Newage Fincorp (India) Ltd. vs Asia Corp Securities Limited on 28 April, 2000

[Cites 14, Cited by 7]

Bombay High Court

Newage Fincorp (India) Ltd. vs Asia Corp Securities Limited on 28 April, 2000

Equivalent citations: 2000(4)BOMCR273, (2000)2BOMLR624, 2000(4)MHLJ134

Bench: Vijay Daga

ORDER
 

Vijay Daga, J.

1. The petitioners have filed this petition to seek interim measures under section 9 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "Act" for short) so as to prevent the respondents from, in any manner, alienating, encumbering, parting with possession of operating upon or creating any liabilities or carrying on any trade on the ring of the Bombay Stock Exchange (hereinafter referred to as "Stock Exchange" for short) pursuant to, or creating any third party rights in respect of the membership card, which is a subject matter of dispute arising out of terms and conditions of the Memorandum of Understanding dated 16th February, 1998 executed between the petitioners and the respondents herein.

2. The main question which this petition raises is; can the dispute relating to membership card be a subject matter of arbitration dispute under Byelaw 248(a) of the Stock Exchange, Mumbai styled as Stock Exchange Rules, Byelaws and Regulation, 1957 framed under Securities Contracts (Regulation) Act, 1956.

BACKGROUND FACTS :

3. The brief facts are as under :

The petitioners are a company duly registered under the Companies Act, 1956 and inter alia carrying on business of trading and investing in shares and securities. The respondents are a member of the Stock Exchange and inter alia hold membership card which empowers them to carry on business in trading of shares and securities on Stock Exchange. The respondents hold the said membership card in accordance with the provisions of the byelaws, rules and regulations of the Stock Exchange framed under the Securities Contracts (Regulation) Act, 1956 (hereinafter referred to as the "Regulation Act" for short).

4. The Memorandum of Understanding (hereinafter referred to as "MOU" for short) was arrived at between the petitioners and the respondents in the month of February 1998, inter alia for the purpose of nominating the petitioners in place of the respondents for the membership card which is held by the respondents. The said transfer by way of nomination of the membership card is allowed subject to the rules of the Stock Exchange.

5. The terms and conditions of the nomination are to be found in the MOU whereunder the petitioners intended to apply to the Stock Exchange for corporate membership card belonging to the respondents. Under the terms and conditions of the said memorandum of understanding it was agreed that the sum of Rs. 85 lakhs shall be paid by the petitioners to the respondents in the following manner :

(a) Rs. 35 lakh (rupees thirty five lakhs only) at the time of signing of the memorandum of understanding;

(b) Rs. 15 lakhs (rupees fifteen lakh only) on 1st March, 1999;

(c) Rs. 15 lakhs (rupees fifteen lakh only) after the application for transfer of the membership card being cleared from the Bombay Stock Exchange and Securities Exchanges Board of India;

(d) Rs. 20 lakhs (rupees twenty lakh only) to be retained by the petitioners for bad delivery and other liabilities, if any, for a period of six months from the date of transfer and for which bank guarantee to be provided by the petitioners to the respondents.

6. The MOU arrived at between the parties specifically provides that the same shall be subject to the provisions of the Companies Act, 1956 or any other rules or regulations for the time being in force. The petitioners at the time of signing of MOU have paid Rs. 35 lakh and thereafter Rs. 8 lakh against the agreed instalment of Rs. 15 lakhs which was to be paid on 1st March 1999. The petitioners have thus paid Rs. 43 lakhs to the respondents for which the respondents have issued receipt acknowledging the receipt of Rs. 43 lakhs.

