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Emmel Financial Services v/s Nikko Stock Brokers P. Ltd. and Stock Exchange, Mumbai

    CHAMBER SUMMONS NO.1313 OF 2002 IN EXECUTION APPLICATION NO.148 OF 2002 IN ARBITRATION REFERENCE NO.385 OF 2001

    Decided On, 12 March 2003

    At, High Court of Judicature at Bombay

    By, THE HONOURABLE MR. JUSTICE A.M. KHANWILKAR

    P.N. Mody with Sagar Divekar instructed by Wadia Gandhy and Co. for garnishee. R.M. Kadam instructed by Malvi Ranchoddas and Co. for applicants. G.B. Kedia for respondents.



Judgment Text

ORAL JUDGMENT


This Chamber Summons has been filed by the Garnishee for setting aside the Warrant of Attachment dated 16th August, 2002 and the Garnishee Notice dated 7th September, 2002.


2.Briefly stated, the applicants secured Award to the extent of amount of Rs. 2.60 crores on 31st December, 2001 against the respondents, concerning certain claim. According to the applicants, the applicants were entitled to receive that amount from the Garnishee-Bombay Stock Exchange, Mumbai. Accordingly, Warrant of Attachment was issued on 16th August, 2002. As a consequence of Warrant of Attachment, Garnishee Notice dated 7th September, 2002 was served on the Garnishee. Accordingly, the present Chamber Summons has been filed by the Garnishee for the relief aforestated.


3.The main contention raised before this Court is that the day on which Warrant of Attachment was issued i.e. on 16th August, 2002, no amount was due and payable by the Garnishee, either to the applicants or to the respondents and, in such a situation, order for Warrant of Attachment could not have been passed in exercise of powers under Order XXI, Rule 46 of the Code of Civil Procedure.


4.On the other hand, according to the applicants, the Warrant of Attachment has been rightly issued because the amount of about Rs. 2.60 crores was liable to be paid to the applicants by the Garnishee in terms of the Circular issued by the SEBI dated 9th July, 1999. It is contended that as soon as the Award was passed on 31st December, 2001, the Garnishee was required to keep the Award sum in a separate account to be paid to the applicants subsequently. It is submitted that the fact that the respondents have been declared as defaulters on 25th February, 2002 and the amount was not kept in the separate account would make no difference to the entitlement of the applicants to get the Award amount from the Garnishee.


5.On considering the arguments advanced on behalf of both the sides, I have no hesitation in taking the view that the order of Warrant of Attachment dated 16th August, 2002 and the Garnishee Notice dated 7th September, 2002 deserve to be revoked and set-aside.


6.It is seen that on the date of the Award as well as the date on which the respondents were declared as defaulters, certain amount was lying with the Garnishee in the account towards securities deposited by the respondents. It is not in dispute that the respondents have been declared defaulters on 25th February, 2002. It is also not in dispute that the Garnishee did not set apart the Award sum as required under the SEBI Circular dated 9th July, 1999. However, it is contended by the Garnishee that it would make no difference even if the amount was to be kept separately, for that account is in the nature of escrow account and would not per se entitle the applicants to receive the payment. Moreover, the intervening circumstance of declaring the respondents as defaulters on 25th February, 2002 was decisive - as on that day all the monies, which would include amount lying in such separately maintained account, if any, would vest in the Defaulters Committee. The argument on behalf of the Garnishee is that, by virtue of Bye-Law No. 326 read with Bye-Law No. 400 of the Regulations, all the amounts pertaining to the respondents would vest in the Defaulters Committee for the benefit and on account of the creditor members and the same could be disbursed only in the manner provided in Bye-Law No. 400. It will be apposite to advert to the said Bye-Laws, which read thus:


"Defaulter's Assets


Bye-law 326. The Defaulters' Committee shall call in and realize the security and margin money and securities deposited by the defaulter and recover all monies, securities and other assets due, payable or deliverable to the defaulter by any other member in respect of any transaction or dealing made subject to the Rules, Bye-laws and Regulations of the Exchange and such assets shall vest in the Defaulters' Committee for the benefit and on account of the creditor members.


