbitral Tribunal was directed to give a finding specifically on the aspect as to whether the respondent was in a position to deliver the shares which were the subject matter of the reference. Because of the failure of the appellant to make payment for the shares which had according to the learned Single Judge resulted in "disastrous consequences" for the respondent, the order was made conditional upon the appellant s depositing the awarded amount in the Court within a period of four weeks failing which the petition under Section 34 would stand dismissed.

6. The appellant preferred an appeal challenging the order passed by the Single Judge. The Division Bench dismissed the appeal but set aside the direction of the learned Judge directing the deposit of the awarded amount. The Division Bench also directed that any amount which may be recovered by the respondent in respect of the arbitration proceedings be made over to the Defaulters Committee to be dealt with in accordance with the provisions of the Rules and Byelaws. The respondent has not challenged this direction and has given an undertaking that all amounts realised by him would be made over to the Defau

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2004 Supreme(SC) 1527

Cases Referred (2)