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2013 DIGILAW 1981 (BOM)

Shankarlal v. Keswani VS India Infoline Ltd.

2013-09-25

D.Y.CHANDRACHUD, M.S.SONAK

body2013
JUDGMENT (Dr. D.Y. Chandrachud, J.) 1. The appeal arises from a judgment of a learned Single Judge dated 1 October 2012 on a Petition which challenged an arbitral award of the appellate tribunal of the Bombay Stock Exchange. The judgment in appeal, has dismissed the petition under Section 34 of the Arbitration and Conciliation Act, 1996. The Petitioner before the Single Judge is in appeal. 2. The Respondent is a member of the Bombay Stock Exchange (BSE) and of the National Stock Exchange (NSE). The Appellant was a constituent. The Appellant and the Respondent entered into an agreement on 27 November 2006 in pursuance of which transactions were entered into both on the BSE and the NSE. According to the Respondent, the transactions on the BSE resulted in a debit of Rs. 1.17 crores on 12 February 2008. The case of the Respondent is that in February, May and October 2008, the Appellant met a director of the Respondent in the presence of its Vice President and one Deepak Bathija, who was acting as a Relationship Manager of the Respondent and was closely related to the Appellant. At these meetings, the Appellant is alleged to have requested the Respondent not to dispose of the shares held by the Appellant in two companies, Opto Circuit Ltd. and IVR Prime Ltd. which were available as collateral security. Accordingly, the Respondent waited until 24 October 2008 when it proceeded to dispose of all shares held by it on behalf of the Appellant. After deducting the value of shares sold from the outstanding of Rs. 1.17 crores, the claim in arbitration was in the amount of Rs. 78.63 lakhs. 3. The arbitral tribunal constituted by the BSE considered the claim of the Respondent in pursuance of a reference to arbitration. By its award dated 19 May 2010, the arbitral tribunal held that the claim was barred by limitation. The tribunal came to the conclusion that under Bye-law 252(2), the claim ought to have been presented within a period of six months of the date of the last transaction on 12 February 2008. The tribunal held that there was no justification for the Respondent to wait until October 2008 to sell the shares of the Appellant, there having been no transaction of sale and purchase between the months of February and October 2008. The tribunal held that there was no justification for the Respondent to wait until October 2008 to sell the shares of the Appellant, there having been no transaction of sale and purchase between the months of February and October 2008. The claim was hence, held to be barred by limitation on the ground that it was beyond six months. Before the tribunal, the Appellant had raised a counter claim. The basis of the counter claim was that as against a debit of Rs. 1.17 crores in the account of the Appellant on 12 February 2008, the market value of shares of the two companies which the Respondent held as collateral was Rs. 1.94 crores. The Appellant in the circumstances, sought to recover the difference of Rs. 76.74 lakhs on the basis that had the Respondent sold shares which were held as collateral on 12 February 2008, an amount of Rs. 1.94 crores would have realised as against the debit of Rs.1.17 crores arising out of the transactions between the Appellant and the Respondent on the BSE. The Tribunal by its award also rejected the counter claim as being barred by limitation. 4. The rejection of the counter claim was not challenged in appeal by the Appellant before the appellate tribunal of the BSE. The appeal was filed only by the Respondent to challenge the rejection of its claim by the arbitral tribunal. The appellate tribunal constituted by the BSE allowed the appeal of the Respondent on 7 January 2011. The appellate tribunal came to the conclusion that: (i) There was a debit balance in the account of the Appellant as on 12 February 2008 in the amount of Rs.1.17 crores which stood reduced by an amount of Rs. The appellate tribunal constituted by the BSE allowed the appeal of the Respondent on 7 January 2011. The appellate tribunal came to the conclusion that: (i) There was a debit balance in the account of the Appellant as on 12 February 2008 in the amount of Rs.1.17 crores which stood reduced by an amount of Rs. 32.76 lakhs by the sale of shares in October 2008; (ii) The bye-laws of the stock exchange permitted the sale of shares by the Respondent and in fact, the entire counter claim of the Appellant proceeded on the basis that the Respondent ought to have disposed of the shares in February 2008 and in failing to do so, a loss had been caused to the Appellant; (iii) It was for the Respondent to select the time when the shares would be sold and significantly, nothing prevented the Appellant to instruct the Respondent to dispose of the shares at a time which he had considered to be the most