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2014 DIGILAW 2368 (BOM)

ANS Pvt. Ltd. v. Jayesh R. Ajmera

2014-12-01

S.C.GUPTE

body2014
JUDGMENT S.C. GUPTE, J. 1. The Arbitration Appeal challenges an award passed by the Appellate Bench of the Arbitration Department of Bombay Stock Exchange Limited, Mumbai. By the impugned award, the appellate bench of the arbitral tribunal allowed the Respondent's appeal and set aside an award by the first arbitral tribunal rejecting the Respondent's claim pertaining to removal of debits in the Respondent's Demat account arising out of certain transactions effected on the Exchange. The appellate bench remanded the matter to the lower arbitral tribunal with certain directions pertaining to the evidence required to be led before the lower arbitral tribunal. 2. The short facts in the Petitioner's case giving rise to the present case, may be stated as follows:- (i) The Respondent along with his wife, one Mrs. Priti Jayesh Ajmera, was a client of the Petitioner, who is a registered stock broker of the Exchange. The Respondent had executed a Member-Client Agreement with the Petitioner, as also a Depository Participant - Client Agreement. The Respondent's wife was the first named holder, whilst the Respondent was the second named holder of the Demat account. The Respondent was allotted an e-mail ID to which the Petitioner used to deliver digital contract notes in accordance with the provisions of the said Member - Client Agreement. (ii) On 7 August 2007, the Respondent's wife passed away. (iii) Around September 2007, the Respondent had amassed a debit balance in the trading account of about Rs. 84.15 lakhs by trading in the scrip of Transworld Infotech Ltd. (iv) On 13 September 2007, in part payment of the said debit balance, the Respondent purportedly paid a total sum of Rs. 21.15 lakhs to the Petitioner through RTGS transfers from the bank account of the Respondent and his HUF. (There is a dispute between the parties as to the authenticity of these payments. It is claimed by the Respondent that these RTGS transfers have been fraudulently effected by the Petitioner in connivance with one Mr. Ketan Delliwala, brother-in-law of the Respondent). (v) On the same day, i.e. on 13 September 2007, the Respondent executed various relevant documents and opened a new Demat account in his sole name. The Respondent also executed:- 1. An account closure form to close the old account jointly held with the Respondent's late wife. 2. Ketan Delliwala, brother-in-law of the Respondent). (v) On the same day, i.e. on 13 September 2007, the Respondent executed various relevant documents and opened a new Demat account in his sole name. The Respondent also executed:- 1. An account closure form to close the old account jointly held with the Respondent's late wife. 2. A transmission request form to transfer 90000 shares of Transworld Infotech Ltd. which were lying in the old joint account to the new Demat account. Accordingly, the joint account was closed and 90000 share of Transworld Infotech Ltd. were transferred to the new Demat account. (vi) In response to the Petitioner's communication calling upon the Respondent to clear the outstanding dues, the Respondent purportedly instructed the Petitioner to sell 90000 shares of Transworld Infotech Ltd. and adjust the sale proceeds towards the debit balance. The Petitioner carried out these instructions, sold the shares and appropriated the sale proceeds towards the debit balance and duly e-mailed the contract notes covering the sales. (The sale of these 90000 shares and adjustment of sale proceeds thereof towards the Respondent's debit balance forms part of the main dispute between the parties). (vii) Soon after the transaction was effected, the Respondent made complaints against the Petitioner to the Bombay Stock Exchange (BSE) purporting to dispute and deny trades executed in his account on his instructions. The Respondent also disputed the RTGS transfers from his bank accounts, referred to above and also the opening of the new depository account in his sole name, as mentioned above. (viii) In relation to the Respondent's complaint, the Central Depository Services Ltd. (CDSL) communicated to the Respondent that the latter could refer the disputes in connection with the opening of the depository account to arbitration in accordance with the CDSL Bye-laws. The Respondent did not reply to the CDSL. The Respondent did not commence any arbitration under the CDSL Bye-laws. The CDSL, therefore, treated the Respondent's complaint as closed. (ix) On 4 June 2008, the Respondent commenced arbitration proceedings against the Petitioner before the BSE under the BSE Rules and Bye-laws. (The BSE Bye-laws and Rules contemplate a two-tier arbitration procedure, i.e. reference of the dispute to a lower arbitral tribunal, the award of which is amenable to challenge before the appellate bench of the arbitral tribunal). (x) Before the lower