IN THE HIGH COURT OF KERALA AT ERNAKULAM
SA.No. 884 of 1996()
1. COCHIN STOCK EXCHANGE LTD.
... Petitioner
Vs
1. P.P.ZIBI JOSE
... Respondent
For Petitioner :SRI.KOSHY GEORGE
For Respondent :SRI.C.T.JOSEPH
The Hon'ble MR. Justice HARUN-UL-RASHID
Dated :08/07/2010
O R D E R
HARUN-UL-RASHID,J.
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S.A.NO.884 OF 1996
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DATED THIS THE 7TH DAY OF JULY, 2010
JUDGMENT
Defendant in O.S.No.1555/88 on the file of the
Principal Munsiff’s Court, Ernakulam is the appellant. The
plaintiff in the suit is a member of the defendant-Cochin Stock
Exchange. The suit was originally filed for a declaration that
Clause 312 of Ext.A1 bye-law and regulations of the
defendant-stock exchange is illegal, ultra vires and void and for a
declaration that Ext.A16 notice dated 23/12/1987 issued by the
defendant declaring the plaintiff as a defaulter is illegal, ultra
vires and void and for a mandatory injunction for restoration of
plaintiff’s right as a member of the defendant-stock exchange.
The prayer in the suit was substituted by an amendment of the
plaint. The amended plaint is for declaration that the notice
dated 23/12/1987 is illegal, ultra vires and for mandatory
injunction for restoration of the plaintiff’s right as a member of
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the defendant stock exchange. The trial court held that the
plaintiff is not entitled to get any relief and dismissed the suit.
The Lower Appellate Court allowed the appeal and decreed
the suit as prayed for. The parties are hereinafter referred to as
the plaintiff and defendant as arrayed in the suit.
2. The defendant in the suit is the Cochin
Stock Exchange Ltd., represented by its President. The
plaintiff, who was a member of the defendant, was engaged in
the business as a share and stock broker in the name and style
P.P.Zibi Jose and Company. For the administration and
control of the affairs of the defendant-stock exchange, bye-
laws and regulations are framed by the defendant in 1978.
Ext.A1 is the copy of the bye-law and Ext.A2 is the copy of
the memorandum of articles of association.
3. Regulation 312 of Ext.A1 bye-law provides
for declaring a member of the defendant as defaulter by the
direction of the Council of Management in any of the
circumstances mentioned therein. Any member, who shall
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cease to be a member, may be re-admitted by the Council of
Management of the defendant as per Article 52 of Ext.A2
Articles of Association. In the plaint it is averred that the
plaintiff is entitled to do the business of share broker on the
floor of the defendant. According to the plaintiff, in August
1987 he had sold certain shares to M/s.Joseph & Thomas. The
amount due from the said firm to the plaintiff is Rs.25,400/-,
that the plaintiff had also purchased certain shares from the
said firm and that after adjusting the amounts, a sum of
Rs.19,300/- is due from the said firm to the plaintiff. It is also
averred that likewise the plaintiff had entered into certain
transactions with M/s.Joy Thomas & Co. and Kolenchery &
Co. Another sum of Rs.4,600/- is due to the plaintiff from the
defendant in settlement No.1 under the new settlement
programme and therefore the Stock Exchange is bound to
recover from the aforesaid persons the amounts due to the
plaintiff and pay the same to him. It is averred that to the
knowledge of the plaintiff neither the Council of Management
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nor the President has decided to extent the time for delivery of
the shares and that it appears that there was an auction
arranged by the defendant for the disposal of certain shares. It
is further averred that the defendant informed the plaintiff that
he has to take delivery of shares worth Rs.27,003/- and called
upon him to do the needful on or before 14/12/1987 and that in
case of failure to comply with the said direction, disciplinary
action will be taken. The plaintiff by letter dated 11/12/1987
requested the defendant to furnish details of shares to be taken
delivery by him but the defendant did not furnish the details
as requested by the plaintiff. By notice dated 23/12/1987 the
defendant informed the plaintiff that he had been declared as a
defaulter with effect from 21/12/1987. The notice dated
23/12/1987 marked as Ext.A16 does not disclose the reasons
for invoking Regulation 312 and he was not given an
opportunity to explain as to why he should not be declared as a
defaulter. For these reasons it is alleged that the action of the
defendant is in violation of the principles of natural justice and
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is influenced by extraneous considerations. The plaintiff
prayed for declaratory decree that Ext.A16 notice is illegal,
ultra-vires and void and also prayed for consequential
injunction directing the defendant to restore the right of the
plaintiff as a member of the defendant-stock exchange.
