Holding

Membership of the Bombay Stock Exchange is a personal permission that lapses and vests in the Exchange upon default, and Rules 16 and 43 governing the allocation of sale proceeds are valid, non‑arbitrary and not inconsistent with insolvency law.

Summary

Vinay Bubna sued the Bombay Stock Exchange (BSE) alleging that the Exchange's Rules 16 and 43, which dictate how the proceeds from the sale of a defaulting member's membership are allocated, were arbitrary, violated constitutional guarantees and were inconsistent with insolvency law. The appellant claimed that the membership card of the defaulting broker, Yogesh Mehta, was an asset of the broker and that the proceeds of its sale should first be used to satisfy his creditors. The Supreme Court examined the nature of BSE membership under Rules 5, 53 and 54 and held that membership is a personal permission that lapses and vests in the Exchange once a member is declared a defaulter. Consequently, the membership card is not the member's property and cannot be sold for the benefit of his creditors. The Court further found that Rule 16's priority scheme – first to the Exchange, then to the former member’s contractual liabilities, and finally to any surplus – is reasonable, serves a legitimate purpose and does not contravene insolvency law or constitutional provisions. Accordingly, the Court dismissed the appeal, upholding the validity of Rules 16 and 43.

Issues considered

Whether the membership of the Bombay Stock Exchange constitutes a property right of the member that can be sold and the proceeds distributed among his creditors.
Whether Rules 16 and 43 of the BSE Rules are arbitrary, illegal or violative of Articles 14, 19(1) and 300A of the Constitution.
Whether the order of priority prescribed in Rule 16 is inconsistent with the law of insolvency.
Whether, upon being declared a defaulter, a member's right of membership vests in the Exchange and ceases to be his asset.

Legislation cited

Insolvency Act

Subjects

stock exchange membershipdefaulterrule 16rule 43securities contracts regulation actconstitutional lawpriority of claimsinsolvencypersonal permissionarbitration

Judgment

·-
A VINAYBUBNA
v.
STOCK EXCHANGE, MUMBAI AND ORS ..
,.
JULY 28, 1999

B [B.N. KIRPAL ANDS. RAJENDRA BABU, JJ.]

Bombay stock Exchange Rules, Bye-laws and Regulations, 1957:

Rules 5,53 and 54-Stock Exchange-Membership of-Rights and
C privileges-Held: Membership is a personal permission from the Exchange to
exercise the rights and privileges attached thereto-Once a member is
declared a defaulter, right of membership vests in the Exchange under Rules
53 and 54-Membership card of a share broker is not his personal property,
which, on default being committed by him, cannot be sold and proceeds
D distributed amongst his creditors-High Court rightly concluded that once
a defaulting member ceases to be a member of the Exchange, no interest in
his membership card remains and it cannot be regarded as his asset-
Securities Contracts (Regulations) Act, 1957.

Rule 16-0rder of priority-Allocation-Validity-Held: R.16 is not
E illegal, arbitrary, void or unjust-On the contrary R.16 mitigates the hardship
which may be caused by defaulting member-Constitution of India, 1950,
Arts,14,19(1) and 300-A.

Rule 16-Nature and scope of-Held, when the defaulting member is
expelled from the Exchange no interest in his membership card remains in
F him and none can pass to his assignee-Hence, R. 16 not contrary to
insolvency law. -
The appellant had dealings in sale and purchase of shal'~S with
respondent No. 3-a share broker-who was a member of the Stock Exchange
until he was declared a defaulter by the Stock Exchange. The appellant
G claimed that respondent No.3 had not paid a sum of more than Rs.21 lakhs
due to him.

The appellant filed a writ petition before the High Court challenging
Rules 16 and 43 of the Bombay Stock Exchange Rules, Bye-laws and
Regulations, 1957 contending that payment to creditors like the appellant
H 1222

. '
VINA Y BUBNA v. STOCK EXCHANGE 1223
should first be made from the sale proceeds of the membership to replace A
respondent No. 3, the defaulter; and that the proceeds should not be distributed
in the manner indicated by Rule 16. The High Court dismissed the petition.
Hence this appeal.