appropriate; (iv) There was no reason to disbelieve the Respondent that it was the Appellant who had approached the Respondent with a request to withhold the sale of shares. This was taken into consideration as a justification for the time selected by the Respondent and not that it extended limitation; (v) The starting point of limitation would be 22 October 2008 and/or 31 October 2008 and not 12 February 2008 in which event the reference was filed within six months and was within time. 5. Having held that the claim was within limitation, the appellate tribunal determined as to whether the case was required to be remanded back to the arbitral tribunal to take a decision on merits or whether the appellate tribunal should itself dispose of the reference. The appellate tribunal held that it was an admitted position that; (i) There was a debit balance in the account of the Appellant of Rs.1.17 crores on 12 February 2008; (ii) The Respondent was within its rights in disposing of the shares held by it to clear the debit balance in the account of the Appellant; (iii) The Respondent had, in fact, disposed of the shares in October 2008 realising a sum of Rs.32.76 lakhs of which credit has been given to the Appellant resulting in a net debit balance of Rs. 78.63 lakhs as on 31 October 2008 which was the claim in the arbitral proceedings. 78.63 lakhs as on 31 October 2008 which was the claim in the arbitral proceedings. In these circumstances, it was held that no useful purpose would be served by remanding the proceedings to the arbitral tribunal. The claim of the Respondent was allowed in the amount of Rs. 78.63 lakhs together with interest at six per cent per annum from the date of the reference till payment or realisation. 6. The award of the appellate tribunal was questioned in a petition under Section 34 before the learned Single Judge. The petition has been dismissed by the impugned order dated 1 October 2012. 7. The following submissions have been urged on behalf of the Appellant by Counsel : (i) The Respondent could not have waited indefinitely for the sale of shares until October 2008, only because the bye-laws gave to the Respondent an entitlement to sell; (ii) The arbitral tribunal has no jurisdiction to adjudicate upon the claim because the claim covered transactions both on the BSE and the NSE. The claim could not have been bifurcated because the Respondent approached the tribunal on the basis of a combined ledger; (iii) Since there was a debit balance on 12 February 2008, the Respondent was under an obligation to mitigate the loss under Section 73 of the Contract Act and shares of the Appellant which were held as collateral should have been sold immediately; (iv) The account of the Appellant had been debited in the amount of Rs.2.05 crores for the payment made by the Respondent to a non-banking financial company. The NBFC may have an independent claim against the Appellant, but the Respondent proceeded to treat the Appellant as a defaulter on the basis of the debit made in respect of the payment made to the NBFC. This point was not considered by the tribunal; and (v) Alternately, even if the limitation were to be held against the Appellant on merits, a remand should have been ordered by the appellate tribunal to the original tribunal constituted by the BSE. 8. On the other hand, it has been urged on behalf of the Respondent that: (i) As in February 2008 in the BSE transactions, an amount of Rs. 8. On the other hand, it has been urged on behalf of the Respondent that: (i) As in February 2008 in the BSE transactions, an amount of Rs. 1.17 crores was due to the Respondent by the Appellant; (ii) The Respondent held collateral security in the form of shares; (iii) The value of the security was sufficient as on 12 February 2008 to meet the debit balance; (iv) Three meetings were held by the Appellant with the senior Vice President and a director of the Respondent and with a close relative of the Appellant who was a sub Broker of the Respondent in the months of February, May and October 2008. At these meetings, it was the Appellant who asked for accommodation and requested that the shares should not be sold; (v) An affidavit of evidence was filed of three witnesses on behalf of the Respondent to which there was no cross-examination. In these circumstances, it was submitted that the Respondent had granted time to the Appellant until October 2008 on the request of the Appellant. Between February and October 2008, no instructions were furnished by the Appellant for the sale of shares. On these foundational facts, it was submitted that: (i) The claim was clearly within limitation since as a matter of fact, no dispute had arisen between the parties until October 2008 when the Respondent proceeded to sell the shares of the Appellant; (ii) On the issue of jurisdiction, it was an admitted position that no such plea was raised in the petition under Section 34 before the learned Single Judge. However, as