7. The respondents after receipt of the part payments as mentioned above moved the Stock Exchange for getting their approval to the transfer of membership card. The Stock Exchange in turn by its letter dated 15th May 1999 called upon the respondents to furnish necessary information and details as mentioned therein. On 7th June 1999, the Stock Exchange informed the respondents that the transfer of membership right has been approved by the SEBI authorities and called upon the respondents to make nomination for transfer of membership rights without undue delay. On 8th June 1999, the respondents nominated the petitioners in their place and tendered their resignation. On 21st June 1999, the Stock Exchange issued general notice to its members informing them that the petitioners have applied for membership and invited objections as per rules in connection with the membership application of the petitioners. On 3rd August 1999, the Stock Exchange by its letter asked the petitioners to apply for corporate membership.

8. The respondents, on 22nd September 1999, issued notice to the petitioners informing them of the default committed by them and also terminated the MOU. The Stock Exchange, by its letter dated 22nd September 1999, also informed the petitioners that their application for membership cannot be considered in view of the letter dated 7th September, 1999 received by it from the respondents. The respondents, on 5th October, 1999, also wrote to the Stock Exchange to cancel the application pending for membership by nomination and to treat all other documents made in favour of the petitioners as cancelled. Thus, in turn the Stock Exchange vide its letter dated 28th December, 1999 informed the petitioners about the withdrawal of the application for membership by nomination moved by the respondents. The Stock Exchange also informed the petitioners that the respondents are intending to transfer the membership to some other person.

9. The petitioners through their Advocate served on the Stock Exchange a legal notice dated 17th January, 2000 and requested it not to transfer the membership in favour of any third party except the petitioners. The petitioners also issued notice to the respondents informing them that the petitioners have made application before the Stock Exchange and appointed their arbitrator and requested the respondents to appoint their arbitrator for amicable settlement of the dispute and differences between the parties. In the aforesaid background and sequence of events, the present petition is filed by the petitioners under section 9 of the Act for interim measures and prayed for an-order of ad-interim injunction as set out hereinabove.

10. The learned Counsel for the petitioners contended that the petitioners have filed reference before the Stock Exchange under the provisions of the Byelaw No. 248 of the Byelaws of the Mumbai Stock Exchange, to get their disputes settled. The petitioners submitted that the purported cancellation of the said Memorandum of Understanding by respondents is illegal, unlawful and without any merits. Under the terms and conditions of the Memorandum of Understanding the petitioners were made to part with huge amount of Rs. 43 lakhs which the respondents have acknowledged. The petitioners have alleged breach of agreement on the part of the respondents and contended that they have made out a prima facie case for grant of interim relief. The petitioners also contended that it is necessary to preserve the subject matter of dispute and prayed for injunction injuncting the respondents from transferring the membership card to any other person or persons until hearing and final disposal of the arbitration proceedings.

11. On being noticed, the respondents appeared and filed their counter affidavit opposing the petition and the reliefs claimed therein. The respondents stated in the affidavit that the petition under section 9 of the Act itself is not maintainable. The respondents stated that in order to invoke the provisions of section 9 of the Act, firstly; there should be a valid and binding arbitration agreement between the parties. It is thus submitted that for want of valid arbitration agreement between the parties this Court has no jurisdiction to entertain and try this petition for interim measures. It is further contended that the petitioners are seeking to rely upon Byelaw 248(a) of the Byelaws of Stock Exchange for claiming arbitration reference but the provision of the said byelaw is not at all available to the petitioners in this case as the said byelaw is applicable to a claim or claims or a dispute or disputes arising out of or in relation to dealings, transactions and contracts of securities made subject to the rules, byelaws and regulations of the Stock Exchange. It is submitted that the dealings contemplated and covered by Byelaw 248(a) are only the dealings in securities and by no stretch of imagination the transaction relating to nomination by member which is a subject matter of the present MOU can be said to be the dealings in securities attracting Byelaw 248(a) of the Stock Exchange, Mumbai. It is also stated in the affidavit that the MOU in question neither contains any arbitration clause, much less an agreement providing for reference to arbitration of the Stock Exchange nor the MOU is subject to any bye-law providing for arbitration. In nut shell, it is being contended that there is no arbitration agreement between the parties. It is thus stated that the provisions of Byelaw 248 are not attracted in the facts of the present case and that the said byelaw cannot be deemed to have been incorporated in the MOU. In other words, it is stated that the MOU is not a contract of the nature contemplated by Byelaw 248(a) as such the said byelaw has no application to the MOU in question.