Application of Defaulters ' Assets and Other Amounts


Bye-law 400. Subject to the provisions of Bye-law 398, the Defaulters' Committee shall realize and apply all the money, rights and assets of the defaulter which have vested in or which have been received by the Defaulters' Committee (other than the amount paid by the Governing Board to the Defaulters' Committee pursuant to Rule 16A in respect of the consideration received by the Governing Board for exercising the right of nomination in respect of the defaulter's erstwhile right of membership) and all other assets and money of the defaulter in the Exchange or the market including the money and securities receivable by him from any other member, money and securities of the defaulter Iying with the Clearing House or the Exchange, credit balances Iying in the Clearing House, security deposits, any bank guarantees furnished on behalf of the defaulter, fixed deposit receipts discharged or assigned to or in favour of the Exchange, Base/Additional Capital deposited with the Exchange by the defaulter, any security created or agreed to be created by the defaulter or any other person in favour of the Exchange or the Defaulters' Committee for the obligations of the defaulter to the following purposes and in the following order of priority, viz.:


(i) First - to make any payments, required to be made under Bye-laws 391 and 394;


(ii) Second - the payment of such subscriptions, debts, fines, fees, charges and other money as shall have been determined by the Defaulters' Committee to be due to the Securities and Exchange Board of India, to the Exchange or to the Clearing House by the defaulter;


(iii) Third - the rectification or replacement of or compensation for any bad deliveries made by or on behalf of the defaulter to any other member in the settlement in which the defaulter has been declared a defaulter or in any prior or subsequent settlement (unless the Governing Board has otherwise determined in respect of such settlement or settlements under Bye-law 394) provided the conditions of Bye-law 153 and all other applicable Rules, Bye-Laws and Regulations and instructions of the Governing Board are complied with;


(iv) Fourth - the balance, if any, shall be paid into the Fund to the extent of the money paid out of the Fund (other than payments made out of Members refundable contributions) and not recovered by the Fund and the interest payable by the defaulter to the Fund in respect thereof;


(v) Fifth - the balance, if any, shall be paid into the Fund to be extent of the money paid out of the Fund out of the refundable contributions of members (other than the refundable contribution of the defaulter) and not recovered by the Fund and the interest payable by the defaulter to the Fund in respect thereof;


(vi) Sixth - subject to the Rules, Bye-Laws and Regulation of the Exchange, including in particular Bye-Law 343, the balance, if any, shall be applied by the Defaulters' Committee for the payment of such unpaid outstandings, debts, liabilities, obligations and claims to or of members of the Exchange arising out of any contracts made by the defaulter with such members subject to the Rules, Bye-laws and Regulations of the Exchange as shall have been admitted by the Defaulters' Committee; provided that if the amount available be insufficient to pay and satisfy all such debts, liabilities, obligations and claims in full they shall be paid and satisfied pro rata;


(vii) Seventh - subject to the Rules, Bye-Laws and Regulation of the Exchange, including in particular Bye-Law 343, the balance, if any, shall be applied by the Defaulters' Committee for the payment of such unpaid debts, liabilities, obligations and claims to or of the defaulter's constituents arising out of any contracts made by such defaulter subject to the Rules, Bye-Laws and Regulations of the Exchange as shall have been admitted by the Governing Board; provided that if the amount available be insufficient to pay and satisfy all, such debts, liabilities, obligations and claims in full they shall be paid and satisfied pro rata;


(viii) Eighth - the balance, if any, shall be paid into the Exchange's Customers' Protection Fund to the extent of any and all amounts paid out of the Customers' Protection Fund towards the obligations or liabilities of the defaulter and interest thereon at the rate of 2.5% per month (or such other rate as the Governing Board may specify) from the date of payment out of the Customers' Protection Fund to the date of repayment to the Fund; and


(ix) Ninth - the surplus, if any, shall be paid to the defaulter.


Clarification: It is clarified that this Bye-law 400 does not apply to the amount paid by the Governing Board to the Defaulters' Committee pursuant to Rule 16A in respect of the consideration received by the Governing Board for exercising the right of nomination in respect of the defaulter's erstwhile right of membership as the same does not belong to the defaulter and the defaulter has no claim, right, title or interest therein."


I find force in this submission. It necessarily follows that, in law, all the amounts lying with the Garnishee towards security deposit by the defaulter, as a consequence of Bye-law Nos 326, stood unconditionally vested in the Defaulters' Committee to be disbursed in the manner provided by the same Regulations and not otherwise. Learned Counsel for the Garnishee has rightly placed reliance on the decisions of the Division Bench of this Court that the above-said Bye-Laws are statutory in nature reported in 1995 (2) Mh.LJ. 770, Hemendra vs. Stock Exchange, Bombay, Stock Exchange, Mumbai vs. Vinay Bubna and ors. Once in law all the amount stood vested in the Defaulters' Committee, on 25th February, 2002 the question of setting apart any amount so as to, to be made over to the applicants by virtue of Circular issued by SEBI dated 9th July, 1999, would not arise. It would be appropriate to reproduce the relevant portion of the subject Circular, which has been pressed into service. The same reads thus:


