1999 (7) TMI 115 - SC - Indian Laws

Supreme Court affirms Stock Exchange Rules on membership rights and default proceedings.

VINAY BUBNA Versus STOCK EXCHANGE, MUMBAI AND ORS.

The Supreme Court upheld the Bombay High Court's decision that Rules 16 and 43 of the Stock Exchange Rules were valid and fair. It was ruled that the ... Membership Cart of stock exchange - default in making payment dues - right and privileges of the member - Held that: - High Court rightly came to the conclusion that once a defaulting member ceases to be a member of the Stock Exchange no interest in his card remains and the same cannot be regarded as his asset and furthermore Rules 16 and 43 are not illegal, arbitrary or void. Issues Involved:1. Validity of Rules 16 and 43 of the Stock Exchange Rules.2. Whether the membership of the Stock Exchange is an asset of the share broker.3. Conflict between Stock Exchange Rules and Insolvency Act.4. Distribution of proceeds from the sale of the membership card of a defaulting member.Issue-wise Detailed Analysis:1. Validity of Rules 16 and 43 of the Stock Exchange Rules:The appellant sought the amendment of Rules 16 and 43 of the Stock Exchange Rules, arguing that they were illegal, bad in law, and ultra vires the Constitution of India. The Bombay High Court dismissed the writ petition, holding that the rules were fair, just, and reasonable. The Supreme Court upheld this view, stating that Rule 16 was not illegal, arbitrary, or unjust. The rule was designed to mitigate hardship caused by the default of a member by prioritizing payments to the Exchange and creditors.2. Whether the membership of the Stock Exchange is an asset of the share broker:The appellant contended that the membership of the Stock Exchange was an asset of the share broker and should be used to pay off creditors. The Supreme Court disagreed, stating that the membership card of a share broker is not his personal property. Upon being declared a defaulter, the member's rights and privileges cease, and the membership vests in the Exchange. This view aligns with the Privy Council's decision in Official Assignee of Bombay Vs. K.R.P. Shroff and Ors., where it was held that a defaulting member loses all interest in the membership card, which cannot be claimed by creditors or the official assignee.3. Conflict between Stock Exchange Rules and Insolvency Act:The appellant argued that Rules 16 and 43 were inconsistent with the laws of insolvency in India, which provide a different manner of asset distribution. The Supreme Court found no conflict, stating that once the membership card ceases to be an asset of the share broker, the question of the rules being contrary to insolvency law does not arise. The rules were deemed to be in the interest of the Exchange and its members.4. Distribution of proceeds from the sale of the membership card of a defaulting member:According to Rule 16, the proceeds from the sale of a defaulting member's membership card are allocated in the following order of priority:- First, to the dues of the Exchange and Clearing House.- Second, to the debts, liabilities, obligations, and claims arising out of contracts made by the former member.- Third, any surplus is directed to the funds of the Exchange or disposed of as decided by the Exchange in a general meeting.The Supreme Court concluded that this order of priority was just and fair, ensuring that creditors like the appellant had a chance to receive payments from the proceeds. The High Court's decision that the membership card is not an asset of the share broker and that Rules 16 and 43 are not illegal, arbitrary, or void was upheld.Conclusion:The appeal was dismissed, affirming that the membership card of a defaulting share broker vests in the Stock Exchange and is not an asset that can be claimed by creditors. Rules 16 and 43 were found to be fair, just, and reasonable, ensuring an equitable distribution of proceeds from the sale of the membership card.