12. On merits of the matter, it is stated in the affidavit that the petitioners are not entitled to specific performance of MOU for the reasons set out in the affidavit and in particular, the membership of the Stock Exchange being in the nature of the personal privilege and not being a property, the same cannot be a subject matter of an action for specific performance. It is further stated that the petitioners have committed breach of the terms and conditions of the MOU and, therefore, the respondents were perfectly justified in terminating the MOU. In order to support the action of termination of MOU it is also stated that the petitioners themselves have failed to make payment of second installment of Rs. 15 lakhs as per the MOU, the respondents have therefore rightly terminated the said MOU. In short, the petition was opposed on the ground of maintainability as also on merits. It is, therefore, stated in the affidavit that the petition filed by the petitioners is liable to be dismissed holding it to be misconceived, untenable and devoid of any substance.

13. In the light of the aforesaid rival contentions, the following points arise for my consideration :

(1) Whether the dispute relating to nomination i.e. membership card can be a subject matter of reference under Bye-law 248(a) of the Stock Exchange Byelaws, Rules and Regulations, 1957?

(2) If the first point is answered in affirmative and in favour of the petitioners, whether the petitioners are entitled for interim measures as prayed for?

(3) What appropriate final order?

I shall deal with the aforesaid points seriatim.

POINT NO. 1:

14. The Regulation Act was brought on statute to prevent undesirable transactions in securities by regulating the business of dealing therein, by providing for certain other matters connected therewith. Section 2 of the Regulation Act contains important definitions. Clauses (a), (e), (g) and (h) of section 2 read :

"(a) "contract" means a contract for or relating to the purchase or sale of securities.

(e) "prescribed" means prescribed by rules made under this Act.

(g) "rules", with reference to the rules relating in general to the constitution and management of a stock exchange, includes, in the case of a stock exchange which is an incorporated association, its memorandum and articles of association.

(h) "securities" include-

(i) shares, scrips, stocks, bonds, debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate;

(ii) Government securities;

(iia) such other instruments as may be declared by the Central Government to be securities; and

(iii) rights or interests in securities."

Section 3 provides for application for recognition of stock exchanges. It provides that any stock exchange, which is desirous of being recognised for the purposes of this Act may make an application in the prescribed manner to the Central Government. Every application under sub-section (1) of section 3 has to contain such particulars as may be prescribed and has to be accompanied by a copy of the byelaws of the stock exchange for the regulation and control of contracts and also a copy of the rules relating in general to the constitution of the stock exchange and amongst others relating to the admission into the stock exchange of various classes of members, the qualifications, for membership, and the exclusion, suspension, expulsion and re-admission of members therefrom or thereinto. Section 9 of the Regulation Act provides that any recognised stock exchange may, subject to the previous approval of the Securities and Exchange Board of India, make byelaws for the regulation and control of contracts. Section 30 of this Act provides for power to make rules which inter alia also provides for manner in which the byelaws are to be made or amended under this Act and how they are to be published before being so made or amended.

15. The scheme of the Regulation Act, if perused, would show that the contract as defined in section 2(a) means the contract for or relating to the purchase or sale of "securities", as defined in section 2(h) of the said Act. "Securities" include shares, scrips, stocks, bonds debentures, debenture stock or other marketable securities of a like nature in or of any incorporated company or other body corporate, the Government securities, such other instruments as may be declared by the Central Government to be securities and the rights or interests in the securities. Thus the contracts relating to purchase or sale of securities are controlled and regulated by the bye-laws framed under section 9 of the Regulation Act. In nut shell, all the contracts relating to the securities are governed by the bye-laws framed under the provisions of this Act.

