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Petitioner: Mian NISAR ELAHI VS Respondent: LAHORE STOCK EXCHANGE(G) LIMITED and 4 other
Court Name: Lahore High Court Judge(s): Jawwad S. Khawaja Title: Mian NISAR ELAHI vs LAHORE STOCK EXCHANGE(G) LIMITED and 4 other Case No.: Civil Original Suit No.1 of 2004 Date of Judgment:2006-12-18 Reported As: 2007 CLD 376 Result: Suit decreed
JUDGMENT
JUDGMENT JAWWAD S. KHAWAJA, J.---This is a suit filed by the plaintiff Mian Nisar Elahi under section 8(5) and section 11 of the Central Depositories Act, 1997 (the "CD Act"). The plaintiff, who is an investor in securities, has prayed for a decree against defendant No.1 which is the Lahore Stock Exchange (Guarantee) Limited ("LSE") and defendant No.3 viz. The Central Depository Company of Pakistan Limited ("CDC") jointly and severally for a minimum sum of Rs.318,588,624 together with interest on the said amount from the date of institution of the suit till the date of decree and thereafter from the date of decree till the satisfaction of the same. Costs of the suit and such other relief which the Court deems fit are also prayed for. 2. Before taking up the pleas of the parties in contention, it will be useful to give brief particulars of the defendants arrayed in the suit. The LSE is a company limited by guarantee incorporated under the Companies Ordinance, 1984 and is registered as a stock exchange under section 3 of the Securities and Exchange Ordinance, 1969 (the "SE Ordinance"). Defendant No.2 is the Securities and Exchange Commission of Pakistan (the "SECP"). It was established by the Federal Government under the Securities and Exchange Commission of Pakistan Act, 1997 (the "SECP Act") inter alia for licensing and regulating stock exchanges and entities connected with the capital markets in Pakistan including central depositories. The CDC is a public limited company licensed as a central depository under the Central Depository Companies (Establishment and Regulation) Rules, 1996 framed under the Central Depositories Act, 1997, ("CDC Act"). Its primary function is to make provision for the establishment and operation of a central depository system for the accoun=uig and transfer of securities through electronic book-entries. The aspects of its functioning, which are
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relevant for this case, are discussed later. Muhammad Tanveer Malik (defendant No 4) is a Member of the LSE. His services as such Member were utilized by the plaintiff for the purpose of his trading; and investment activities undertaken at the LSE. Defendant No.5, namely, Iftikhar Shall is an investor and was also a member of the LSE. He has been impleaded for the reason, inter alia. That LSE and SECP have treated him and the plaintiff as part of one. Group which, according to LSE and SECP, had indulged in illegal activities including manipulation of prices of securities listed on the LSE. As a consequence, LSE has sold the securities of the plaintiff to adjust the liabilities owed to it by Iftikhar Shafi . 3. Although the pleadings of the parties are unnecessarily prolix, their respective positions, as set out in their pleadings, can now very briefly be outlined. The plaintiff is an industrialist. Since 1998 he is also an investor in shares listed on the Stock Exchanges in Lahore and Karachi. As noted above, while transacting his business of investment and trading in shares on the LSE, he mainly utilized the services of Tanveer Malik. In his investment portfolio, the plaintiff held the shares detailed in paragraphs 16 and 18 of the plaint. Paragraph 16 lists shares in twenty-one companies listed on the LSE. These shares were pledged in favour of the LSE to secure the liabilities of Tanvir Malik in his capacity as a member of the LSE. The case of the plaintiff is that the pledged shares were unlawfully sold by the LSE in complicity with CDC, giving rise to the monetary claim set out in the plaint. 4. The LSE has resisted the suit, inter alia, on the ground that the sale of shares was in accordance with law and was also justified by the circumstances which prevailed between end May, 2000, when the stock markets in Pakistan crashed, and April, 2001, when the pledged shares were sold by LSE. It has also been averred by LSE that sale of the pledged shares was sanctioned by the order dated 9-4-2001 passed by a Commissioner of the SECP". In addition, LSE has alleged that the plaintiff had agreed to the sale. The CDC, in its defence, has pleaded that it was obliged by law and its own regulations to honour all instructions of LSE as pledgee and, therefore, it had no involvement other than recording the call on the pledged shares and to transfer the same from the account of the plaintiff in accordance with LSE's call. The nature and functions of a central depository under the CD Act have also been pleaded in defence. LSE and CDC have, on legal grounds, raised a number of preliminary objections, inter alia, against the maintainability of the suit and the jurisdiction of the Court. This skeletal outline of the respective pleadings of the parties has been given at the outset to provide a broad context only. It will be flashed out below during the course of discussion on the issues in contention. 5. Learned counsel for the parties were asked to propose agreed issues for trial. On their joint suggestion, the following issues were framed on 4-5-2005:- (1). Whether the jurisdiction under section 11 of the CDC Act, 1997 is a summary jurisdiction? If so, whether the present case is maintainable? OPD-1. (2) Whether the present proceedings for damages filed by the plaintiff involve complicated questions of fact and law? If so, whether the present case for damages is maintainable under the CDC Act, 1997? OPD-1. (3) Whether the plaintiffs case is barred by time? OPD-1. (4) Whether the plaintiff is an aggrieved party entitled to maintain the present case? OPD-1. (5) Whether the present case for damages filed by the plaintiff is maintainable under section 11 of the CDC Act, 1997 read with section 8(5) thereof? OPD-1. (6) Whether the present case is hit by res judicata, lis pendens and/or barred by the provisions of Order II, rule 2, C. P. C.? OPD- 1. (7) Whether the present case is entitled to proceed in light of the pendency of Commercial Appeals No.11, 1121, 13, 14 and 15 against the orders of the Commissioner SECP dated 9-4-2001 and the Appellate Bench dated 30-7-2002? OPD- 1.