4. The defendant filed a detailed written
statement denying the averments in the plaint and prayed for
dismissal of the suit. According to the defendant, the plaintiff
as a member of the Cochin Stock Exchange failed to discharge
his obligations as enjoined under Ext.A1 bye-law, Ext.A2
Memorandum of Articles of Association, circulars and
instructions issued from time to time, that he has violated the
bye-law and regulations repeatedly during the course of his
business, that he repeatedly failed to settle the dues on the due
dates as per the settlement programme and that by circular
dated 28/9/1987 all the members were requested to give
statement regarding the deliveries pending to be effected for
settlement No.1 before 2 p.m. on 29/9/1987, but the plaintiff
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failed to give the statement as required. It is also averred in
the written statement that in the light of the direction issued by
this Court in O.P.No.7225/87 all the members are required to
furnish details of transactions done with P.K. Joy, who is also
a member of the Stock Exchange. It is averred that the
plaintiff did not care to do so as required. The defendant
contended that the plaintiff deliberately concealed his dealings
with the said Joy outside the floors of the exchange which are
specifically prohibited under the Securities Contracts Act. It is
further stated in the written statement that the plaintiff was
also conducting business in several names contrary to the
permission granted to him, he has concealed several
transactions from the defendant, he failed to make payment
due from his settlement No.2 etc. Besides this, it is alleged
that the plaintiff failed to comply with the directions issued by
the Cochin Stock Exchange to furnish statements of accounts
of his business in relation to several other transactions. The
defendant also narrated several other instances in the written
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statement which would point out the violation of the
provisions of the bye-law, memorandum of articles of
association, circulars and directions issued to the plaintiff. It is
stated that in the circumstances, the Council of Management,
after considering all the aspects in detail in its meeting held on
21/12/1987, had declared the plaintiff as a defaulter by
invoking the powers conferred on it vide Article 149 and bye-
law 312 and thereupon the plaintiff ceased to be a member of
the exchange with effect from the said date. Ext.A16 is the
notice issued to the plaintiff informing him that he has been
declared as a defaulter with effect from December, 21, 1987
and hence he ceases to be a member of the exchange from the
said date. Ext.A16 notice dated 23/12/1987 was issued based
on Ext.A17 proceedings of the Cochin Stock Exchange. In
Ext.A17 proceedings after declaring the plaintiff as a defaulter
on his failure to fulfil and discharge the engagements,
obligations and liabilities to the exchange and its members, the
Council of Management further informed the plaintiff that he
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is at liberty to apply for re-admission as a member, as per
Articles 47 to 54 of Ext.A2 Memorandum of Articles of
Association.
5. The reasons stated for declaring the plaintiff
as a defaulter is explained in detail in Ext.A17 dated
21/12/1987. The sum and substance of the reasons are as
follows:
i) Failure to make payment for settlement
Nos.1 and 2, though notice was issued calling upon
the plaintiff to make payment. It is stated that that the
payment was made belatedly. The defendant
informed the plaintiff that failure to make payments in
time for settlement Nos.1 and 2 is a deliberate and
mala fide acts calculated attempt to disrupt and
defame the functions of the Stock Exchange and its
members and to create inconvenience to public with
the intention of undermining their confidence in the
exchange.
ii) Failure to inform the stock exchange regarding
the deliveries pending to be effected for settlement No.1
which the plaintiff is required to be maintained as a
member as per the mandatory requirements under SCR
Act, Rules and By-laws.
iii) The stock exchange by letter dated 8th
October, 1987 informed the plaintiff to furnish
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details of the illegal clandestine transactions done
with Sri T.K. Joy. It is stated in paragraph 3 of
Ext.A17 that the plaintiff failed to furnish the details
as required, even though the failure to furnish the
details required in the communication dated 8th
October, 1987 has brought the exchange to a virtual
crisis. It is also stated in the proceedings that the
plaintiff has deliberately concealed the transaction
with T.K.Joy in his daily returns with the exchange.