16. Section 30 provides for power to make rules for the purpose of carrying into effect the objects of the Act. The rules amongst others may provide for the manner in which the byelaws are to be made or amended and the manner in which they are to be published for inviting criticism before being so made or amended and also may provide for the manner in which the applications are to be made for acquiring membership of the Stock Exchange.

17. In the above backdrop, it would be clear that the byelaws and rules are operating in two different fields. So far as membership is concerned the same is regulated and controlled by the rules framed under section 30; whereas the contract relating to the securities are governed by the provisions of the byelaws framed under section 9 of the Act. In the aforesaid premise, if the area of operation of the byelaws and rules are demarcated by the Act then in that event one can safely reach to the prima facie conclusion that the issues relating to the membership are to be governed by the rules; whereas issue relating to the contract in respect of securities are to be governed by the byelaws. In the aforesaid backdrop, now it is necessary to examine the provisions of the byelaws relating to reference to arbitration. Section 9 of the Regulation Act makes it obligatory on the part of the recognised stock exchange to make byelaws providing for method and procedure for settlement of claims of disputes including by way of arbitration and also further makes it obligatory to frame byelaws to meet the contingency arising out of any contravention of the byelaws so as to render the member concerned liable to one or more punishments like fine, expulsion, suspension from membership for a specified period or any other penalty of a like nature not involving the payment of money.

18. The Mumbai Stock Exchange, being recognised stock exchange, in exercise of powers conferred under section 9 of the Regulation Act, has framed byelaws and if said byelaws are perused, then it would be clear that the byelaws are exclusively meant for regulating the dealing in securities and contracts. Similarly byelaws have to provide for the method and procedure for settlement of claims or disputes including settlement by arbitration. As such in exercise of such powers conferred by section 9 of the Regulation Act, Byelaw 248 has been framed, which reads :

"248. (a) Reference to Arbitration.---

All claims (whether admitted or not), differences and disputes between a member and a non-member (the terms "non-member" and "non-members" shall include a remisier, authorised clerk or employee or any other person with whom the member shares brokerage) arising out of or in relation to dealings, transactions and contracts made subject to the Rules, Bye-Laws and Regulations of the Exchange or with reference to anything incidental thereto or in pursuance thereof or relating to their construction, fulfillment or validity or relating to the rights, obligations and liabilities of remisiers, authorised clerks, employees or any other persons with whom the member shares brokerage in relation to such dealings, transactions and contracts shall be referred to and decided by arbitration as provided in the Rules, Byelaws and Regulations of the Exchange.

(b) Contract Constitutes Arbitration Agreement.---

An acceptance whether express or implied of a contract subject to arbitration as provided in sub-clause (a) and with this provision for arbitration incorporated therein shall constitute and shall be deemed to constitute an agreement between the member and the non-member or non-members concerned, that all claims (whether admitted or not), differences and disputes of the nature referred to in sub-clause (a) in respect of all dealings, transactions and contracts of a date prior or subsequent to the date of the contract shall be submitted to and decided by arbitration as provided in the Rules, Bye-laws and Regulations of the Exchange and that in respect thereof any question whether such dealings, transactions and contracts have been entered into or not shall also be submitted to and decided by arbitration as provided in the Rules, Byelaws and Regulations of the Exchange."