a matter of fact, the claim was based only on transactions on the BSE and, in fact, the counter claim of the Appellant was on the same basis; (iii) A finding of fact has been rendered by the appellate tribunal that the Respondent had given accommodation to the Appellant until October 2008 at the behest of the Appellant and this is based on the evidence of three witnesses whose affidavits were filed by the Respondent and on which there was no cross-examination whatsoever; (iv) Bye-law 247A(5) specifically grants liberty to a member of the stock exchange to close out a transaction by selling the security and the grant of liberty would indicate that there is no obligation to sell shares at any particular point in time; (v) The appellate tribunal was justified in coming to the conclusion that there was no reason to remand the proceedings back to the arbitral tribunal having regard to the fact that: (a) It was admitted that an amount of Rs.1.17 crores was due as on February 2008; (b) The entire matter was heard on merits by the lower tribunal, but it had rejected the claim only on the ground of limitation; (c) The power of the Appellate Tribunal was wide enough to decide all questions which were open for adjudication in appeal; and (d) As a matter of fact, the counter claim of the Appellant proceeded on the basis that the sale should have been conducted in February 2008 when default occurred. The fact of default is hence, not in dispute. No appeal was filed by the Appellant against the rejection of the counter claim. 9. The rival submissions fall for consideration. 10. Bye-law 252(2) of the Bye-laws of the BSE provides as follows: “252(2) The Arbitrators shall not take cognizance of any claim, complaint, difference or dispute unless the same has been received by the concerned Regional Arbitration Centre of the Exchange within six months from the date of the transaction or from the date on which the client claims to have given the instruction / order to buy or sell a security or from the date on which the client claims to have paid money or given a security, whichever is earlier. Any dispute as to whether a claim, complaint, difference or dispute falls within the ambit of this clause shall be decided by the Arbitrators. Any dispute as to whether a claim, complaint, difference or dispute falls within the ambit of this clause shall be decided by the Arbitrators. Provided that the Governing Board or the Managing Director and Chief Executive officer may, from time to time, appoint Committees separately for each Regional Arbitration Centre to amicably settle all claims, complaints, differences and disputes that are referred to it. Provided further that when such claims, complaints, differences and disputes are referred to the aforesaid Committee, the time taken in amicable settlement of such claims, complaints, differences and disputes shall be excluded while computing the period of limitation. Provided further that this Bye-law shall be applicable in-respect of all Arbitration Cases filled on or after the date when this Bye-Law comes into effect. Provided further that in respect of Arbitration Cases arising out of the transactions having been done prior to the date on which this Bye-law comes into effect, the limitation period of six months shall be computed from the date on which this Bye-law comes into effect.” Bye-law 247A(5) provides as follows: “(5) In case of purchases on behalf of client, Member brokers shall be at a liberty to close out the transactions by selling the securities, in case the clients fails to make the full payment to the Member Broker for the execution of the contract within two days of contract note having been delivered for cash shares and seven days for specified shares or before pay-in day (as fixed by Stock Exchange for the concerned settlement period), whichever is earlier; unless the client already has an equivalent credit with the Member. The loss incurred in this regard, if any, will be met from the margin money of that client.” Under Bye-law 247A(5), where a purchase is made by a member on behalf of a client, liberty is granted to a member to close out the transactions in the event that the client fails to make full payment within the period stipulated. Bye-law 247A(5) does not provide a specific time within which the liberty which has been granted to close out a transaction must be exercised. Bye-law 247A(5) is indeed susceptible of the interpretation that the liberty which has been conferred to sell shares to close out a transaction must be exercised in a reasonable manner. Bye-law 247A(5) does not provide a specific time within which the liberty which has been granted to close out a transaction must be exercised. Bye-law 247A(5) is indeed susceptible of the interpretation that the liberty which has been conferred to sell shares to close out a transaction must be exercised in a reasonable manner. A reasonable manner of the exercise of a liberty granted may