arbitral tribunal, the Respondent's claim included three particular items. (The BSE Bye-laws and Rules contemplate a two-tier arbitration procedure, i.e. reference of the dispute to a lower arbitral tribunal, the award of which is amenable to challenge before the appellate bench of the arbitral tribunal). (x) Before the lower arbitral tribunal, the Respondent's claim included three particular items. Firstly, the Respondent challenged the written instructions given on his behalf for the trades in his account effected in September/October 2007 and sought reversal of the losses incurred. Secondly, the Respondent disputed the RTGS transfers by his bank from the accounts of the Respondent and his HUF, alleging the same to be fraudulent and seeking a refund of Rs. 21.15 lakhs. Thirdly, the Respondent challenged the opening of the new Demat account in his sole name and transfer of 90000 shares of Transworld Infotech Ltd. from the joint account of the Respondent and his wife to the sole account of the Respondent. (xi) By an interim award dated 2 December 2008, the lower arbitral tribunal held the dispute with regard to the RTGS transfers to be beyond the jurisdiction of the arbitral tribunal. The lower arbitral tribunal by its interim order also allowed the Respondent's application to lead further evidence. The Respondent filed his affidavit of evidence. A number of dates were fixed for cross-examination of the Respondent on his affidavit of evidence, but the Respondent did not show up and further adjournments were sought. The lower arbitral tribunal finally refused to grant any further adjournments and directed the parties to file written submissions. The parties filed their written submissions. (xii) By an award declared on 17 March, 2009, the lower arbitral tribunal rejected the Respondent's claim holding inter alia as follows:- (a) The Respondent's challenge to the opening of the Demat account and transfer/ transmission of 90000 shares from the joint account of the Respondent and his wife to the sole account of the Respondent was beyond the jurisdiction of the arbitral tribunal; and that the dispute in this behalf ought to have been referred to CDSL. (b) The Respondent had admitted his signatures on the Member-Client Agreement as well as KYC form and could not dispute his signature on page 1 thereof relating to digital contract notes. (c) Based on the BSE records and material available before the arbitral tribunal, the tribunal found that the trades had in fact been executed on the Respondent's instructions in his account. (c) Based on the BSE records and material available before the arbitral tribunal, the tribunal found that the trades had in fact been executed on the Respondent's instructions in his account. (xiii) The Respondent challenged the award of the lower arbitral tribunal before the appellate arbitral tribunal of BSE. The appellate bench by its award dated 29 January 2010 set aside the award of the lower arbitral tribunal and remanded the matter to the lower arbitral tribunal for being decided after giving the parties an appropriate opportunity to present their respective cases in accordance with law. (xiv) Once again, by an interim award/order, the lower arbitral tribunal held that the Respondent's allegations concerning the RTGS payment being fraudulent, were beyond the jurisdiction of the arbitral tribunal. The lower arbitral tribunal, accordingly, rejected the Respondent's application to lead oral evidence on this count, holding that no oral evidence was required in the matter. The interim award was not separately challenged by the Respondent. The Respondent argued his main case in the subsequent hearings. By an award dated 29 October 2010, the lower arbitral tribunal again rejected the Respondent's case in its entirety on the same grounds and for the reasons, as contained in the previous award. (xv) The Respondent once again preferred an appeal before the appellate bench of the arbitral tribunal. The appellate bench directed the Petitioner to produce several documents in respect of the Demat account and other matters. The documents were submitted by the Petitioner to the appellate bench. Further hearings were held before the appellate bench. (xvi) By the impugned award dated 21 June 2011, the appellate bench of the arbitral tribunal once again set aside the award of the lower arbitral tribunal and remanded the matter back to it. The appellate bench whilst remanding the matter directed the Respondent to produce certified true copies of RTGS mandate forms by approaching his bankers. The appellate bench also directed the Petitioner to produce the nomination register in respect of the new DP account opened in the sole name of the Respondent. The appellate bench further directed the Petitioner to produce Power of Attorney for pay in of securities, which was executed by the Respondent as also the extract of the notarial register before the lower arbitral tribunal. 