On behalf of th; appellant it was contended that membership of the
Stock Exchange was an asset which belonged to respondent No. 3; that a B
defaulting member has to be treated like an insolvent because he was unable
to pay his debt; that distribution of the proceeds from the sale of the
membership according to the order of priority indicated by Rule 16 was
unfair, unjust, arbitrary and violative of Articles 14, 19(1) and 300-A of the
Constitution; and that Rules 16 and .43 were inconsistent with the law of C
insolvency.

Dismissing the appeal, this Court

HELD: 1. Rules 5, 53 and 54 of the Bombay Stock Exchange Rules,
Bye-laws and Regulations, 1957 provide that the membership of the Exchange D
constitutes a personal permission from the Exchange to exercise the rights
and privileges attached thereto. Once a member is declared a defaulter his
right of membership vests in the Exchange under Rules 53 and 54. The
High Court, therefore, was right in coming .to the conclusion that on a
default being committed, the share broker ceases to become a member of the
Exchange and all his rights, privileges etc. as a member come to an end. If E
. he does not clear the dues within six months the Governing Body then has
a right of nomination in respect of such membership. It will be incorrect to
state that on the stock broker ceasing to be a member, he still retains any
rights or interest in the permission which has been granted to him by the
Exchange to carry on business as a member. The membership card of a share F
broker is not his personal property which, on default being committed by him
and his ceasing to be a member, can be sold and the proceeds distributed
amongst his creditor. Rules 53 and 54 leave no manner of doubt that member's
... right of membership vests in the Exchange after he is declared defaulter•
(1227-E; 1228-H}
G
Official Assignee ofBombay v. KRP Shroff, AIR (1932) PC 186, approved.

2. There is nothing unfair or unjust in Rule 16 providing that the first
priority from out of the sale proceeds would be towards the amounts due to
the Exchange itself. The second priority is given to the debts, liabilities,
obligations and claims arising out of the contracts made by the erstwhile H
1224 SUPREME COURT REPORTS [1999] 3 S.C.R.

A member. Even though at the time when the nomination is made by the Stock
Exchange of the vacancy which has been created the es:stwhile member has
no interest, in law, therein, nevertheless Rule 16\makes a provision by '
providing for payment being made for clearing the debts etc. of the erstwhile
members. But for Rule 16, in other words, creditors like the appellants
B would not have a ray of hope of receiving any money rea.liscd by the Stock
Exchange on the vacancy being created by reason of default of the stock
broker. In view of this it is not possible to accept that the said Rule is in
any way bad in law. [1230-B-C]

Stock Exchange, Ahmedabad v. CIT, (1998) 18 SCL 135, held
C inapplicable

3. When the defaulting member is expelled from the Exchange no
interest in his membership card remains in him and none can pass to his
assignee. Once the membership card ceases to be an asset of the share
broker the question of Rule 16 being contrary to the insolvency law does not
D arise. [1229-G)

4. The High Court rightly came to the conclusion that once a defaulting
member cases 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. [1230-G)
E
CIVIL APPELLATE JURISDICTION: Civil Appeal No. 4120 of
1999:

From the Judgment and Order dated 23.12.97 of the Bombay High Court
'in W.P. No. 1177of1997.
-
F V. B. Joshi and Umesh Bhagwat for the Appellant.

Ashok H. Desai, P. Venugo;ml, N,ihar A.Modi, P.S. Sudheer, K.J.John,
Bhargava V. Desai and Siddhartha Choudhary for the Respondents.

The Judgment of the court was delivered by
G
KIRP AL, J. Special leave granted.