The plaintiff purposefully failed to co-operate with
the exchange, though he has been asked to reveal the
transaction with T.K. Joy.
iv) It is further pointed out in Ext.A17 that the
plaintiff was permitted by the exchange to carry out
his securities business only in the name of P.P. Zibi
Jose & Co. But it is found that the plaintiff was
operating his business illegally through various
dummy firms. It is also stated that those transactions
were deliberately concealed from the exchange
authorities.
v) The plaintiff failed to furnish to the stock
exchange the statements of accounts of his business
with M/s.Kolenchery & Co, M/s.Joy Mathew & Co.
and M/s.Joseph and Thomas. It is said that the
details are necessary in order to know the
genuineness of the plaintiff’s claim stated in the
letter dated 15th October, 1987. He also failed to
furnish details of transaction of settlement No.1. It
is stated that the failure to furnish the details is not
expected from a disciplined member and the action
of the plaintiff is deliberately intended to harm the
exchange and its members.
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vi) The plaintiff failed to settle the disputes that had
arisen between him and Mr. and Mrs.C.S.
Chandran, though requested by the stock exchange
in its letter dated 9/12/1987. The letter was issued
based on the complaint received from M/s.Choksey
Bhargava & Co., Calcutta.
vii) The plaintiff has made a newspaper statement
against the members of the exchange, the authorities
of the exchange and also against the exchange to
give the impression that its members are in financial
crisis. It is said that the attempt is to discredit the
exchange and its administrators before investing
public is an act unbecoming of a member.
viii) It is also stated that the plaintiff failed to make
payments to various members of the exchange.
Plaintiff was informed that some of the cheques
issued by him to certain members have been
dishonoured.
ix) The plaintiff failed to deliver the shares sold by
him and refused to accept shares brought by him in
respect of settlement in 6A and other transactions,
even though statements were given to the plaintiff
from the exchange.
x) The exchange issued a letter dated 11/12/1987
calling upon the plaintiff to remit the exchange a
sum of Rs.27,003/- being the amount due from him
in respect of settlement No.6A.
6. It is stated in Ext.A17 that the defendant was
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constrained to declare the plaintiff as a defaulter on his
failure to fulfil and discharge his engagements, obligations and
liabilities to the exchange and its members. Ext.A17
proceedings also would go to show that the Cochin Stock
Exchange issued notices on various occasions to the plaintiff
calling upon him to furnish details of transactions of
settlement Nos.1 and 2 and directing to remit to the exchange
the amounts due from him in respect of settlement No.6A.
7. The plaintiff as a member is governed by the bye-
law and memorandum of articles of association formulated for
the administrative purposes. Plaintiff contended that he was
declared as a defaulter by the stock exchange by violating the
Rules and Regulations, that the action of the stock exchange is
not done in good faith and that the procedure adopted by the
defendant in declaring the plaintiff as a defaulter is violative of
the principles of natural justice. These questions raised by the
plaintiff were considered by the trial court in detail.
8. Ext.A16 is the decision of the stock exchange
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based on Ext.A17 proceedings. By Ext.A16 notice the plaintiff
was informed that he has been declared as a defaulter with
effect from 21/12/1987. The reasons for declaring him as a
defaulter are elaborately explained in Ext.A17 proceedings. A
combined reading of Ext.A16 and Ext.A17 would disclose the
reasons for declaring the plaintiff as a defaulter.
9. The relevant portion of Regulation 312 of
Ext.A1 bye-law is extracted below:
“A member shall be declared a defaulter by
direction of the Council of Management or the President
or in the absence of the president by direction of any two
members of the Council of Management–
(i) if he is unable to fulfil his engagements.”
