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Non-Realisation of securities during pendency of proceedings can't be termed abuse of discretion: SC

Non-Realisation of securities during pendency of multiple proceedings cannot be outrightly termed as an abuse of discretion: SC



Rusoday Securities Ltd v. National Stock Exchange of India and Ors.

Civil Appeal No. 9571 of 2019 20 November, 2020

Decided on November 20, 2020.


A division bench of the Hon’ble Supreme Court comprising of Justice A.M. Khanwilkar and Justice Dinesh Maheshwari decided the present appeal.


The seminal question involved in this appeal is about the mode of dealing with withheld securities of a defaulting member by NSE/NSCCL, consequent to his expulsion. The cause espoused in this appeal is in the backdrop of the decision of withdrawal of trading facilities of the appellant dated 13.10.1997, followed by withholding of various securities by the Exchange, purportedly belonging to the appellant. Concededly, there was no immediate challenge by the appellant against this decision of withholding of securities. It was only in Appeal No. 84 of 2008 filed before the Tribunal on 05.05.2008, the appellant had made grievance about the non-return of stated withheld securities. On 20.10.2008, representatives of the appellant were permitted by the respondent Exchange to inspect the physical records of securities at the premises of the Exchange. The appellant, after a gap of almost six years, called upon the Exchange vide letter dated 21.02.2014 to return the withheld securities. Similar communications were sent on 04.04.2014 and 03.05.2014 to NSE and SEBI respectively.


The appellant then approached the Securities Appellate Tribunal in Appeal No. 238 of 2014 praying for the release of withheld securities. On 09.09.2014 the Tribunal relegated the parties before NSE for passing a reasoned order on the said question. The Defaulter’s Committee of the Exchange heard the appellant and passed an elaborate order dated 04.12.2014 justifying the withholding of securities. This order was finally challenged by the appellant before the Tribunal on 17.01.2015 in Appeal No. 118 of 2015. The challenge was turned down by the Tribunal vide order dated 04.06.2019 (impugned order).


The questions of law framed and answered by the Court are as follows:

(i) Whether the respondents are obliged to forthwith realise the withheld securities and appropriate the sale proceeds towards the dues payable by the appellant in terms of Rule 20(f) of Chapter IV of NSE Rules read with Chapter XII on “Defaults”?

(ii) As a consequence of withholding of securities of a defaulting member, whether the respondents are under a legal obligation to deal therewith as a prudent person and more so as a “trustee”, and in discharge of fiduciary trust/responsibility are obliged to get the same registered with a view to protect the financial interests of the defaulting member and persons claiming through him?


The Court felt it necessary to examine the maintainability of the original appeal before the Tribunal for relief relating to withheld securities. It stated:

Either way, the legal consequence is that the second round of proceedings for the same relief would not be maintainable. If the relief was prayed for and given up during the course of the appeal without seeking leave for agitating it at a later stage, the principle underlying Order II Rule 2 of the 1908 Code may be attracted. Alternatively, if the prayer was duly pursued before the Tribunal in the previous appeal but not granted, in law, it would deem to be refused. In which case, the principle of constructive res judicata would act as a legal bar in the subsequent proceedings for that very relief. (Para 79)


In response to the appellant’s contention that cause of action accrued only after the Defaulter’s Committee’s order dated 04.12.2014, the Court stated that this plea is ex facie untenable by observing:

The said order of the Defaulter’s Committee did not result in the withholding of securities. It merely supplied reasons and justification for such withholding. The cause of action, if at all any, had arisen to the appellant from the moment their securities were withheld in 1997. Merely because a subsequent order is passed to justify a prior action, it cannot be a case of accrual of fresh cause of action to the aggrieved. (Para 80)


However, owing to the peculiar facts of the case, the Court deemed it appropriate to examine the subject matter on merits. The Court noted that the security deposits came to be deposited on account of membership obligations and the securities were withheld on account of failure to complete settlements.


With respect to the realization of securities under clause (11) of Chapter XII of the NSE Byelaws titled “Default”, the Court held that the Exchange cannot be held liable by stating:

However, in the present case, no fault can be found in the conduct of the Exchange as it had actually realised the deposits at various points of time owing to the inability of the appellant to keep up with the statutory margin requirements. (Para 87)


With respect to withheld securities, the Court stated that actual recovery qua the appellant could only be made from the “receiving securities” as those securities were deliverable to the appellant and were withheld as collateral for the sole reason of non-payment, and not from introductory securities:

Indisputably, the introductory securities have been marked as objectionable by the companies; and securities with outstanding objections are of no use to the Exchange for the purpose of recovery so long as such objections are not removed. The introductory securities fall outside the purview of the vesting provision. Further, the responsibility of the Exchange was limited to providing the appellant an opportunity to remove the objections and continue withholding the securities in the interim. Any enquiry regarding the legality or illegality of objections could have taken place between the introducing member and the respective companies. The same also cannot form a part of the subject matter before us. (Para 90)


