In a first appeal against the City Civil Court’s dismissal of the broker’s refund suit, the Bombay High Court has held that once the Governing Body annuls a trade, the obligation of the selling member does not survive. Further, the Bye-Law 315J of Rules, Bye-Laws and Regulations of the Stock Exchange Mumbai, 1957, indemnity does not apply outside arbitration references, and the ultimate liability to refund lies squarely on the Exchange.
The Court explained that once the Governing Body of a recognised Stock Exchange annuls a trade on the ground that it was a fictitious transaction, the trade is treated as having come to an end and ceased to exist, and the question of physical delivery of the shares pursuant to such annulled trade does not arise at all. Further, the indemnity under Bye-Law No. 315J of the Bye-Laws of the Stock Exchange applies only to suits or proceedings in respect of matters purporting to be done under the Bye-Laws and Regulations, and specifically arises in the context of references made under the chapter of ‘References and Appeals to Dispute Resolutions’, and cannot be read to mean that the indemnity applies in every situation to the Exchange.
The High Court went on to clarify that Bye-Law No. 92, which deals with the non-liability of the Clearing House in respect of the title, ownership, genuineness, regularity or validity of any security, transfer deed or any other document passing through the Clearing House, cannot be applied to absolve the Exchange from refunding the amount paid by a member towards an annulled trade. Thus, the ultimate liability to refund the amount deposited by a member towards an annulled trade lies squarely on the Stock Exchange, regardless of whether the said amount was distributed to the respective receiving members, since the member only seeks refund of the amount deposited with the Exchange and not damages or loss suffered on account of trading.
A Single Judge Bench of Justice Aarti Sathe observed that the present First Appeal deserves to succeed inasmuch as the Trial Court failed to consider vital facts and aspects which make the Respondent-Exchange liable for the payment of Rs. 10.58 lakhs to the Appellant. It was an admitted fact that the Appellant had placed an order for 21,600 shares of EPL through the Respondent-Exchange and had deposited Rs. 23 lakhs in respect of the purchase of the said shares, with the pay-in and pay-out dates being between 10 October 1996 and 14 October 1996. The Respondent-Exchange itself admitted in its Written Statement dated 25 November 2008 that the Governing Board had decided to annul the transactions entered into between Mr. K.F. Vora, Mr. H.V. Shah and GHFL Securities as investigation proceedings were being conducted against them in respect of suspected fictitious trades, and that the shares pertaining to the annulled transactions were released back to the concerned members including Mr. K.F. Vora.
The Court noted that once the trades of Mr. K.F. Vora were annulled and the disputed shares were returned back to him by the Respondent-Exchange, the question of physical delivery of the same to the Appellant did not arise at all, because an annulment of a trade means that the trade has come to an end and thereafter the trading of that share itself is not possible.
The Court further observed that once the trading of the shares was annulled on 14 October 1996, the insistence of the Respondent-Exchange by letters dated 22 July 1997, 25 July 1997, 9 September 1997 and 23 February 1998 to the Appellant to take physical delivery of the shares raised serious doubts as to how the Respondent-Exchange could effect physical delivery of shares whose trade had been annulled, and that such insistence defied all logic. The Court held that the argument of the Respondent that the Appellant chose not to take physical delivery only because the share price of the disputed shares was falling was liable to be rejected at its threshold, considering that the trading of the said shares was annulled.
The Court further observed that once the annulment of the trade concerning the disputed shares had taken place, the obligation, if any, of Mr. K.F. Vora towards the Appellant would not survive, and consequently there could be no action which the Appellant could possibly bring against Mr. K.F. Vora as a member broker. The Court noted that there was no privity of contract between the Appellant and Mr. K.F. Vora, considering that the very process of trading as explained in the Written Statement showed that while effecting purchase/sale orders on the trading system, there is no one-to-one contract contemplated between a prospective buyer and prospective seller of shares.