The appellant in this appeal had dealings in sale and purchase of shares ~.
w~th one Yogesh Mehta - respondent No.3 [hereinafter referred to as 'the
share broker'] who was a member of Bombay Stock Exchange until he was
H declared a defaulter by the said Exchange.
' VINAY BUBNA v. STOCK EXCHANGE [B.N. KIRPAL, J.] 1225
According to the appellant as on I 0th May, 1995 a sum of Rs. A
21,81,635.50 P. was due and payable by the share broker but the payment was
no_t made. Thereupon the appellant filed an arbitration petition against the
said share broker before the Bombay High Court. In the said proceedings an
application was filed for appointing a court receiver. The court did not grant
to the appellant any relief in respect of the membership card of the share B
broker whereupon an appeal was filed al!d it was contended that a court
receiver should be appointed in respect of the said membership card. This
appeal was disposed of after a statement on behalf of the Stock Exchange was
recorded to the effect that it "shall not apply any amount received by it as
consideration on nomination of the membership to any person falling in the
same category for the purpose of priority as the appellant under Rule 16 of C
the Stock Exchange Rules till the award of the arbitration was received". It
may here be stated that in view of the default having been committed by the
share broker he was, on l 0th December 1996, declared defaulter by the Stock
Exchange and thereafter he ceased to be it's member.

The appellant wanted Rules 16 and 43 of the Stock Exchange to be D
amended. Letters were written by him to SEBI and other authorities including
the Stock Exchange. When efforts in this behalf failed, a writ petition was fi!ed
in the Bombay High Court by the appellant with a prayer that Rules 16 and
43 of the Stock Exchange Rules, Bye-laws and Regulations 1957 should be
declared as illegal, bad in law and ultra v:res the Constitution of India. It was E

..- also prayed that the Stock Exchange be directed to amend/alter Rules 16 and
43 of the Stock Exchange. The main reason for impugning these rules was
that, according to the appellant' the membership of the Stock Exchange was
an asset of the share broker and on its sale from the proceeds thereof
payment should first be made to creditors like the appellant of the share
broker and the proceeds should not be distributed iu the manner indicated F
by the said rules.

The Bombay High Court dismissed the writ petition, inter alia, holding
that it regarded the said rules as being fair, just and reasonable. It was further
held that on default being committed the share broker ceased to be a member
of the stock exchange and there was no conflict between the provisions of G
the said rules and the Insolvency Act.

On behalf of the appellant it was contended that the membership of the
Stock Exchange was an asset which belonged to respondent No.3 and on the
sale of the same to distribute the proceeds in the manner indicated by Rule
16 was unfair, unjust and arbitrary and was violative of Articles 14, 19 (1) and H
1226 SUPREME COURT REPORTS [1999] 3 S.C.R.

A 300A of the Constitution of India. It was submitted that a member who is
declared as. defaulter has to be treated in the similar position to that of an
insolvent because he is unable to pay his debts and the Rules 16 and 43
framed by the Bombay Stock Exchange are inconsistent with the laws of
insolvency as applicable in India which provide for manner of distribution of
B . the asset of the insolvent which is at varjance with the said rules.
On behalf of the Stock Exchange it was submitted that after the
respondent No,3 had been declared a defaulter, he ceased to be a member of
the Stock Exchange whereupon his rights of membership vest in the Exchange .
free of all rights, claims and interest and the Exchange was at liberty to invite
C applications from other persons and to admit any one who offers to pay the
highest amount. The proceeds so received do not belong to the ex-member
and the order of priority contained in Rule 16 was just and fair and is not
illegal, wrong or arbitrary.

The respondent - Stock Exchange is an incorporated association of
D persons and is recognised under the Securities Contracts (Regulation) Act,
1957. According to its constitution, rules and bye-laws the Exchange, from
time to time, admits members, popularly referred to as stock or share brokers.
It is they who constitute the Exchange as per Rule 2 of the said rules. The
Exchange is established, as per Rule 4, with the object, inter alia, to support
and protect, in the public interest, the character and status of brokers and
E dealers and to further their interests and to maintain high standards of
commercial honour and integrity. Rule 5 provides that the membership of the
Exchange shall constitute a personal permission from the Exchange to exercise
the rights and privileges attached thereto but this is subject to the Rules, Bye- -
laws and Regulations of the Exchange. Rule 6 provides, inter alia, that the
F right of membership is inalienable. As per Rule 7, subject to the provisions
of the Rules, a member shall have a right of nomin_ation which shall be
personal and non-transferable. Rule 9 stipulates that "on the death or default
of a member his right of nomination shall cease and vest in the Exchange."
Rule 11 deals with nomination by members. With regard to nomination in case
of defaulter sub-rule (c) provides as under:-
G
Nomination in case of Defaulter

"The forfeited right of membership of a defaulter shall be restored to
him if he be re-admitted as a member within six months from the date
of default but if an application by a defaulter for re-admission be
H rejected by the Governing Board or if no such application be made
J

VINAY BUBNA v. STOCK EXCHANGE [B.N. KIRPAL, J.] 1227
within six months of the declaration of default the Governing Board A.
may at any time exercise the. right of nomination in respect of such
membership."

