D.Y. Chandrachud, J.@mdashThis appeal arises out of an order passed by Mr. Justice D.K. Deshmukh on 5th June, 2003 in an arbitration petition instituted u/s 34 of the Arbitration and Conciliation Act, 1996.
2. On 21st June 2001, the First Respondent submitted a claim for the recovery of a net amount of Rs. 3,46,89,636.12 before an Arbitral Forum constituted under the Bye-laws, Rules and Regulations of the National Stock Exchange of India Ltd. ("NSE")- The First Respondent was a member of NSE, while the Appellant was his constituent. A member-client agreement dated 15th January, 2001 was stated to have been entered into between the parties. The basis of the claim was that transactions had been entered into on behalf of the Appellant through the on line screen based trading system of NSE and, in Settlement 10 of 2001 covering the period between 7th March, 2001 and 13th March, 2001, the First Respondent bought for and on behalf of the Appellant, 1,61,000 shares of a Company known by the name of Amar Raja Batteries Limited ("ARBL") in three lots. The Appellant, it was alleged, had initially made a payment of Rs. 50 lakhs by a cheque dated 18th March, 2001. The cheque was returned unpaid and thereafter was substituted by a Banker''s Pay Order of a like amount which was encashed. According to the First Respondent, the Appellant had not effected payment of the balance of Rs. 4.12 crores which was due and payable. The First Respondent relied upon contract notes, the bills issued to the appellant and on a copy of the ledger accounts for the relevant period. The First Respondent was initially suspended and thereafter declared as a defaulter on 19th June, 2001 and he avers that the default occurred because of the non-payment by the Appellant of the price of the shares which had been purchased by the First Respondent for and on behalf of the Appellant. According to the First Respondent, the transactions were completed in March 2001 much prior to his being declared in June 2001 as a defaulter. The Appellant contested the claim lodged by the First Respondent before the Arbitral Forum. The Appellant challenged the maintainability of the claim and put forth a defence on merits.
3. By an Arbitral Award dated 31st July, 2002, the Arbitral Tribunal constituted by NSE allowed the claim and directed the Appellant to pay an amount of Rs. 3,46,89,636 together with simple interest calculated at the rate of 12 per cent per annum from 21st June, 2001. The Arbitral Tribunal held that : (i) The First Respondent had conducted and concluded transactions as a stock broker for and on behalf of the Appellant who was a client-constituent; (ii) The First Respondent had purchased 1,61,000 shares of ARBL in three lots in March 2001; (iii) The liability of the Appellant to effect payment of the purchase price was established in view of the contract notes, bills, statement of ledger accounts and other documents and exhibits furnished by the First Respondent together with the claim for arbitration; (iv) At the relevant time, when the transactions were completed, the First Respondent was authorised to act as a duly registered stock broker; (v) The First Respondent acting in the capacity of a member-stock broker of NSE duly completed the transactions for the Appellant who was a client; (vi) These transactions were completed on the Stock Exchange and inasmuch as they related to trading in shares recourse, for the resolution of disputes to arbitration was valid; and (viz) The subsequent declaration of the First Respondent as a defaulter on 19th June, 2001 after the completion of the transactions in March 2001 would not to prejudice or affect the right of the First Respondent to recover the amount due and payable by the Appellant in respect of the transactions completed earlier. The Arbitral claim was accordingly allowed.
4. The Appellant thereupon filed an Arbitration Petition u/s 34 of the Act in which the Learned Single Judge delivered judgment on 5th June, 2003. The Learned Single Judge noted in the course of the judgment that no submission was urged before him to challenge the finding of the Arbitral Tribunal rejecting the contention of the Appellant that the purchase of the shares by the First Respondent was not authorised and was not made on behalf of the Appellant. Two submissions were urged before the Learned Single Judge : (z) The membership of the First Respondent of the Stock Exchange stood cancelled on the date on which an application for referring the matter to arbitration was made and consequently, the First Respondent had no locus standi to seek a reference to arbitration; and (ii) The Arbitrators had neither considered, nor recorded any finding on the specific defence of the Appellant that the First Respondent was not in a position to effect delivery of the shares which were alleged to have been purchased by the Appellant and consequently, the Appellant could not be held liable to pay the price of the shares. The Learned Single Judge rejected the first submission holding that on the date on which the shares were purchased, the First Respondent was a member of the Stock Exchange and the Appellant was his constituent. The Learned Single Judge held, relying on the provisions of Clause (1B) of Chapter XI of the Bye-laws of NSE that disputes regarding transactions entered into by a member before he is declared as a defaulter continue to be arbitrable. The Learned Single Judge held that though a trading member''s right of membership lapses and vests with the exchange upon his declaration as a defaulter by virtue of Rule 33, with the consequence that he shall forfeit all his rights and privileges as a member of the Exchange, the provision for arbitration contained in the bye-laws will operate as an exception to Rule 33. One of the submissions which was urged before the Learned Single Judge was that upon the declaration of a member as a defaulter it was only the Defaulters'' Committee that would be entitled to enforce the rights of the defaulting member including the right to recover the sums due for the benefit of the other members. The Learned Single Judge held that while the Defaulters'' Committee may also be entitled to enforce certain rights of a defaulting member, no provision had been pointed out to establish that the right of a member to institute arbitration proceedings in relation to transactions which were entered into by him before he was declared as a defaulter was taken away and vested in the Defaulters'' Committee. The first submission was thus rejected by the Learned Single Judge.