The Court further observed that the bar to initiate proceedings against the Respondent-Exchange under Bye-Law No. 315J of the Bye-Laws would not be attracted to the facts of the present case, inasmuch as the said Bye-Law categorically provides that no party shall bring or prosecute any suit or proceeding against the Exchange in respect of any matter or thing purporting to be done under the Bye-Laws or Regulations, and it comes specifically under the chapter of ‘References and Appeals to Dispute Resolutions’ and applies only when a reference is made under the relevant Bye-Laws. Since there was no reference of any dispute as envisaged under Bye-Laws 315B to 315L, the submission of the Respondent-Exchange that it be protected on account of the aforesaid indemnity was rejected.
The Court further observed that Bye-Law No. 96(a) gives the discretion to the Clearing House to deliver securities which it has received from a member or to instruct a member of a direct delivery of the security which he has to deliver under the Bye-Laws to another member who is entitled for them, and Bye-Law No. 96(b) provides that the member giving and receiving delivery shall be deemed, notwithstanding that no direct contract exists between them, to have made a contract between sellers and buyers. The Court held that even if there was a deemed contract between the Appellant and Mr. K.F. Vora, the fact that the trade was annulled and that the delivery was not being effected by Mr. K.F. Vora but in fact was being done by the Clearing House would by itself show that there was no relief that the Appellant could have sought against Mr. K.F. Vora.
Briefly, the Appellant, Shri Bipin Kantilal Kapadia, is a share and stock broker and a recognised member of the Respondent, The Stock Exchange, Bombay (BSE), carrying on business as proprietor of M/s. Ishwarlal Nanavati with Clearing No. 279. On 9 September 1996, in the course of his brokerage business, the Appellant purchased 44,600 shares of Energy Products India Limited (EPL), bearing Scrip Code No. 531620, in Settlement on behalf of his clients. The said 44,600 shares were purchased from three member-brokers of the Respondent-Exchange, at the standard rate of Rs. 49 per share, aggregating to Rs. 21.85 lakhs. The pay-in and pay-out dates for Settlement were 9 September 1996 and 13 September 1996 respectively.
Pursuant to the Rules, Regulations and Bye-Laws of the Respondent-Exchange, a Statement of Payment and Receipt bearing Statement was issued, by which the Appellant’s account was debited with Rs. 22.30 lakhs towards the purchase of the 44,600 shares. For Settlement, the 44,600 shares were to be delivered by the three brokers, including 21,600 shares by Mr. K.F. Vora (the disputed shares). The Appellant deposited approximately Rs. 23 lakhs with the Clearing House of the Respondent-Exchange. However, the Clearing House delivered only 23,000 shares, resulting in a short delivery of 21,600 shares valued at Rs. 10.58 lakhs, which were required to be received from Mr. K.F. Vora.
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In the meanwhile, disciplinary proceedings were initiated against Mr. K.F. Vora and certain other brokers, and in or around November 1996, the transactions in respect of EPL shares entered into in Settlement were cancelled/annulled, with approximately 69,400 shares being returned by the Clearing House to the concerned broker members in or about December 1996. This decision was taken pursuant to a meeting of the Governing Body of the Respondent-Exchange held on 14 October 1996, which noted that certain transactions in EPL shares were not genuine commercial transactions but were fictitious transactions, and that the concerned brokers had admitted in writing before the Exchange that such fictitious transactions had been undertaken. The trading rights of Mr. K.F. Vora were also suspended by the Respondent-Exchange. On 11 December 1996, the Respondent-Exchange released the disputed shares to Mr. K.F. Vora and called upon him to collect the said shares from the Clearing House.
The Appellant informed the Respondent-Exchange that it was no longer interested in receiving the disputed shares and called upon the Exchange to refund the amount of Rs. 10.58 lakhs paid towards the purchase of the disputed shares. The Respondent-Exchange repeatedly called upon the Appellant to collect the disputed shares from the Clearing House, which the Appellant declined on the ground that, by that stage, the shares were no longer of any benefit to him. The Appellant thereafter filed suit seeking a declaration that the transaction was void and a direction to the Respondent-Exchange to refund Rs. 18.39 ,750/- along with further interest, without making Mr. K.F. Vora a party. Page 7 The Trial Court, by judgment and decree dated 29 April 2017, dismissed the suit holding that the Respondent-Exchange was merely regulating the trading in shares, that the suit was bad for misjoinder and non-joinder of parties, and that the Appellant was not entitled to a refund of Rs. 10,58,000/- with interest from the Respondent-Exchange.