10. The reasons for the action taken set out in
Ext.A17 proceedings are extracted in the preceding
paragraphs. After declaring the plaintiff as a defaulter in
Ext.A17 proceedings, the defendant informed the plaintiff that
he is at liberty to apply for re-admission as a member as per
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S.A.884/1996Articles 47 to 54 of the exchange. Ext.A17 proceedings and
Ext.A16 notice were issued in pursuance of a resolution of the
Council of Management. Ext.B3 is the minutes of the meeting.
The trial court, after perusing Ext.B3 minutes, found that the
Council of Management had a detailed discussion on the
subject and perused all the relevant correspondence and
records and satisfied that in the interest of the Exchange the
plaintiff should be declared as a defaulter.
11. In pursuance of the resolution referred above,
Ext.A17 was drawn and served on the plaintiff. Both parties
admitted that Regulation 312 deals with the situation regarding
declaration on the basis of default. It is the case of the plaintiff
that Regulations 168 to 190 of Ext.A1 are applicable to such a
situation and it is not proper for the defendant to invoke
Regulation 312 of Ext.A1. The defendant contended that they
were constrained to declare the plaintiff as a defaulter not due
to the single transaction concerning the settlement No.6A, but
also due to the failure of the plaintiff to fulfil the obligations to
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the defendant, being a member. Regulation 312 deals with
exclusively the situation regarding the declaration on the basis
of default. In the facts and circumstances, it is not correct to
say that Regulations 168 to 190 of Ext.A1 are applicable.
Exts.A16 and A17 would help to draw the answer as to what
permitted the stock exchange to declare the plaintiff as
defaulter. Several reasons are stated in Ext.A17 for taking
action against the plaintiff under Regulation 312. It is not
disputed before this Court that Stock Exchange was the
authority to invoke Regulation No.312. According to the
plaintiff, instead of invoking Regulation No.312 the Stock
Exchange ought to have resorted to Regulations 168 to 190.
12. From Ext.A17 and related documents, this Court
is convinced that there are sufficient reasons for the stock
exchange to resort Regulation 312 of Ext.A1 and to declare the
plaintiff as a defaulter. The declaration was made not based on
a single transaction concerning settlement No.6A; but due to
failure of the plaintiff to discharge the obligations to the
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defendant, being a member under series of transactions. The
evidence adduced by the parties also would show that the
declaration was done, as the plaintiff was unable to fulfil his
engagements or obligations to the defendant and its members.
Ext.A17, Ext.B3 and other related documents revealed that the
plaintiff failed to fulfil his engagements. It has also come out
in evidence that the plaintiff was not prompt in making
payments to the defendant and the defendant was constrained
to issue notices on several occasions to get money from him.
The action of the defendant in issuing notices is an indication
to the plaintiff’s failure to fulfil his engagements in due time.
Ext.A17 proceedings referred to some other notices issued
other than Ext.A14 notice to the plaintiff calling upon him to
fulfil his obligations and engagements.
13. The trial court has considered the questions in
detail and observed that the plaintiff has got obligation to the
defendant and he has no right to make news publication
which would affect the reputation of the defendant adversely.
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The court below made such an observation finding that some
news affecting the reputation of the Stock Exchange had
appeared in the newspaper because of the information passed
on by the plaintiff to the press. The trial court further held that
it is clear from the evidence on record that the Stock Exchange
passed proceedings in good faith and declared the plaintiff as a
defaulter.
14. The learned counsel for the Stock Exchange
submitted that in view of the peculiar nature of business carried
on in the floor of the Stock Exchange and the nature of its
functions, it is not practical to issue notices calling upon the
party to appear for hearing and a full-fledged hearing cannot be
conducted. According to the learned counsel, decisions were
taken after deliberations in the Council of Management and
before taking decisions, and sufficient opportunities were
given to the plaintiff to comply with the directions of the Stock
Exchange. He also submitted that due to the peculiar nature of
the business in the Stock Exchange the payments and
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obligations of the members have to be complied with as per
the provisions of the bye-law and the Memorandum of Articles
of Association. From Ext.A17 it is clear that the plaintiff was
given sufficient opportunity to comply with the directions
which the plaintiff was bound to comply. Ext.A17 shows that
the defendant informed that the plaintiff is at liberty to apply
for re-admission as a member and that proceedings were
initiated by the defendant in good faith for the proper
administration of the defendant-Stock Exchange. Specific
instances of granting opportunities to the plaintiff to discharge
the obligations under Exts.A1 and A2 are set out in Ext.A17.
