Karachi Stock Exchange (Appellant)
1. Kurban Ali M. Merchant. 2. Purviz Merwanji Dalal (Respondent)
A. R. Cornelius CJ
M. Yaqub Ali J
Abdus Sattar J
May 27, 1965.
Lien on the security deposit by a member of stock exchange
As per rule 3(iv) of the Forward Contract Rules all deposits by a member of Karachi Stock Exchange shall be subject to a first lien for payments to be made in settlement of forward transactions. Since the defendant had not done any forward transaction since January 1961 her security deposit would not be subject to any such lien in 1962 and hence the order of the High Court that the deposit be paid into the court in pursuance of an order of attachment was lawful……………(3 and 4)
Sharifuddin Pirzada, Senior Advocate (Aziz A. Munshi, Advocate, with him) instructed by S. M. Hanif, Attorney—For the Appellant.
Naimuddin, Advocate, instructed by A. Aziz, M. Dastagir, Attorneys— For Respondent No. 1.
Ex-Parte—For Respondent No. 2.
Civil Appeal No. K-16 of 1964.
(On appeal from the judgment and order of the High Court, West Pakistan, Karachi Bench, Karachi dated the 28th November, 1962 in Suit No. 4 of 1961.)
Cornelius, CJ.—This appeal arises out of a suit brought by a share broker of Karachi, namely, Kurban Ali, against Mrs. Purviz Merwanji Dalai, described as proprietor of a firm of stock brokers, for the recovery of Rs. 45,500, due in relation to certain transaction of sale and delivery of bonus vouchers. At the same time as the suit was filed, an application was made for an order to restrain the defendant from realizing a sum of Rs. 15,000 held in deposit on her account by the Karachi Stock Exchange Limited. The deposit was described as a forward business deposit. The application was resisted, but on the 7th February 1961, a learned Single Judge of the High Court made an order restraining the defendant:—
“from- realising Rs. 15,000 from the Karachi Stock Exchange Ltd., or a lesser amount that may be with the Karachi Stock Exchange Ltd., claimable by her on the date of this order”.
(The rest of the order is not relevant for the purposes of this appeal).
A year later, on the 2nd February 1962, the plaintiff applied for an order requiring the Karachi Stock Exchange Ltd., to deposit in the Court.
“the amount of Rs. 15,000 or such lesser amount as may be in its possession’s,
This application was resisted by the Karachi Stock Exchange Ltd., but was actually supported by the defendant on the ground that nothing was due from her to any one in respect of any forward transaction. The Karachi Stock Exchange Ltd., however claimed firstly, that the deposit was held “under certain Rules for the payment of the claims of other members” of the Karachi Stock Exchange and therefore did not constitute a debt due to the defendant secondly, that two persons had put in claims’ against defendant to the Stock Exchange which were under investigation, and thirdly, that a suit for accounts had been filed against the defendant by a Mr. Davar, who was a member of the Stock Exchange, and the practice’ of the Stock Exchange was not to refund a member’s security deposit, if any other member had an outstanding claim against the first-mentioned member.
2. It was proved in evidence that the defendant had notified the Karachi Stock Exchange that she had suspended her business as from the 30th January 1961. Although on behalf of the Stock Exchange it was stated at the bar that she had thereafter resumed business, no proof of any kind was led in support. On the other hand, it is stated before us that Mrs. Purviz Dalai left Pakistan several years ago so that it is a reasonable conclusion that as from the 30th January 1961, she had done no business on the Karachi Stock Exchange.
3. The learned Single Judge of the High Court made a lengthy examination of certain legal questions arising in respect of this case, not only for the decision of the case but in order, as it seems, to explain certain earlier orders of the same kind, which he had made. This appears from the following passage of the judgment:—
“Occasions had formerly, arisen at which I had ordered the attachment and payment of certain sums which were similarly deposited by other members of this garnishee. Perhaps in the present instance, the garnishee’ object is to get the legality of such orders fully tested”.