19. The perusal of Byelaw 248(a) would show that all the claims, differences and disputes between the members and non-member or non-members arising out of and in relation to dealings, transactions and contracts made subject to Rules, Byelaws and Regulations of the Exchange are required to be referred to and decided by arbitration as provided thereunder. In other words, the contract made subject to the rules is also within the sweep of Byelaw 248(a). After having gone through the scheme of the Regulation Act and after having examined the area of operation of the byelaws and rules, it would be clear that the transaction in securities are regulated by the byelaws and not by rules; whereas the subject of membership and nomination is governed by the rules and not by byelaws. Rules do not provide any machinery for resolving disputes. This machinery is provided by byelaws only. Rule 5 provides that membership shall constitute a personal permission from exchange to exercise rights and privileges thereto subject to the Rules, Byelaws and Regulations of the exchange. Had it been the intention of Byelaw 248(a) to cover transaction relating to securities only then in that event it was not necessary for the framers of byelaws to employ words "subject to rules" appearing in Byelaw 248(a). While interpreting the Byelaw 248(a) each word used therein will have to be assigned its own natural and logical meaning. Consequently, prima facie the dispute relating to membership and nomination should fall within the sweep of Byelaw 248(a). I am, therefore, prima facie of the opinion that the dispute relating to nomination can be the subject matter of arbitration proceedings under Byelaw 248(a) of the Stock Exchange, Mumbai.

20. It was also contended by the learned Counsel appearing for the respondents that there is no arbitration agreement between the parties. According to him, if an application under section 9 is so made, the Court will first have to be satisfied that there exist a valid arbitration agreement. On being so satisfied, the Court will have the jurisdiction to pass orders under section 9 of the Act.

21. It is true that there has to be an agreement, to confer authority on the arbitrator to hear and decide the dispute. Whenever one party to the dispute asserts that there is no arbitration agreement to refer the dispute to an arbitrator then such issue has to be examined and determined. To constitute "an arbitration agreement", it is necessary that from documents it must appear that the parties had agreed to submit present and future differences to arbitration.

22. So far as the present case is concerned, the clause is incorporated in the MOU reads as under :

"This MOU is approved from the respective Board of Directors and the share holders of ACSL. and Newage Fincorp India Ltd. and both the parties shall take all the necessary steps to get the approval of this MOU as per the Companies Act or any other rules and regulations in force for the time being in force."

In the above extracted clause, arbitration agreement has not been specifically referred to in the MOU but it shall be deemed to be part of the MOU because the MOU specifically says that "both the parties shall take all the necessary steps to get the approval of this MOU as per the Companies Act or any other rules and regulations for the time being in force." which obviously would mean and include the rules framed by the Stock Exchange, Mumbai. As already held by me hereinabove, the membership and nomination of exchange are governed by the rules framed by the Stock Exchange, Mumbai, thus, unless the MOU and terms and conditions incorporated therein are found to be consistent with the rules of the Stock Ex change, Mumbai and unless necessary steps are taken by the parties to get the approval of the stock exchange, it is not possible for any member of stock exchange to nominate a person in his place. Therefore, the last clause of the MOU referred to hereinabove, if understood in its proper perspective, will obviously include reference to the rules, which by necessary implication make Byelaw 248(a) applicable whereunder any dispute between the parties arising out of contract can be referred to an arbitrator.

23. In the above background, it is not possible for me to agree with the contention of the respondents that there is no arbitration agreement between the parties to refer any dispute to an arbitrator in terms of the clause incorporated in the agreement. I, therefore, hold that there is an arbitration agreement between the parties to refer any dispute arising between the parties to an arbitrator.

24. At this juncture, I may mention that this is a prima facie view formed by me after examining the scheme of the Regulation Act and byelaws, rules and regulations of the Stock Exchange in order to invoke the jurisdiction of this Court under section 9 of the Act. The Act specifically provides that arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement. The arbitral tribunal shall be free to decide the said questions, if raised, on its own merits without getting influenced by what is stated hereinabove.

POINT NO. 2

25. Once having found that the dispute between the parties is subject to the arbitration machinery provided in the byelaws of the Stock Exchange, Mumbai then the second question which needs to be answered is, whether the petitioners are entitled to the interim measures of protection.