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Note. During arguments, learned counsel for both sides agreed that Commercial Appeal No.12 had inadvertently been omitted from this issue when it was framed. A reference to this appeal has, therefore, been included in Issue No.7 with the concurrence of learned counsel for the parties. (8) Whether the plaintiffs shares were unlawfully sold off by defendant No.1? OPP. (9) Whether defendant No.4 was not in default of the rules and regulations of defendant No.1 at the time the plaintiffs shares were sold off by defendant No.1? If not, whether the plaintiffs shares could have been sold off by defendant No.1 in the absence of any default? OPP. (10) Whether defendant No.2 lacked the jurisdiction to determine civil liabilities and to order that they be satisfied out of the properties of the private p rties involved? OPP. (11) Whether the sale/transfer by defendant No.1 of the plaintiffs shares was in violation of the order dated 9-4-2001 passed by the Commissioner, SECP/defendant No.2? If so, to what effect? OPP. (12) Whether the plaintiff is entitled to recover damages for the losses suffered by him on account of the sale of his shares, and if so, to what extent? OPP. (13) Relief. Issues Nos.1 to 7 reflect the preliminary objections raised by LSE and CDC. When the issues were framed, learned counsel representing these two defendants made a request that issues Nos.1 and 2 be taken up as preliminary issues because the same could be decided without recording evidence. It was also submitted that if LSE and CDC were to succeed on these issues, there would be no necessity for adjudication of the other issues. The request of counsel being reasonable was allowed. Learned counsel for the Parties were heard on the two preliminary issues. Vide order dated 6-6-2005, it was h el:1 that the present suit was maintainable before the High Court and that summary procedure was not applicable to the suit. ICA No.2 of 2005 has been filed by LSE to impugn the order dated 6-6-2005 but has not, as yet, been decided. For completeness, the order dated 6-6-2005 has been appended with this judgment as Appendix-I. 6. Issues Nos.3 to 13 now require adjudication. The plaintiff alone has appeared in support of his own case, while Amir Zareef Khan (DW-1), Secretary, LSE has been examined as the sole witness by LSE. CDC has not examined any witness. The testimony of the witnesses was, at the request of the parties, recorded through a local commission. Extensive documentary evidence has also been brought on record by the parties. The oral and documentary evidence has been examined and arguments of learned counsel for the parties have been heard over a number of days. Before embarking on a discussion of the evidence, however, it will be helpful to examine the statutory provisions and regulatory instruments which are relevant for a proper understanding of the controversy covered by the issues. 7. The pledged shares are not in the form of paper scrips. These shares are entered in and the transactions relating thereto are effected through electronic book-entry in a central depository system maintained and operated by the CDC. The CD Act and regulations framed by the CDC with the approval of SECP govern the operation of the central depository system. Section 2 of the CD Act contains definitions of various terms used in the Act and regulations. In view of the relevance of some of these terms in the present case, the 'same are reproduced as under:- "2. Definitions.---In this Act, unless there is anything repugnant in the subject or context,- (1) (2) "account" means an account maintained by a central depository in the name of an account- holder so as to record the title of the account-holder to any book-entry securities entered in such account; (3) "account-holder" means a person who opens and maintains an account with a central depository and operates such account; (4) ..........................................................
