1979 (2) TMI 175 - SC - Companies Law

Court upholds legality of directions and resolutions, dismisses appeal on merits.

The court dismissed the appeal, upholding the legality of the directions issued by the respondent on June 28, 1969, and the resolutions passed on July 2 ... Prohibition on forward trading - closing out or liquidation of outstanding contracts - construction of notification and its proviso - rules, bye-laws and regulations of a recognised stock exchange - contemporanea expositio and administrative construction - declaration of member as defaulter and disciplinary powers under bye-lawsConstruction of notification and its proviso - closing out or liquidation of outstanding contracts - prohibition on forward trading - Scope and meaning of the proviso in the Central Government notification dated June 27, 1969, as to whether outstanding forward contracts remaining unperformed on that date could be closed or liquidated and whether 'carry over' was permitted. - HELD THAT: - The Court held that the notification is in three parts: (i) a general ban on future forward trading; (ii) a proviso expressly permitting entry into contracts for the purpose of closing out or liquidating existing contracts entered into up to the date of the notification and remaining to be performed thereafter (thereby permitting forward contracts for liquidation, which include 'carry over'); and (iii) a concluding part referring to 'such contracts' which, on proper grammatical and contextual construction, refers to contracts banned by the first part and not to the outstanding contracts dealt with by the proviso. The Court rejected the appellants' contention that the proviso prohibited liquidation by carry over and that outstanding contracts had to be adjusted only at previous official closing rates. The Court further treated contemporaneous administrative documents (a press statement and a communication from the Joint Director, S.E., Ministry of Finance) as persuasive contemporanea expositio corroborating the plain construction that outstanding contracts were to be liquidated in accordance with the relevant rules, bye-laws and regulations of the exchange within a reasonable period. Applying these principles, the Court concluded that the proviso permitted closing or liquidating outstanding transactions in the normal manner under the exchange rules, including by entering into forward contracts for liquidation.Proviso permits liquidation or closing out of outstanding forward contracts (including by carry over) in accordance with the rules, bye-laws and regulations of the recognised stock exchange; appellants' restrictive construction rejected.Rules, bye-laws and regulations of a recognised stock exchange - declaration of member as defaulter and disciplinary powers under bye-laws - Validity of the Delhi Stock Exchange's directions dated June 28, 1969, and the resolutions dated July 2 and July 3, 1969, declaring the member a defaulter and calling for additional security. - HELD THAT: - Having construed the notification to permit liquidation under exchange rules, the Court held that the respondent's emergency directions (calling for lists of outstanding transactions and interim margins calculated in accordance with its regulations) were within the powers of the exchange and lawful. The Court found that ample opportunity was afforded to the member to comply, and his persistent refusal to follow the directions justified the board's resolution declaring him a defaulter and subsequent disciplinary steps under the bye-laws and articles of association. The contemporaneous government communications supporting liquidation under exchange rules further reinforced the legality of the exchange's measures taken in the crisis.The directions of June 28, 1969, and the resolutions of July 2 and July 3, 1969, were proper, justified and lawful; the High Court correctly rejected the appellants' challenge on merits.Final Conclusion: On proper construction the notification's proviso permitted liquidation of outstanding forward contracts (including by carry over) in accordance with the recognised exchange's rules, bye-laws and regulations; the Delhi Stock Exchange's directions and the resolutions declaring the member a defaulter and calling for additional security were lawful and the appeal is dismissed with costs. Issues Involved:1. Maintainability of the writ petition.2. Scope and ambit of the proviso in the notification dated June 27, 1969.3. Legality of the directions issued by the Delhi Stock Exchange on June 28, 1969.4. Validity of the resolutions passed by the Delhi Stock Exchange on July 2 and 3, 1969.Issue-wise Detailed Analysis:1. Maintainability of the Writ Petition:The respondent raised a preliminary objection to the maintainability of the writ petition, arguing that the relationship between the appellant and the respondent was contractual, arising from the memorandum and articles of association, and the rules, bye-laws, and regulations made under those articles. Since the grievance related to contractual rights and obligations, and no statutory right or obligation was involved, the remedy under writ jurisdiction was not available. However, the court decided to address the merits of the case without ruling on the preliminary objection.2. Scope and Ambit of the Proviso in the Notification Dated June 27, 1969:The central issue was the proper construction of the proviso in the notification, which banned all forward trading in shares from June 27, 1969, but allowed existing forward contracts to be closed or liquidated. The appellants contended that the demand for interim margins by the respondent amounted to a 'carry over' of forward transactions, which was illegal under the ban. The respondent argued that the proviso permitted the closing or liquidation of outstanding transactions in the normal manner under its rules, bye-laws, and regulations.The court held that the notification had three parts: the first part banned all forward trading, the second part (the proviso) allowed the closing or liquidation of existing forward contracts, and the third part subjected new forward contracts to the rules, bye-laws, and regulations of the recognized stock exchange. The court concluded that the proviso permitted the closing or liquidation of existing outstanding transactions by entering into a forward contract in accordance with the rules, bye-laws, and regulations of the respondent.3. Legality of the Directions Issued by the Delhi Stock Exchange on June 28, 1969:The respondent issued directions on June 28, 1969, requiring its members to submit lists of outstanding transactions and deposit interim margins based on specified rates. The appellants argued that this demand was illegal and amounted to a 'carry over' of forward transactions. The court found that the directions were proper and legal, as they were in accordance with the proviso in the notification, which allowed the closing or liquidation of outstanding transactions in the normal manner under the respondent's rules, bye-laws, and regulations.4. Validity of the Resolutions Passed by the Delhi Stock Exchange on July 2 and 3, 1969:The respondent passed a resolution on July 2, 1969, declaring the appellant a defaulter for failing to comply with the directions, and another resolution on July 3, 1969, demanding additional security of Rs. 20,000. The appellants challenged these resolutions as illegal and unjust. The court held that the resolutions were proper and justified, as the directions issued on June 28, 1969, were legal, and the appellant had failed to comply with them despite ample opportunity. The court rejected the appellants' contention that their fundamental right to carry on business under Article 19(1)(f) of the Constitution had been infringed.Conclusion:The court dismissed the appeal, upholding the legality of the directions issued by the respondent on June 28, 1969, and the resolutions passed on July 2 and 3, 1969. The appellants' case on merits was rightly rejected by the High Court, and the appeal was dismissed with costs.