26. The Court before the grant of interim measures of protection must broadly satisfy itself that

(a) the person seeking interim measures has made out a prima facie case;

(b) the balance of convenience is in his favour ; and

Now, turning to the interim measures sought in the present case, the petitioners are seeking reliefs in terms of prayer clause (a), the gist of which is already incorporated in the opening part of this judgment. The petitioners are complaining flagrant violation of the terms of MOU/agreement, incorporated at Annexure A, by the respondents. The petitioners have stated that they have already made a payment of Rs. 43 lakhs out of 85 lakhs to the respondents and the respondents have failed to abide by the terms of the MOU/agreement in question.

The petitioners have alleged that the respondents have committed following breaches:

(a) failed to ascertain the liabilities incurred by the respondents in respect of the said membership card;

(b) failed to obtain immediate necessary approval from regulatory authorities for the purpose mentioned in the MOU; and

(c) failed to clear immediately all the claims i.e. arbitration settlement claims etc. which are pending against the respondents.

27. The learned Counsel for the petitioners contended that the membership right may not be a property but it is certainly a privilege conferred subject to the provisions of the byelaws, rules and regulations of the Stock Exchange, Mumbai. According to the petitioners, such a privilege is a transferable privilege subject to the compliance of the provisions of the rules of the Stock Exchange, Mumbai. Thus, according to the petitioners, the transaction of a transfer of membership is possible through the process of nomination subject to the provisions of the rules of the Stock Exchange, Mumbai. The petitioners further submitted that the only reason for which the Stock Exchange is refusing to process the application of membership by nomination is because of the objection and termination of MOU by the respondents, otherwise, there is not any other hurdle under any of the provisions of byelaws, rules and regulations of Stock Exchange, Mumbai to process the application for membership by nomination. The petitioners contended that the purported termination of the MOU by the respondents is illegal, unlawful and without any merits and asserted that the petitioners have already parted with a huge amount of Rs. 43 lakhs which the respondents have already acknowledged. The petitioners further contended that it has also been found that there have been various claims outstanding against the respondents which have been raised by various parties. The learned Counsel for the petitioners, contended that the petitioners have come to know that out of the transactions effected by the respondents, during the period 1995-96, 1996-97 and 1997-98 huge amounts have become due and payable by the respondents as turn over tax, which the respondents have not paid till date to the SEBI under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. Consequently, the petitioners have alleged flagrant breach of the terms and conditions of MOU by the respondents.

28. In order to counter the above, submissions, the learned Counsel for the respondents contended that the petitioners are not entitled to specific performance of the MOU for the following reasons :

(a) the petitioners are in breach of their obligation :

(b) the petitioners failed to make payment of the second instalment of Rs. 15 lakhs by stipulated date i.e. 1st March 1999. The said obligation to pay Rs. 15 lakhs was absolute and unconditional not linked to any other terms of the MOU;

(c) the breach of the above obligation entitled the respondents to terminate the MOU.

29. It is further contended that the membership of the stock exchange being a personal privilege and not being property the same cannot be a subject matter of action for specific performance. Consequently, it cannot be a subject matter of arbitral dispute. The learned Counsel relied upon two decisions of this Court to bolster up his contentions. First one is the decision in Sejal Rikeen Dalal v. Stock Exchange, Bombay, wherein this Court has held :

"In order to decide whether there is any property in the membership of the Stock Exchange, it is necessary to refer to Rules relating to membership of the Stock Exchange. Under Rule 5, the membership shall constitute a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules, Bye-laws and Regulations of the Exchange. The membership, therefore, is not a transferable right. It is only a personal permission granted by the Stock Exchange to an individual member. This is brought out further by Rule 6 which states that the right of membership is inalienable. The membership rules give to a member a right of nomination which shall be personal and non-transferable. This right under Rule 11 can be exercised by a member of not less than 7 years standing who desires to resign. He may in turn nominate a member as set out in Rule 11."

The second judgment sought to be relied upon is in the case of Vinay Bubna v. Stock Exchange of Mumbai, wherein this Court observed as follows :

"As held by the Privy Council in the aforesaid case, once a defaulting member ceases to be a member of the Stock Exchange, no interest in his card remains in himself and none can pass to his assignee, and interest of a member in the Stock Exchange is not a property, as defined under section 12 of the Transfer of Property Act."