In point No.7 of Ext.A17 it is stated that the Stock Exchange
had requested the plaintiff to settle the disputes that had arisen
between the plaintiff and Mr. and Mrs. C.S. Chandran. The
request was made vide letter dated 9/12/1987 on a complaint
received from M/s.Choksey Bhargava & Co., Calcutta. In
point No.3 there is a reference to the letter dated 8th October,
1987 issued by the Stock Exchange directing the plaintiff to
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furnish details of the illegal clandestine transactions done with
Mr. T.K. Joy. In point No.1 there is reference to the notices
dated September 23, 1987 and October 10, 1987 calling upon
the plaintiff to make payment stating that he has deliberately
failed to make payment for settlement No.1. Again in point
No.6 there is also a reference to the letter dated September 28,
1987 by which the plaintiff was called upon to furnish details
of transactions for settlement No.1 and letter dated November
16, 1987 requesting him to deliver all the pending deliveries on
November 20, 1987. In point No.11 there is a further reference
to the letter dated October 17, 1987 calling upon the plaintiff to
furnish statements of accounts with the following members,
namely, M/s.Kolenchery & Co., M/s.Joy Mathew & Co. and
M/s.Joseph & Thomas.
15. The Lower Appellate Court mainly for two
reasons reversed the findings of the trial court. The learned
Judge held that the proceedings are not in accordance with the
bye-law and articles of association, that it offends the
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principles of natural justice and that the proceedings were
taken not in good faith. The learned District Judge observed
that the only notice which was sent to the plaintiff by the
defendant-Stock Exchange before the plaintiff was declared as
a defaulter, is Ext.A14 dated 11/12/1987. In paragraph 14 I
have referred to various notices issued to the plaintiff which
are mentioned in Ext.A17 proceedings. The learned Judge
proceeded on the basis that the Stock Exchange issued only
one notice i.e. Ext.A14 dated 11/12/1987 which relates to only
one engagement. The learned Judge was wrong in holding so.
The learned judge failed to take note of the fact that several
communications were issued calling upon him to discharge the
obligations and duties which I have referred in paragraph 5. a
Therefore, the finding of the learned Judge that 10 out of 11
reasons to support the action taken by the defendant-Stock
Exchange were communicated to the plaintiff, only after the
resolution to declare the plaintiff as a defaulter was passed by
the Council of Management, is factually wrong. The learned
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Judge held that in the face of the evidence it cannot be said that
as per Ext.A14 notice a well-defined ground was conveyed to
the plaintiff so as to justify the action under Regulation 312(i)
of Ext.A1 bye-law. The learned Judge also held that even
assuming that the ground mentioned in Ext.A14 has been
substantiated on the admission of DW1 himself it involves
only one act of default and cannot constitute a ground under
Clause (i) of bye-law 312 which contemplates plurality of
default. The learned Judge found that Ext.A14 involves only
one act of default; but the learned Judge failed to consider the
fact that the action was taken against the plaintiff finding that
he has committed plurality of default. Ext.A17 contains 11
grounds for the action taken under Regulation 312 of the bye-
law. Therefore, the finding of the Lower Appellate Court that
action was taken for the commission of single default, is
factually wrong. The learned Judge failed to examine the
evidence on record which shows that the plaintiff has
committed plurality of defaults inviting action under
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Regulation 312 of the bye-law. Therefore, the further finding
of the Lower Appellate Court that the decision taken by the
Council of Management of the defendant-Stock Exchange on
21/12/1987 declaring the plaintiff as a defaulter had thus
offended one of the cardinal principles of natural justice, is
also equally wrong and therefore liable to be interfered with. I
have set out in detail the plaintiff’s failure on several occasions
including the default narrated in Ext.A14 notice. The Lower
Appellate Court did not consider and appreciate the evidence
adduced by the parties in the right perspective. The Lower
Appellate Court only elicited some portions of the evidence
mainly Ext.A14 notice and held that it constitutes only one act
of default and that action under Clause (i) of Regulation 312
of the bye-law contemplates plurality of default.