3. The appellate bench further directed the Petitioner to produce Power of Attorney for pay in of securities, which was executed by the Respondent as also the extract of the notarial register before the lower arbitral tribunal. 3. A perusal of the impugned award of the appellate bench indicates a fundamental flaw, which goes to the root of the matter. The lower arbitral tribunal had before it three distinct issues. The first issue concerned the instructions issued on behalf of the Respondent for trades in his sole Demat account for trades in 90000 shares of Transworld Infotech Ltd. in September/October 2007 and reversal of losses in respect thereof. The second and third issues, respectively, concerned the RTGS transfers by the bankers of the Respondent and his HUF to the Petitioner in the sum of Rs. 21.15 lakhs and the opening of the new Demat account in the sole name of the Respondent and transfer of 90000 shares of Transworld Infotech Ltd. from the joint account of the Respondent and his wife to the new account of the Respondent. The lower appellate tribunal after hearing the parties and by detailed interim/final award issued in that behalf clearly held that the second and third issues, namely, the RTGS transfers to the tune of Rs. 21.15 lakhs from the account of the Respondent and his HUF and the opening of the new Demat account in the sole name of the Respondent and transfer of the 90000 shares from the joint account of the Respondent and his wife to the sole account of the Respondent, were matters beyond the jurisdiction of the arbitral tribunal under BSE Rules and Bye-laws. These matters clearly pertained to issues which were outside the jurisdiction of the arbitral tribunal, inter alia, as they concerned third parties, who were neither before the arbitral tribunal nor were parties to the arbitration agreement between the Petitioner and the Respondent. The issue concerning the RTGS transfers essentially concerned the bankers of the Respondent and his HUF. The allegation was that the bankers fraudulently effected the RTGS transfers without there being any authorized instructions on behalf of the Respondent. The issue concerning the RTGS transfers essentially concerned the bankers of the Respondent and his HUF. The allegation was that the bankers fraudulently effected the RTGS transfers without there being any authorized instructions on behalf of the Respondent. So also, the opening of the new Demat account in the sole name of the Respondent and transfer of the 90000 shares of Transworld Infotech Ltd. from the joint account of the Respondent and his wife to the new account concerned the transactions effected by CDSL and were subject to the dispute resolution mechanism under the CDSL Bye-laws. The lower arbitral tribunal proceeded to consider the first issue, which alone properly lied within its jurisdiction, namely, the authority of the Petitioner to effect trades in the sole account of the Respondent concerning the 90000 shares of Transworld Infotech Ltd. held in that account. The lower artibral tribunal did not allow the Respondent to lead any evidence in respect of either the RTGS transfers effected from the bank accounts of the Respondent and his HUF in the sum of Rs. 21.15 lakhs or the opening of the new Demat account in the sole name of the Respondent and transfer of 90000 shares from the Transworld Infotech Ltd. from the joint account of the Respondent and his wife to his sole account. The arbitral tribunal, after going through the material placed by the parties before it and hearing the parties, proceeded to hold that the trades effected in the sole account of the Respondent of 90000 shares of Transworld Infotech Ltd. in September/October 2007 by the Petitioner were authorized and duly effected under the Member - Client Agreement executed in that behalf by the Petitioner and the Respondent. The lower arbitral tribunal, accordingly, rejected the Respondent's claim. The appellate arbitral tribunal set aside the impugned award and remanded the matter back to the lower arbitral tribunal, directing further evidence to be led before it. The appellate bench particularly directed production of documents pertaining to the RTGS transfers effected from the accounts of the Respondent and his HUF to the Petitioner, as also the opening of the new Demat account in the sole name of the Respondent. The appellate bench particularly directed production of documents pertaining to the RTGS transfers effected from the accounts of the Respondent and his HUF to the Petitioner, as also the opening of the new Demat account in the sole name of the Respondent. Before doing so, the appellate bench did not even consider whether or not the award passed by the lower arbitral tribunal in respect of the two issues concerning the RTGS transfers and the opening of the Demat account was correct or not. Without as much as going through the submissions of the parties and reaching even a prima facie conclusion in that behalf, the