30. The learned Counsel for the respondents alternatively contended that assuming but not admitting that the respondents are in breach of MOU, the petitioners can always be compensated in terms of money. As such, in the submission of the Counsel for the respondents, no case has been made out on merits by the petitioners to claim interim measures under section 9 of the Act.

31. The principles of granting interim reliefs can very well be applied while considering the prayer for grant of interim measures under section 9 of the Act. The discretion of the Court can very well be summarised in order to grant interim measures. It is not enough for the petitioner to show that he has a prime facie case but he has to further show (i) that in the event of withholding the relief of interim measures he will suffer an irreparable injury; (ii) that in the event of his success in the arbitration proceedings he will not have the proper remedy, in being awarded adequate damages; (iii) that in taking into consideration the comparative mischief of inconvenience to the parties, the balance of convenience is in his favour or in other words, (iv) that his inconvenience in the event of withholding the relief of interim measures will in all events exceed that of the respondents in case he is not granted relief; and lastly, (v) the petitioner must show a clear necessity for affording immediate protection to his alleged right or interest which would otherwise be seriously injured or impaired.

32. It cannot be disputed that the membership card is not a property under section 12 of the Transfer of Property Act. It constitutes a personal permission from the exchange to exercise the rights and privileges attached thereto subject to the rules of the stock exchange. It is not a transferable right and no property can be claimed in membership of stock exchange. It is also not in dispute that a member has right of nomination subject to the provisions of rules. It has been held by this Court that the membership right is not a property but a privilege conferred subject to the byelaws, rules and regulations of the stock exchange. In this behalf, Rules 5, 7 and 11 need to be noticed, which are as under :

"5. Membership a Personal Privilege.---

The membership shall constitute a personal permission from the Exchange to exercise the rights and privileges attached thereto subject to the Rules. Bye-laws and Regulations of the Exchange.

7. Right of Nomination.---

Subject to the provisions of these Rules a member shall have the right of nomination which shall be personal and non-transferable.

11. Nomination by Member.---

(a) A member of not less than three years' standing who desires to resign may nominate a person eligible under these Rules for admission to membership of the Exchange as a candidate for admission in his place;

Provided that a member of less than three years' standing who desires to resign may with the sanction of the Governing Board nominate his own son eligible under these Rules for admission to membership of the Exchange as a candidate for admission in his place;

Provided further that the Governing Board may, at its absolute discretion and in exceptional cases and or cogent reasons to be recorded in writing, permit by a special-resolution, a member of less than three years' standing, who desires to resign, to nominate a person as a candidate for admission in his place, subject to such terms and conditions as the Governing Board may in its absolute discretion think fit to impose.

Provided further that a member of less than three years' standing, may resign and exercise his right of nomination in favour of a company with the sanction of the Governing Board on the following conditions namely:

(i) He shall be a director of such company for a period of such number of years as would have brought him three years standing had he not resigned from the membership;

(ii) He shall hold not less than 51% of the paid up equity capital of the company for the period mentioned in sub clause (i); and

(iii) The company is eligible for membership in accordance with Rule 19-A."

33. The scheme of the above rules do provide for nomination by member. The possibility of dispute between the parties arising out of nomination cannot be ruled out. The rules providing machinery to resolve disputes via byelaws of the stock exchange also cannot be ruled out. The arbitration machinery provided in the byelaws cannot be denied. Now turning to the facts of the present dispute, it is clear from Clause 10 of the MOU that the respondents agreed to clear all the claims i.e. arbitration settlement claims, etc., immediately after signing of MOU. The petitioners in para-23 of the petition have specifically alleged as under :

"The petitioners submit that apart from the said fact the petitioners have also come to know that for the transactions effected by the respondents during the period 1995-96 a sum of Rs. 14, 434.09 lakh; during the period 1996-97 a sum of Rs. 61,230.38 lakh and during the period 1997-98 a sum of Rs. 76,579.83 lakh has become due and payable by the respondents as turn over tax which the respondents have not paid till date to the SEBI under the SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992. The petitioners submit that the petitioners have gathered the aforesaid informations from SEBI as well as the petitioners have also come to know that various large liabilities are outstanding and in fact but yet been discharged by the respondents."