The Court observed that the “receiving securities” withheld or recovered by the respondents required legal vesting before they could be realised for the satisfaction of dues and further crystallized the issue: The question is, what procedure ought to be followed for realisation of “receiving securities”. Is it forthwith realisation, or only upon its vesting in law? The Court felt it necessary to harmonise the two sets of provisions, namely, Chapter XII of NSE Byelaws titled “Default” and Chapter 9 of NSCCL Regulations titled “Non-Delivery and Non-Payment”, in order to understand the procedure in a holistic manner and finally stated:

It is thus clear that realisation cannot be done unless vesting is complete and there is no obligation on the Exchange/Corporation to forthwith realise the securities upon withholding. Expulsion or declaration of defaulter, as the case may be, is a precondition for realisation, which, in this case, took place only in 2006. Even on applying rule of prudence, such forthwith realisation would not be appropriate as such action would deprive the defaulting member from an opportunity to correct its mistake by settling liabilities within due course of time without giving up membership. (Para 98)


In response to the question raised by the appellant regarding the applicability of Rule 20(f) in this case, the Court held that the respondents were well within their powers to realise the withheld securities in accordance with clause (11) soon after expulsion in 2006 by stating:

For, the Rule was not in existence when trading facility of the appellant was withdrawn. This plea, in our opinion, is misconceived. In that, the Rule clearly signifies that it applies to expelled members and the moment a member is expelled from membership, this rule will automatically become operative. Literally understood, the relevant point of time for checking the applicability of this rule is the “date of expulsion”. In the instant case, expulsion of the appellant took place in 2006, whereas the said rule was inserted beforehand in 2001. (Para 99)


With respect to the issue regarding the manner of dealing with withheld securities and requirement of registration, the Court stated:

The Corporation is empowered with a set of methods to close out the outstanding deals against the appellant. Upon vesting, it could have sold out the withheld securities through an auction or by placing an order of sale in Exchange or in any other permissible manner. (Para 102)


In the present case, it is clear that the manner of dealing with the withheld securities is not circumscribed under strict parameters. The Exchange is bestowed with discretion to choose amongst the available options and the appellant holds no control over such choice. To this limited extent, the role of the Exchange as regards the withheld assets is of a fiduciary character, obligating it to choose the just course of action out of the available options. (Para 106)


More importantly, an exercise of such discretion in commercial relationships is guided by the nature of things, as they exist or vary from time to time. Illustratively, in the present case, it was out of this sound exercise of discretion that the Exchange did actually get some of the securities registered in its name. Equitable common law principles cannot be used to create mandatory legal obligations. (Para 109)


It is thus clear from the state of affairs discussed above that the respondents were cognizant of their duty towards the withheld securities pending determination of final claim. However, no action of registration could have been taken without complying with other conditions. The role of the defaulting member was of an enabler and unless the Exchange was placed in a position to register, it could not have exercised its discretion to register. It is important to note that permitting the Exchange to register forthwith as a matter of obligation would also be counterproductive to the interests of the defaulting member. For, such a blanket action would have the effect of converting a limited right of lien into that of absolute ownership over the withheld assets without giving the defaulter sufficient time to get his assets released much less before a declaration of being a defaulter or an order of expulsion. Such can never be the purpose of withholding. (Para 113)


In response to the appellant’s contention that he has suffered loss of corporate benefits due to non-registration by the respondent, the Court stated:

Understood thus, the liability for the loss incurred by the appellant, if at all any, on account of corporate benefits (dividends, bonus etc.) accrued on withheld shares would not fall upon the Exchange, in the fact situation of the present case. Even otherwise, the respondents’ decision of not realizing the securities or taking any adverse action during the pendency of multiple proceedings cannot be outrightly termed as an abuse of discretion. (Para 115 & 116)


Further, the Court held:

The Tribunal misinformed itself by observing that this issue had already stood answered in the previous judgment of the Tribunal in Appeal No.84 of 2008. The Tribunal simply entered into an examination of the provisions relating to withholding whereas the real question was regarding the manner of dealing with the withheld securities. (Para 117)


For the final culmination of this dispute, the Court delved into the determination and recovery of liabilities, and stated:

The quantum of amount due from the appellant to the respondents, being a question of fact, has been decided by the Tribunal and we do not wish to interfere therewith. For, no serious error has been pointed out in any factual determination made by the Tribunal. Further, the scope of Section 22F is limited to entertaining an appeal on questions of law, and we have proceeded accordingly. (Para 121)


On a concluding note, the Court disposed both appeals by in the below-stated terms:

We hereby issue the following directions for full and final settlement of all claims between the parties:

(i) NSE to evaluate and get the remaining transferrable securities, if any, transferred in its favour and recover the remaining amount using the same evaluation criteria adopted in respect of other withheld securities of the appellant within 6 weeks.

(ii) After realisation, the surplus amount be returned forthwith to the appellant along with interest at the rate of 12% P.A. from the date of determination of claim/date of vesting until the date of payment.92

(iii) Respondents to return the unrealised securities including those with outstanding objections to the appellant within 6 weeks from today.

(iv) In case recovery is not possible from the remaining securities, for any reason whatsoever, the respondents may communicate the same to the appellant forthwith and the appellant shall then pay the amount so demanded (including interest, if any), to the respondents within 6 weeks from the date of receipt of such communication.

(v) NSE is directed to oversee the evaluation and realisation of remaining securities, and settlement of claims. (Para 122)



Jhanavi M

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