5. Insofar as the second submission was concerned, the Learned Single Judge held that though a specific ground was raised before the Arbitral Tribunal, that an order for the payment of the purchase price by the Appellant to the First Respondent could not have been made when the First Respondent was not in a position to give delivery of the shares which had been purchased : that submission had not been dealt with by the Arbitral Tribunal. The Court, however, held that this by itself would not warrant the setting aside of the arbitral award in its entirety since the finding of the Arbitral Tribunal that there was a concluded contract for the purchase of shares had not been seriously challenged before the Court. The Learned Single Judge, therefore, was of the view that it would be appropriate to make an order under Sub-section (4) of Section 34 of the Arbitration and Conciliation Act, 1996 ("the Act") to direct the Arbitral Tribunal to resume the arbitral proceedings and to record a finding on this aspect of the matter.
6. Having said this, the Learned Single Judge was of the view that a condition should be imposed on the Appellant, before the Arbitral Tribunal was directed to resume proceedings. The Learned Judge held that the First Respondent was declared as a defaulter and his membership was cancelled because the Appellant did not make payment for the shares in respect of which purchase orders were placed on the First Respondent. Thereafter, it was observed that there appears to be no dispute that on the date on which the purchases had been made if payment had been made by the Appellant, the shares could have been delivered and transactions could have been completed. The Learned Judge observed that there was considerable substance in the submission urged on behalf of the First Respondent that he is entitled to the purchase price. The Learned Judge noted that the inability of the First Respondent to deliver shares subsequently occurred due to two factors viz., (i) A failure of the Appellant to pay the purchase price of shares as a result of which the First Respondent in turn could not make payment to parties from whom the shares were purchased, consequent upon which he was declared as a defaulter; and (ii) Due to the alleged dealings of the Appellant, delivery of shares to the Appellant had been stopped by the authorities. The Learned Judge held that in case the First Respondent established this position, which course appears to be likely, he would be entitled to the purchase price though the Appellant would not get the shares. In the circumstances, in order to ensure that the Appellant establishes his bona fides, the Learned Judge directed the Appellant to deposit an amount of Rs. 3,46,89,636 in this Court within a period of four weeks, failing which the Petition would stand dismissed without reference to the Court. Subject to the aforesaid deposit being made, the Arbitral Tribunal would render its finding on the question which had been left unanswered in the course of the arbitral award.
7. Counsel appearing on behalf of the Appellant assailed the view of the Learned Single Judge. First, it was urged that the arbitral proceedings which were instituted by the First Respondent were not maintainable upon his being declared as a defaulter. Counsel urged that upon the declaration of a default, all the rights of membership would lapse and would vest with the Exchange and the right to pursue arbitral proceedings would vest in the Defaulters'' Committee. The second submission which was urged that in any event, in a petition u/s 34 of the Arbitration and Conciliation Act, 1996, the Learned Single Judge was not justified, while passing an order under Sub-section 4 directing the Arbitral Tribunal to resume proceedings to require the Appellant to deposit the amount of Rs. 3,46,89,636 which was awarded by the Arbitral Tribunal. These submissions may now be considered.
Re : Maintainability of Arbitral Proceedings :
8. Chapter XI of the Bye-laws of NSE deals with Arbitration. Clause (1) which makes a provision for a reference to arbitration, provides thus :
"(1) All claims, differences or disputes between the Trading Member inter se and between Trading Members and Constituents arising out of or in relation to dealings, contracts and transactions made subject to the Bye-laws, Rules and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their validity, construction, interpretation, fulfilment or the rights, obligations and liabilities of the parties thereto and including any question of whether such dealings, transactions and contracts have been entered into or not shall be submitted to arbitration in accordance with the provisions of these Bye-laws and Regulations".