34. The aforesaid specific allegations have been answered by the respondents in the following manner :

"With reference to paragraph 23, I submit that the contents thereof are not germane for the purposes of the present petition and hence not dealt with here."

The aforesaid reply cannot be said to be a reply to the specific and concrete allegations made by the petitioners with facts and figures. Non-denial of allegations amounts to admission. It is not sufficient for the respondents to deny as generally the allegations, but must deal specifically with each allegation of fact of which they do not admit the truth. Every allegation of fact, if not denied specifically or by necessary implication, or stated to be not admitted, shall be deemed to be admitted except as against a person under disability as stated under Order 8, Rule 5 of C.P.C. The said principle can very well be made applicable to the petition under section 9 of the Act to find out the prima fade case. In the instant case, in absence of specific denial, one can reach to the prima facie conclusion that the breach of Clause 10 has given rise to tribal issue with other issues including an act of non-payment of Rs. 15 lakh on or before 1st March 1999, which the arbitral Tribunal shall have to consider.

35. In granting or refusing to grant interim measures, the Court has wide discretion under section 9 of the Act. The exercise of this discretion has to be in a judicial manner depending upon the circumstances of each case. No hard and fast rule can be laid down as regards exercise of such discretion. However, the rule that before the issue of interim relief, the Court must satisfy itself that the petitioner has a prima facie case, does not mean that the Court should examine the merits of the case closely and come to a conclusion that the petitioner has a case in which he is likely to succeed. This would amount to prejudging the case on its merits. All that Court has to see is that on face of it the person applying for an interim relief has a case which needs consideration. The balance of convenience also has to be looked into.

36. Bearing the above principles in mind, it is clear that the dispute between the parties has given rise to serious triable issues as set out herein-above. I, therefore, find that the petitioners have made out a prima facie case. If the membership is allowed to be transferred by nomination in favour of some other person other than the petitioners then it will give rise to multiplicity of proceedings, the third party rights, if created, would not be the subject matter of arbitration disputes between the present parties. The balance of convenience, therefore, is clearly in favour of the petitioners. It is a commercial privilege attached to the membership of stock exchange and loss of commercial privilege cannot be compensated in terms of money. As such it would be necessary to preserve the subject matter of arbitral dispute by granting interim measures in aid of final reliefs to which the petitioners may be entitled in arbitration proceedings.

POINT NO. 3:

37. I have now reached the stage for considering appropriate relief to be granted in the light of my findings on point Nos. 1 and 2. Once it is held that the dispute sought to be raised can be a subject matter of arbitration proceedings and that the petitioners are entitled to interim measures then the normal course would be to grant interim measures as prayed for. Considering the facts and circumstances of the case, the petitioners would be entitled for the relief in terms of prayer clause (a) excluding bracketed portion. Accordingly, the petition is allowed in terms of prayer Clause (a):

"(a) that the respondents by themselves, their agents, servants and employees be restrained by a permanent order and injunction of this Hon'ble Court from in any manner alienating, encumbering, parting with possession of, (operating upon) or creating any liabilities on, ( or carrying on any trade on the ring of the Bombay Stock Exchange pursuant to), on creating any third party rights in respect of the membership card being the subject matter of the Memorandum of Understanding dated 16th February, 1998 executed between the petitioners and the respondents herein."

38. The observation and the findings recorded are tentative and the same shall not come in the way of either of the parties to the arbitration. No order as to costs.

39. Petition allowed.

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