The judgment delivered contains an exhaustive examination of no fewer than 10 precedent case, together with a general survey of the law which has resulted in the conclusion by the learned Judge that a deposit, as required from every member of the Stock Exchange on forward contract business vide rule 3 of the relevant Rules, being subject by such Rule “to a first lien for payments to be made in Forward Settlement” is in law to be treated as subject to “a possessory lien which partakes of the nature of a floating security”. Mr. Sharifuddin Pirzada for the Karachi Stock Exchange urged that this pronouncement of law should be examined for correctness by this Court as it tends, in his opinion, to operate to the prejudice of the Karachi Stock Exchange in its general dealing with its members. We consider however, that the appropriate course in this case is to confine the examination to the question whether, on the simple facts as they appear in the case, in relation to Mrs. Purviz Dalai, the sum of Rs. 15,000 had in substance become a debt due to her from the Stock Exchange, or whether there were any circumstances arising out of her membership, which would enable the Stock Exchange to retain the monies for the discharge of its obligations to other members or to members of the public. The only rules which are relevant in this connection are rules 3, 16 and 17 of the Rules governing forward contract, which have been reproduced in the judgment of the learned Single Judge. Rule 3 requires that every member desiring to do Forward Contract Business shall notify the Secretary in writing of such desire and send him a cheque for Rs. 2,500 ”as basic deposit”. In this case Mrs. Purviz Dalai had intimated her desire to do forward contract business and had deposited a cheque for Rs. 15,000 to be held in deposit. Rule 3 further lays down that the basic deposit will only cover business to the extent of Rs. 2,500 shares, and that for business on a larger scale extra sums would be required to be deposited. By sub-rule (iv) it is laid down that—
“all deposits shall be subject to a first for payments to be made in Forward Settlement”.
By rule 16, a right is created in a member to the return of the sum in deposit in excess of the basic deposit of Rs. 2,500, and such supplement as would be required for the member’s outstanding business, within 24 hours, of the demand being made. Rule 17 relates to withdrawal of the basic deposit, and this can only be claimed on production of proof that no business or dues from the member are outstanding and that the member has stopped all Forward Contract Business.
4. The facts clearly show that Mrs. Purviz Dalai ceased operations as a broker early in January 1961. The application by the plaintiff in this case for the deposit to be paid into the Court was made on the 22nd February 1962, that is to say, after a period of a year. The Forward Contract rules contain provisions for settlement of forward contracts, which show clearly that these are to be settled either at the end of each week or at the latest at the end of each month. From this, it is safe to conclude that any forward contracts which had been entered into by Mrs. Purviz Dalai fell to be settled and should have been settled long before the application of the 2nd February 1962 was made. Mr. Sharifuddin Pirzada was not, able to show that any such contracts by Mrs. Purviz Dalai remained to be settled on the 2nd February 1962. Consequently, under the clear provisions of the Forward Business Rule, she had become entitled to withdraw the whole of her deposit of Rs. 15,000 from the Karachi Stock Exchange still to remain in control of the deposit by reference to rules 44 to 49 of the General Rules and Regulations, These provide that a member of the Stock Exchange who is unable to fulfil his engagements shall be declared a defaulter, and shall thereupon cease to be a member. The case is thereupon to be referred to the Defaulters’ Committee, which takes charge of all the books of account, etc., of the defaulting member, and proceeds to ascertain the state of his affairs. The Defaulters’ Committee is empowered to take over the defaulters’ assets by rule 49, reading as below:—
“all monies, shares, securities and other assets due, payable or deliverable, to the defaulter must be paid or delivered to the Defaulters’ Committee within thirty days of the declaration of default”.
In the present case, there is nothing to show that a declaration of default was made, or the matter was referred to the Defaulters’ Committee, and consequently, it is difficult to accept the contention that the deposit in this case should, by reason of rules 44 to 49 of the General Rules have been left in the control of the Karachi Stock Exchange. A sufficient period of time, that is over four years, has elapsed since the occasion arose for investigating the state of Mrs. Purviz Dalal’s affairs as a member of the Karachi Stock Exchange. It is not open to the Exchange in the circumstances to advance any general grounds of responsibility to its other members and members of the public for satisfying the dues of Mrs. Purviz Dalai, for under its own rules, by the date the application for transfer of the deposit to the High Court was made, the exact state of affairs should have been ascertained and appropriate steps, should have been taken under the Rules. The fact that no such action was taken is sufficient in our opinion for concluding that the deposit had assumed the character of a debt due from the Exchange to Mrs. Purviz Dalai. It is clear that the Exchange cannot be allowed to hold on to the security deposit, in the absence of any power for the purpose derivable from the Rules, and exercisable in the existing circumstances. Accordingly, we are of the view that the order of the learned Single Judge directing that the deposit should be paid into the High Court was a proper order to make in the case, and we hereby dismiss this appeal with costs.
5. At the request of Mr. Sharifuddin Pirzada, we place on record that we do not express any view as to the correctness of the pronouncement by the learned Single Judge in respect of the nature of the lien upon deposits such as that in the present case, created by rule 3(iv) of Forward Contracts Rules of the Exchange, viz. that it amounts to a ‘floating security’.
Source: 25 DLR (SC) (1973) 82