Bye-law (1C) then provides thus :
"The provisions of Bye-laws (1), (1A) and (1B) shall become applicable to all claims, differences, disputes between the parties mentioned therein for all dealings, contracts and transactions made subject to the bye-laws, Rules and Regulations of the Exchange provided such dealings, contracts and transactions had been entered into between the parties mentioned therein prior to or the date on which the Trading Member was either declared a defaulter or expelled or has surrendered his trading membership".
9. Hence, the provision for arbitration contained inter alia in Bye-law (1) shall continue to apply notwithstanding the declaration of a Trading Member as a defaulter so long as the dealings, contracts and transactions had been entered into prior to the date on which he came to be declared as a defaulter. Under Rule 33 of the Rules governing NSE a Trading Member''s right of membership lapses and vests with the Exchange immediately upon his declaration as a defaulter. Rule 33 stipulates that a member who is declared as a defaulter, shall forfeit all his rights and privileges as a member of the Exchange, including any right to the use of or any claim upon or any interest in any property or funds of the Exchange if any. Chapter XII of the Bye-laws provides for the declaration of default. By virtue of Clause (11) of Chapter XII the Defaulters'' Committee shall call in and realise the security deposits in any form, margin money, other amounts lying to the credit of and securities deposited by the defaulter. The Defaulter''s Committee is empowered to 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. All such assets vest ipso facto on the declaration of any trading member as a defaulter, in the Exchange for the benefit of and on account of any dues of the Exchange and of all other entities named therein, including other trading members. Constituents and registered sub-brokers of the defaulter. Bye-law (12) of Chapter XII requires that all monies, securities and other assets due, payable or deliverable to the defaulter must be paid or delivered to the Defaulters'' Committee within such time of the declaration of default as the relevant authority may direct. A trading member violating this provision shall be declared a defaulter. Bye-law 28 of Chapter XII is relevant and provides thus :
"(28) The Defaulters'' Committee shall be empowered to (a) initiate any proceedings in a court of law either in the name of the Exchange or in the name of the defaulter against any person for the purpose of recovering any amounts due to the defaulter (b) to initiate any proceedings in a Court of law either in the name of the exchange or in the name of the creditors (who have become creditors of the defaulter as a result of transactions executed subject to Bye-laws, Rules and Regulations of the Exchange) of the defaulter against the defaulter for the purpose of recovering any amounts due from the defaulter. The defaulter as well as the creditors of the defaulter shall be deemed to have appointed the Exchange as their constituted attorney for the purpose of taking such proceedings".
The provisions of Bye-law 28 thus amply demonstrate that the Defaulters'' Committee has been empowered to initiate any proceedings in a Court of law either in the name of the Exchange or in the name of the defaulter to recover amounts due to the defaulter or in the name of the creditors of the defaulter against the defaulter for recovering any amounts due from the defaulter. Arbitral proceedings have not been brought within the scope of Bye-law 28. Bye-law 29 provides that if any trading member adopts proceedings in a Court of law against a defaulter to enforce any claim against the defaulter''s estate arising out of any transaction or dealing in the market made subject to the Bye-laws, Rules and Regulations of the Exchange before he was declared a defaulter and obtains a decree and recovers any sum of money. Such amount as may be fixed by the relevant authority shall be paid to the Defaulters'' Committee for the benefit and on account of the creditor members having claims against such defaulter.
10. Thus neither the rules, nor the Bye-laws abrogate the right of a trading member who is declared as a defaulter to adopt and pursue arbitral proceedings in respect of transactions which were entered into subject to the Rules, Regulations and Bye-laws of the Exchange, prior to the declaration of the member as a defaulter. Upon a declaration of a trading member as a defaulter, his right of membership lapses and vests with the Stock Exchange, Consequent thereto he forfeits his rights and privileges as a member of the Exchange. That includes any right to the use of or any claim upon or any interest in any property or funds of the Exchange. From Clause (1C) of Chapter XI of the Bye-laws it is clear that the mandate to submit to arbitration all claims, differences or disputes between the parties specified therein for dealings, contracts and transactions made subject to the Bye-laws, Rules and Regulations of the Exchange continues to apply, notwithstanding the declaration of a trading member as a defaulter, so long as such dealings, contracts and transactions had been entered into prior to the date on which a trading member was declared as a defaulter. Bye-law 11 of Chapter XII enables the Defaulters'' Committee to call in and realise the security deposits, margin money and other amounts lying to the credit of and securities deposited by the defaulter. The Defaulters'' Committee can similarly 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 under Bye-law 12 of Chapter XII all moneys, securities and other assets due, payable or deliverable to the defaulter must be paid or delivered to the Defaulters'' Committee. Finally, there is the provision of Clause 28 of Chapter XII, which empowers the Defaulters'' Committee to initiate proceedings against defaulter in a Court of law inter alia in the name of the exchange, a defaulter, or creditors. These provisions do not take away the right of a trading member of NSE who has been declared as a defaulter to submit a claim in arbitration in accordance with Chapter XI of the Bye-laws against a constituent in respect of dealings, contracts and transactions made subject to the Bye-laws, rules and regulations, and which were entered into prior to the declaration of the Trading Member as a defaulter. Moneys which the Arbitral Forum holds to be recoverable must be made available to and be placed at the disposal of the Defaulters'' Committee to be dealt with in accordance with the provisions of the Rules and Bye-laws. There is, therefore, no merit in the first submission.