appellate bench directed remand of the matter and leading of evidence on the two issues, which were clearly held by the lower arbitral tribunal to be beyond its jurisdiction. The two issues indeed concern third parties, who were not before the arbitral forum and who were not parties to the arbitration agreement. The arbitral tribunal clearly lacks jurisdiction to go into these two issues. Thus, the impugned award of the appellate bench remanding the matter to the lower arbitral tribunal and directing leading of evidence on the two issues, which were held to be beyond jurisdiction of the arbitral tribunal and which conclusion was not reversed by the appellate bench, is clearly beyond the purview of the appellate tribunal and has resulted in palpable failure of justice requiring interference with the impugned award. 4. In that view of the matter, the impugned award of the appellate bench suffers from grave error, which is an error of jurisdiction and which goes to the root of the matter. The impugned award, accordingly, deserves to be set aside. 5. The next question, which immediately arises upon the setting aside of the impugned award of the appellate bench, is, what is the effect of such setting aside. Learned Counsel for the Petitioner submits that a necessary corollary to the setting aside of the impugned award of the appellate bench is the restoration of the original award passed by the lower arbitral tribunal. On the other hand, it is submitted by the learned Counsel for the Respondent that the original award of the lower arbitral tribunal has merged into the award of the appellate bench and is not really in existence. On the other hand, it is submitted by the learned Counsel for the Respondent that the original award of the lower arbitral tribunal has merged into the award of the appellate bench and is not really in existence. It is submitted by the learned Counsel for the Respondent that in the facts of the case, the original award of the lower arbitral tribunal cannot be restored. 6. The BSE Rules and Bye-laws envisage a two-tier arbitration, which is a unique procedure, for which no suitable provisions are to be found in the Arbitration and Conciliation Act, 1996. The legality or validity of a two tier arbitration procedure within the framework of the Arbitration and Conciliation Act, 1996 has not been finally considered by the Supreme Court. Though the issue concerning validity of such an arbitral procedure within the framework of 1996 Act is referred to the decision of a larger Bench, our Courts have countenanced such an arbitration procedure so far. It is, however, a peculiar incidence of a two-tier procedure of an arbitration reference that when the reference goes through both the tiers, the award of the first arbitral tribunal clearly merges with the award of the appellate tribunal. Once an appellate award is rendered, it is only that award which holds the field and is the award which can be said to be in existence. The situation is not akin to a hierarchical chain of original and appellate courts that we encounter in ordinary civil law. There, even if the doctrine of merger has a play after rendering of an appellate order, each order has a separate existence so that setting aside of an appellate order may result in restoring the original order. Besides, the higher court examining the appellate order itself has the jurisdiction to pass the very order reversed or interfered with by the appellate order. Such is not the case where the arbitration reference itself is a two-tier reference and the court examining the final award merely has authority to affirm or set aside award but no authority to substitute an award. Setting aside of the award of the appellate tribunal does not, thus, ipso facto restore the original award passed by the first arbitral tribunal. Setting aside of the award of the appellate tribunal does not, thus, ipso facto restore the original award passed by the first arbitral tribunal. If the original award passed by the first arbitral tribunal has to be restored after setting aside the appellate award, it will clearly amount to rewriting of an arbitral award. The original award of the first arbitral tribunal not being in existence any more, restoration of such an award is bringing into effect a new award not in existence. This clearly is impermissible within the jurisdiction of this court under Section 34 of the Arbitration and Conciliation Act, 1996. In that view of the matter, there is no question of restoring the original award passed by the first appellate court. The impugned award, which is the only existing award, being invalid and unsustainable, will, however, have to be set aside. The parties may in that case be left to their own devices to consider their respective positions and adopt suitable steps, as they may be advised. 7. For the reasons noted above, the impugned award dated 21 June 2011 is set aside. There shall be no order as to costs.