Rules 53 and 54 deal with the effect of default and read as under:

DEFAULT B
"53. A member who is declared a defaulter shall at once cease to be
a member of the Exchange and as such cease to enjoy any of the
rights and privileges of membership but the rights of his creditor
members against him shall remain unimpaired.
c
LAPSE OF MEMBERSHIP RIGHT
54. A member's right of membership shall lapse to and vest in the
Exchange immediately he is declared a defaulter."

A bare perusal of the aforesaid and other rules clearly shows that the D
said rules provide that the membership of the Exchange constitutes a personal
permission from the Exchange to exercise the rights and privileges attached
thereto subject to the Rule, Bye-laws and Regulations of the Exchange.
According to Mr. Ashok H. Desai, learned senior counsel for the respondents,
every contract notice issued to a constituent contains a specific provision
that "the contract is made subject to the Rule, Bye-laws and Regulations and E

- usages of the Stock Exchange, Bombay''.. The members of the Stock Exchange,
namely, the stock brokers are permitted to buy and sell the shares for their
clients like the appellant. To secure due performance of his obligations the
Exchange takes security from each members upon which it has a lien as
provided by Rule 43. A member is declared a defaulter if he fails to meet his F
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 vacancy thus created by the termination of the membership is filled by

-- the admission of another person, who generally is a person who offers to pay
the highest amount. The consideration which is received by the Ex~hange on
making a fresh nomination after the termination of the membership is then G
allocated according to Rule 16 which reads as follows:

"16. ALLOCATION IN ORDER OF PRIORITY - When as provided in
these Rules the Governing Board has exercised the right of nomination
in respect of a membership vesting in the Exchange the consideration
received therefore shall be applied to the following purposes and in H
1228 SUPREME COURT REPORTS (1999] 3 S.C.R.

A the following order of priority namely -

Dues of Exchange and Clearing House
(i) first-the payment of such subscriptions, debts, fines, fees, charges
and other monies as shall have been determined by the
B Governing Board to be due to the Exchange or to the Clearing
House by the former member whose right of membership vests
in the Exchange;

Liabilities relating to Contracts
C (ii) second-the payment of such debts, liabilities, obligations and
claims arising out of any contracts made by such former member
subject to the Rules, Bye-laws and Regulations of the Exchange
as shall have been admitted by the Governing Board: provided
that if the amount available be insufficient to pay and satisfy all
such debts, liabilities, obligations and claims in full, they shall
D be paid and satisfied pro rata; and

Surplus
(iii) third-the payment of the surplus if any to the funds of the

E
Exchange: provided that the Exchange in general meeting may at
its absolute discretion direct that such surplus be disposed of
-
or applied in such other manner as it may deem fit.