"The Stock Exchange should on receipt of the arbitration award, debit the amount of the arbitration award from the security deposit or any other monies of the member (against whom an award has been passed) and keep the amount in a separate account. Thereafter a confirmation may be obtained from the concerned member that he has not filed any appeal within the stipulated time under section 34 of the Arbitration and Conciliation Act and only then the payment may be made to the awardee. If an appeal is filed and the same is pending in a Court of law, the amount so kept in the separate account be paid to the awardee in accordance with the court orders."


According to the Garnishee, this Circular has no binding effect and in any case, was only directory in nature. Whereas, the Counsel for the applicants submits that this Circular was binding on the Garnishee. To my mind, it is not necessary to go into the wider questions. Whereas, on plain language of the aforesaid Circular, it would appear that the amount was required to be kept separate, but could be paid, inter alia, only if no appeal was to be filed by the respondents within the period provided under section 34 of the Arbitration and Conciliation Act. In the present case, it is seen that the Award was passed on 31st December, 2001 and the statutory period for filing appeal was available to the respondents, but before expiry of that period, the respondents came to be declared as Defaulters on 25th February, 2002. Obviously, there was no question of making any payment to the applicants till this date i.e. 25th February, 2002. Whereas, as soon as the declaration that the respondents were defaulters, was issued, by virtue of Bye-Law 326, all the amounts standing in the accounts of the respondents towards securities deposited by him, stood vested in the Defaulters' Committee and that amount could be disbursed only in terms of Bye-Law No. 400 and not otherwise.


7.The argument of Mr. Kadam for the applicants is that the Garnishee was obliged in law to keep the Award sum in a separate account and since the Garnishee failed to comply with that requirement, it cannot enure to its benefit. I find no substance in this argument. Moreover, it is seen from the record that the Garnishee declared the respondents as defaulters on the basis of the materials made available before it, in particular, letter dated 8th February, 2002 given by the respondents along with the list of other creditors, which would indicate that the liability of the respondents was to the extent of about Rs. 19.68 crores, far exceeding the claim of the applicants on account of the Award or for that matter the amount Iying in the account of the respondents held by the Garnishee.


8.It was also argued that the applicants have asserted in the reply affidavit in paragraph 8 that meeting was convened between the Garnishee and the respondents on 16th January, 2002; but as rightly contended by the Counsel for the Garnishee, the letter issued by the Garnishee addressed to the Assistant Commissioner of Income-Tax dated April 16, 2002 clearly clarifies the position as to in what circumstances, the Garnishee was required to proceed against the respondents and the inability of the Garnishee to part with any amount, as requested by the applicants or the respondents.


9.Having taken overall view of the matter, to my mind, the Warrant of Attachment could not have been issued, as there was no debt due by the Garnishee to the respondents, nor any amount was payable to the applicants as such, on the relevant date.


10.My attention has been rightly drawn by the Counsel for the Garnishee that the Circular which has been pressed into service by the applicants would be of no avail because, assuming that the same was to co

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me in force in the shape of Bye-Law or Regulations as is contended, that cannot be given retroactive operation. In other words, in the present case, since the respondents came to be declared as defaulters on 25th February, 2002, whereas the requirement under the Circular was translated into amended Bye-Law only recently after 25th February, 2002. Accordingly, by virtue of Bye-Law 326, all the amounts standing to the account of the respondents towards security deposits, stood vested in the Defaulters' Committee for the benefit and on account of creditor members and the same could be disbursed only in terms of Bye-law No. 400 and not otherwise. In such a situation, the question of issuing Warrant of Attachment with reference to the Award against the respondent would be inappropriate. 11.Accordingly, this Chamber Summons is made absolute in terms of prayer clause (a), which reads thus : "(a) that this Hon'ble Court be pleased to revoke and/or set aside and/or cancel the Warrant of Attachment dated 16th August, 2002 and the Garnishee Notice dated 7th September, 2002, copies whereof are Exhibit - "A" and "B" to the Affidavit-in-Support of this Chamber Summons." 12.At this stage, Mr. Kadam submits that the operation of this order be stayed for a period of four weeks from today. In the interest of justice, operation of this order is suspended for a period of four weeks from today. 13.All concerned to act on the ordinary copy of this Order, duly authenticated by the Personal Secretary/Chamber Registrar.
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