16. The learned counsel for the respondent cited the
decisions reported in Dhulabhai v. State of Madhya Pradesh
and another (AIR 1969 SC 78), United India Insurance Co.
Ltd. v. Ajay Sinha and another ((2008) 7 SCC 454), Sahara
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India (Firm), Lucknow v. Commissioner of Income Tax,
Central-1 and another (((2008) 14 SCC 151), Charan Lal
Sahu v. Union of India (AIR 1990 SC 1480),
ASST.Commissioner, Anti-evasion Commercial Taxes,
Bharatpur v. Amtek India Ltd. ((2007) II SCC 407),
Brijendra Singh v. State of U.P. and others (AIR 1981 SC
636) Agricultural Income Tax Officer v. Thankamma
Parameswaran (1986 KLT 416) and contended that the
principles of natural justice is violated. I do not think that the
decisions cited above are applicable to the facts of this case.
17. I have in detail stated the opportunities afforded
by the stock exchange to the plaintiff to fulfil the obligations
under the bye-law and Memorandum of Articles of
Association. The case was considered by the courts below and
this Court on merits. The question as to whether the civil court
has jurisdiction or not does not arise for consideration. This
Court finds that the action taken by the stock exchange is in
good faith and therefore, the decision of the Supreme Court in
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Dhulabhai v. State of Madhya Pradesh and another (AIR
1969 SC 78) was pressed into service. The learned counsel for
the plaintiff/respondent cited the said decision wherein the
principles regarding the exclusion of jurisdiction of the
civil court are laid down. According to the learned counsel,
the civil court has got jurisdiction to decide the question. The
civil court has decided all the issues raised by the plaintiff in
the case on merits. I do not think that there is any relevance to
go into the principles laid down by the Apex Court in that
decision at this stage for the aforesaid reason. Section 29 of the
Securities Contracts (Regulation) Act, 1956 prohibits suit,
prosecution or other legal proceeding whatsoever shall lie in
any Court against the governing body or any member, office-
bearer or servant of any recognised stock exchange or against
any person or persons appointed under sub-section (1) of
Section 11 for anything which is in good faith done or intended
to be done in pursuance of this Act or of any rules or by-laws
made thereunder. The trial court as well as this Court on facts
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held that the proceedings initiated by the Stock Exchange is in
good faith and therefore, according to the learned counsel for
the appellant, the suit itself is not maintainable. This Court
entered the finding regarding good faith in favour of the Stock
Exchange. The court below proceeded to consider all the
issues on merits as well. In fact, this Court as well as the
Lower Appellate Court decided the matter on merits apart from
the question of good faith and therefore the bar of jurisdiction
has no much relevance at this stage.
` 18. The learned counsel for the appellant cited the
decisions reported in Rajendra Roy v. Union of India and
another ((1993) 1 SCC 148) and Vinay bubna v. Stock
Exchange, Mumbai and others (1996) 6 SCC 215). The
Apex Court, after considering all the relevant aspects including
the by-law and Memorandum of Articles of Association of the
Mumbai Stock Exchange, held that membership of the Stock
Exchange is a personal permission from the Exchange to
exercise the rights and privileges attached thereto, subject to
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the rules bye-laws and regulations of the Exchange. The Apex
Court further held that a member is declared as a defaulter, if
he fails to meet his obligation, and the rules further show that
thereafter his right of membership and nomination ceases and
vests in the exchange and belongs to the exchange. The learned
counsel also brought to my notice the decision reported in
Rajendra Roy v. Union of India and another ((1993) 1 SCC
148). In the said decision the Apex Court held that inference
of mala fides must be based on firm foundation of facts
pleaded and established and not merely on insinuations and
vague allegations. According to the learned counsel, the
allegations in the plaint are vague and without firm
foundations. The judgment and decree passed by the Lower
Appellate Court require interference.
In the result, the appeal is allowed. The judgment
and decree passed by the Lower Appellate Court are set aside
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and the judgment and decree passed by the trial court are
restored. No order as to costs.
HARUN-UL-RASHID,
JUDGE.
kcv.