postulate an exercise of the liberty granted within a reasonable period of time. Whether the conduct of the member was reasonable in a given case is a question of fact to be decided by the arbitrator. The arbitral tribunal, when it considers the conduct of a member of the stock exchange would have to give due regard to the course of dealings between the parties, the understandings, if any, between them, the practice in the trade and other relevant circumstances. In the present case, it is not in dispute that the Respondent filed affidavits of three of its witnesses, including of its Director, Vice President and of Deepak Bathija, a sub-broker of the Respondent, who is also closely related to the Appellant. The witnesses were not cross-examined. On the basis of the material on the record, the Appellate Tribunal held that there was no reason to disbelieve the case of the Respondent that it was the Appellant, who approached the Respondent with a request to withhold the sale of shares. The case of the Respondent was that meetings took place between the parties in February, May and October 2008 at which, it was the Appellant, who had requested the Respondent not to sell the shares of the two companies which were held by the Respondent as collateral security. The Appellant did not dispute the factum of the meetings, but disputed what according to the Respondent, transpired in the meetings. The question as to whether the Appellant was given accommodation till October 2008 by the Respondent on the request of the Appellant, was a pure question of fact. The appellate tribunal having held that this was so, the learned Single Judge justifiably did not re-appreciate a finding of fact. Once that be the position, it is evident that the sale of shares did not take place until October 2008 in view of the request made by the Appellant and the disputes which arose between the parties were only after the sale was conducted by the Respondent. Once that be the position, it is evident that the sale of shares did not take place until October 2008 in view of the request made by the Appellant and the disputes which arose between the parties were only after the sale was conducted by the Respondent. It is after the Respondent conducted the sale, that the Appellant raised the contention that the shares should have been sold in February 2008 to square off the debit balance of Rs.1.17 crores. Consequently, having due regard to the fact that under Bye-law 247A(5) liberty was granted to the Respondent to close out the transactions by the sale of shares and the finding of fact that the sale did not take place prior to October 2008 in view of the request of the Appellant, it is impossible to hold that the claim was barred by limitation. The view of the Appellate Tribunal did not fall for interference in the petition under Section 34 on this issue. 11. The question of jurisdiction is sought to be raised for the first time in appeal and Counsel appearing on behalf of the Appellant has fairly stated that it was not raised either in the petition under Section 34 or in the submissions before the learned Single Judge. The submission, however, is that if the claim is based on a combined ledger which relates to both the BSE and NSE which cannot be bifurcated, the award would be a nullity since the tribunal had jurisdiction only to consider claims arising out of transactions on the BSE. We are unable to accept the submission. The intent of Parliament is evinced in Section 16 of the Arbitration and Conciliation Act, 1996, for subsection (2) requires that a plea that the arbitral tribunal does not have jurisdiction must be raised no later than the submission of the statement of defence. The intent of the legislature, therefore, is that a plea on the absence of jurisdiction must be raised at the earliest opportunity before the arbitral tribunal. When an arbitral award is sought to be challenged, a plea on the absence of jurisdiction ought to be raised in the petition under Section 34 and where in the present case, it has not been so raised, it would be impermissible to allow a party to raise it for the first time in appeal. When an arbitral award is sought to be challenged, a plea on the absence of jurisdiction ought to be raised in the petition under Section 34 and where in the present case, it has not been so raised, it would be impermissible to allow a party to raise it for the first time in appeal. But that apart, even on merits, it is not possible to accede to the submission that the claim related to transactions on the BSE and NSE. The Respondent stated in its claim that a combined ledger was maintained both in respect of the transactions on the BSE and NSE. The claim before the arbitral tribunal, however, related only to transactions on the BSE. Both were segregated. Indeed, the counter claim of the Appellant was made on the same basis. There is, therefore, no merit in the contention that the claim was beyond jurisdiction. 