Re : Direction to Deposit :
11. The Learned Single Judge came to the conclusion that an important defence which had been urged on behalf of the Appellant in response to the claim in arbitration had not been dealt with by the Arbitral Tribunal. The contention of the Appellant was that there can be no direction to the Appellant to pay the price of the shares unless the First Respondent was in a position to effect delivery and since the First Respondent was not in a position to deliver the shares, the Appellant could not be held liable for the payment of the purchase price. The view of the Learned Single Judge that the defence which had been raised was not duly considered was unexceptionable. So was the view that in such a case under the provisions of Section 34(4), the Court was empowered to adjourn the proceedings to allow the Arbitral Tribunal to resume the proceedings or to take other action as in the opinion of the Arbitral Tribunal would eliminate the ground for setting aside the arbitral award. On the finding of the Learned Single Judge that a defence which had been raised by the Appellant was not considered by the Tribunal, it was only appropriate and proper that the proceedings before the Court be adjourned so as to enable the Arbitral Tribunal to consider the defence and to arrive at its finding thereon. That would obviate a challenge to the validity of the award on the ground that a submission urged before the Arbitral Tribunal was not considered.
12. However, having said this, the Learned Single Judge proceeded to make observations upon the merits of the defence of the Appellant that he was not liable to pay because the First Respondent was not in a position to deliver the shares. The Learned Single Judge observed that the inability of the First Respondent to deliver the shares occurred on account of the failure of the Appellant to pay the purchase price as a result of which the First Respondent could not make payment to the parties from whom the shares were purchased. Then it was observed that due to the alleged dealings of the Appellant, the delivery of shares to the Appellant came to be stopped by the authorities. The Learned Single Judge then concluded by holding thus :
"In case the Respondent establishes this position which course appears to be likely, the Respondent would be entitled to the purchase price, though the petitioner does not get the shares".
The Learned Judge then observed that it appears that a consistent attempt has been made by the Appellant to avoid making payment. These observations, with great respect, are not warranted at this stage. The Learned Judge has followed the procedure prescribed by Section 34(4) so as to enable the Arbitral Tribunal to consider the defence of the Appellant which had not been dealt with in the arbitral award. However, the observations on the merits of the rival claims and contentions of the parties would virtually conclude the issue before the Arbitral Tribunal. That apart, once the Court came to the conclusion that an important aspect of the defence was not considered by the Arbitral Tribunal, it would be manifestly unjust to direct the Appellant to deposit the entire amount of the arbitral award. The impugned order provides that the Arbitration petition shall stand rejected unless the entire amount was deposited as directed. Such a course of action is not open to the Court while proceeding to adopt the course of action stipulated in Section 34(4). The object of taking recourse to the course of action specified in Section 34(4) is to enable the arbitral Tribunal to resume proceedings or to take such steps as in its opinion will eliminate the grounds for setting aside the Arbitral award. Directing the objector before the Court to deposit the amount of the arbitral award would lie outside the jurisdiction of the Court since the whole purpose of following the procedure under Sub-section (4) of Section 34 is to allow the Arbitral Tribunal to take further action that would obviate a challenge to its award on a specific ground.
13. In the circumstances, we are of the view that the Learned Single Judge was not justified in imposing a condition that the Appellant shall deposit an amount of Rs. 3,46,89,636 in this Court and in making observations upon the merits of the defence in paragraph 13 of the judgment.
14. In the circumstance, we dispose of this appeal, by confirming the finding arrived at by the Learned Single Judge in regard to the maintainability of the arbitration proceedings and the direction to the Arbitral Tribunal u/s 34(4) to resume the arbitral proceedings for recording its finding on the aspect indicated in paragraph 11 of the judgment of the Learned Single Judge. We, however, set aside the direction in regard to the deposit of an amount of Rs. 3,46,89,636 by the Appellant at this stage. We also clarify that the Arbitral Tribunal shall proceed with the arbitral proceedings uninfluenced by the observations in paragraph 13 of the impugned judgment. The appeal is allowed to the aforesaid extent. In the circumstances, there shall be no order as to costs.