The order of priority laid down by the aforesaid Rule· 16 ensurec; that
dues to the Exchange or to the Clearing House have first to be met before
the balance amount can be utilised for payment of debts, liabilities, obligations
F etc. arising out of any contract made by the former member. If the amount
available is insufficient to pay all such debts, liabilities etc. then the payment
is to be made pro rata. If, however, any surplus still remains the same is to
be disposed of or applied in such manner as the Exchange in general meeting
may decide.
G
The High Court, in our opinion, was, therefore, right in coming to the
conclusion that on a default being committed the share broker ceases to
become a member of the Exchange and all his rights, pr:vileges etc. as a·
member come to an end. If he does not clear the dues within six months the
Governing Body then has a right of nomination in respect of such membership.
H It will be incorrect to state that on the stock broker ceasing to be a member,
VINAY BUBNA v. STOCK EXCHANGE [B.N. KIRPAL, J.] 1229
he still retains any right or interest in the permission which has been grantt;d A
to him by the Exchange to carry on business as a member. The membership
card of a share broker is not his personal property which, on default being
committed by him and his ceasing to be a member, can be sold and the
proceeds distributed amongst his creditors. Rules 53 and 54 leave no manner
of doubt that the member's right of membership vests in the Exchange after
he is declared defaulter. This view, namely, that the defaulting member can B
claim no interest in the membership card and can pass none is in consonance
with the decision of the Privy Council in Official Assignee ofBombay v. K.R.P.
Shroff and Ors., AIR (1932) Privy Council 186 In that case a member of the
Bombay Stock Exchange had lost his membership for being a defaulter. The
main question which arose for determination there was whether a card or right C
of membership of a share broker or the proceeds of sale thereof, when sold,
w.ould pass to the assignee in insolvency of the share broker's estate after
he had lost his membership for being a defaulter. After referring to the Rules
of the Stock Exchange in this connection it was observed at page 190 as
follows:
D
"But although the rules are badly drawn and not in uniform phraseology
their result in the case of a member who has lost his membership for
being a defaulter clearly enough is that he loses all interest both in
• the property of the Association and in his card. In such a case no
interest is reserved in the defaulter's card except to members of the E
Association who have suffered by his lapse - in the rules sometimes
called his creditors - or to the Association itself. This seems to their
Lordships to be the result of R. 18, 56, 57 and 62. The defaulting
member himself has no interest in the result of the sale provided for
under these rules nor can he require a sale to be made. The rules are
there for the benefit of his "exchange creditors" and are doubtless F
enforceable at their instance."

In that case also a contention was sought to be raised that if the
• proceeds of the sale of the insolvent's card are not given to the official
assignee, the same would be regarded as being contrary to the law of
insolvency. It was rightly observed that when the defaulting member is expelled G
from the Exchange no interest in his membership card remains in himself and
none can pass to his assignee. Once the membership card ceases to be an
asset of the share broker the question of Rule 16 being contrary to the
insolvency law does not arise.

As we see it not only Rule 16 is illegal, arbitrary or unjust but the same H
1230 SUPREME COURT REPORTS [1999] 3 S.C.R.

A is, on the other hand, framed in such a manner that the hardship which may
be caused by the default committed by· the erstwhile member is mitigated.
There is nothing unfair or unjust in Rule 16 providing that the first priority
from out of the sale proceeds would be towards the amounts due to the
Exchange itself. The second priority is given to ~he debts, liabilities, obligations
B and claims arising out of the contracts made by the erstwhile member. Even
though at the time when the nomination is made by the Stock Exchange of
the vacancy which has been created the erstwhile member harl no interest,
in law, therein, nevertheless Rule 16 makes a provision by providing for
·payments being made for clearing the debts etc. of the erstwhile members. But
for Rule 16, in other words, creditors like the appellant would not have a ray
C of hope of receiving any rµoney realised by the Stock Exchange on the
vacancy being created by reason of default of the stock broker. In view of
this, it is not possible to accept that the said Rule is in any way bad in law.

Learned counsel for the appellant placed reliance on the decision of
Gujarat Htgb Court in Stock Exchange, Ahmedabad v. Assistant Commissioner
D of/ncome~tax, [1998] 18 SCL 135. In that case after the death of a stock broker
he was declared a defaulter and the income tax department sought to attach
the membership card. It was contended by the Stock Exchange that or. the
stock~broker being declared a defaulter no right existed which could be
attached. Reliance was placed on the Privy Council's decision in Shroffs
E case. The High Court rightly distinguished Shroff s case by observing that
after the death of a stock broker he should not be declared as a defaulter. It
appears to us, without going into the correctness of the said decision of the
Gujarat High Court, that the same is of no relevancy in the present case
because the validity of the action in declaring a member as defaulter has not
been challenged in the present case whereas in the Gujarat case the Court.had
F held that after the death of a stock broker he could not have been declared
as a defaulter. This being so, the consequences which follow on a member
being declared as a defaulter did not really come up for consideration in the
Gujarat case. ·

In our opinion, the High Court rightly came to the conclusion that once
G 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. For the aforesaid
reason the appeal is dismissed but with no order as to costs.

v.s.s. Appeal dismissed.

•