12. The arbitral tribunal had come to the conclusion that the claim was barred by limitation. That view of the arbitral tribunal was reversed by the appellate tribunal. The powers of the appellate tribunal are co-extensive with those of the arbitral tribunal, where a two tier process, as in the present case, is adopted. The constitution of the appellate tribunal is provided in bye-law 274A. The bye-law contemplates that the appellate tribunal has to make its award in writing, furnishing reasons for its award and the award so made shall be deemed to be final and binding on the parties. There is nothing in the byelaw that would detract from the power of the appellate tribunal to render a full, final and complete determination. Indeed such a determination would be consistent with the need to promote the efficacy as well as the efficaciousness of arbitral proceedings. Remands foster delays. That apart, in the facts of this case, it is evident that the Appellant proceeded on the basis that the Respondent ought to have sold out the collateral immediately after 12 February 2008 when there was a debit balance in the account of the Appellant. It was on this basis that the Appellant made a counter claim by which it sought to adjust the value of the shares held as collateral on 12 February 2008 against the debit outstanding on that date. It was on this basis that the Appellant made a counter claim by which it sought to adjust the value of the shares held as collateral on 12 February 2008 against the debit outstanding on that date. In fact, the following extract from the written statement of the Appellant before the arbitral tribunal makes its position clear: “On perusal of the statement of account submitted by the Applicant along with the Statement of Case, it is evident that the account of the Respondent was constant in alleged debit since 15 May 2007 and the Respondent has not paid any amount to the Appellant. Despite there being running debits in the account of the Respondent, on 26 June 2007, the Applicant has allowed the Respondent to effect a transaction to the tune of Rs.1,07,17,075.75 which resulted into a huge alleged debit of Rs.1,18,28,768.84, however, the Respondent has not paid any amount towards the said transaction. In view of the alleged default committed by the Respondent, the Appellant ought to have closed the said transaction as provided under By-laws 241. In the instance case, the Applicant did not square off the contract of the Respondent in the open market, therefore, the Applicant deemed to have taken over the outstanding transactions to its own account. In such an event, the Applicant cannot have any claim against the Respondent. On the contrary, with respect to subsequent sale transactions, the Applicant is required to pay the sale consideration to the Respondent.” The appellate tribunal has correctly come to the conclusion that in view of the position that: (i) Admittedly, there was a debit balance in the account of the Appellant to the extent of Rs.1.17 crores as on 12 February 2008; (ii) The Respondent was within its rights in disposing of the shares held by it to clear the debit balance in the account of the Appellant; (iii) The Respondent, in fact, disposed of the shares in October 2008 and realised a sum of Rs.32.76 lakhs resulting in a net debit balance of Rs.78.63 lakhs on 31 October 2008, no useful purpose would be served by remanding the matter back to the arbitral tribunal. The undisputed position was the basis of the arbitral award of the appellate tribunal. There was no reason for the Learned Single Judge to interfere under Section 34 and the petition was, hence, rejected for justifiable reasons. 13. The undisputed position was the basis of the arbitral award of the appellate tribunal. There was no reason for the Learned Single Judge to interfere under Section 34 and the petition was, hence, rejected for justifiable reasons. 13. Before concluding, we may also advert to the fact that the issue of mitigation really does not arise in the facts of this case once it is held that the shares were not sold until October 2008 on the request of the Appellant. As regards the debit against the payment to the NBFC, it has been clarified before the Court that the agreement with the NBFC related only to the transaction on the NSE. Moreover the issue as regards the debit which has been made on account of the payment made to the NBFC has not been urged before the Learned Single Judge and, therefore, in any event it would not be appropriate to allow the Appellant to raise the issue for the first time in appeal. That apart, Counsel appearing on behalf of the Respondent has submitted that the aforesaid debit had no reference to transactions on the BSE. 14. For these reasons, no case for interference is made out. The appeal is accordingly dismissed. 15. In view of the dismissal of the appeal, the Notice of Motion in the appeal does not survive and is accordingly disposed of.