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(5) "book-entry security", in relation to a central depository, means a security which is transferable by book-entry in the central depository register pursuant to a declaration made by the central depository under subsection (6) of section 4 which is- (a) in the case of a security transferable by registration, registered in the name of the central depository or issued to the central depository pursuant to section 14; or (b) in the case of a security transferable by delivery or endorsement, deposited with or transferred by endorsement to the central depository. (6) ............................................... (7) "central depository register" means a computerized electronic register maintained by a central depository in respect of book-entry securities; (17) "participant" means- (a) an account-holder who is a member of a stock f xt Lange; and (b) Provided that such account-holders- (i) perform services for sub-account holders in accordance with the terms of an agreement entered into between the central depository and each of the participants; (27) "sub-account" means a sub-account maintained, as part of the account of a participant, in accordance with the regulations by a central depository in the name of a sub-account holder so as to record the title of the sub-account holder to any book-entry securities entered in such sub- account; and (28) "sub-account holder" means a person in whose name a sub-account is opened and maintained by a participant with a central depository and is operated by that participant." The defendant Tanvir Malik as member of the LSE is a participant in terms of section 2(17) above as he maintains an account with CDC and performs services for sub-account holders such as the plaintiff. Tanvir Malik has established, in his account, a Sub-Account No.577 in which shares owned by the plaintiff are held. 8. Section 4 of the CD Act sets out the features of the central depository system required to be maintained and operated by a central depository such as CDC. Subsection 1 and its clauses a (ii) and b, being helpful in the context of this case, are reproduced as under: "S.4. Central depository system. - (1) A central depository shall establish a central depository system whereby, in accordance with the regulations, - (a) (i) (ii) where the account-holders are participants, sub-accounts may be opened and maintained, as part of the accounts of the participants, with the central depository by the participants on behalf of the sub-account holders so as to record the title of the sub-account holders to book-entry securities entered in such sub-accounts; (b) transfers of such book-entry securities shall be effected electronically or by any similar means; Subsection (5) of section 4 stipulates that title to book-entry securities entered in a sub-account shall vest in the sub-account holder. 9. The liability of a central depository for its wrongful acts and negligence is governed under section 8 of the CD Act. Subsections (1) and (5), being relevant for our purposes, are reproduced as under:- "8. Central depository discharged from liability if acting on instructions:-- (1) A central depository, if acting in good faith and without negligence, shall not be liable for any loss, damages, compensation, costs and expenses in tort or under any law or contract for any breach of trust or duty and in the
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cases where the central depository has, in the accounts or sub-accounts maintained by it, made or allowed to be made entries or handled or allowed handling of any book-entry securities, according to the instructions of an account-holder or a participant, notwithstanding that the account-holder or the participant, as the case may be, had no right to dispose of or take any other action in respect of such book-entry securities." (2) (3) (4) ........................................................... (5) Without prejudice to the provisions of any other law for the time being in force, if any loss is caused to an account-holder or a sub-account holder due to any negligent or wrongful act or omission of a central depository or any of its employees, the central depository shall compensate such account-holder or sub-account holder for such loss." The plaintiffs claim against CDC is based on subsection (5) above. 10. Pledges of book-entry securities are dealt with by ction 12 of the CD Act, which provides as under:- "12. Pledge of book-entry securities.-- (1) Book-entry securities shall be pledged only in favour of an eligible pledgee to secure the payment of a debt or liability or performance of any obligation by any account-holder directly or by any sub-account holder through instruction given to a participant when the book-entry securities are blocked in the manner set out in subsection (2). (2) The book-entry securities to be pledged shall be blocked when an account-holder or a participant gives Instructions to the central depository system in a manner that the pledgor or the relevant participant when the pledgor is a sub-account holder ceases to handle the pledged book-entry securities and notice of the blocking is available through the central depository system to the eligible pledgee. (3) A pledgee of the pledged book-entry securities shall, in addition to the powers available to him under the Contract Act, 1872 (IX of 1872), have the following powers:-- (a) a power, upon the default of the pledgor, to transfer the pledged book-entry securities or any part thereof: and (b) any other power which may be granted to him in writing by the pledgor in relation to the pledged book-entry securities provided that the central depository shall not be concerned with or affected by the exercise of any such power. (4) The central depository system shall only allow the pledgee to remove the block from the pledged book-entry securities in such manner that they are available to the pledgor for the purpose of handling them. (5) The central depository system shall not allow the pledgor to handle the pledged book-entry securities save upon the removal by the pledgee of the block from such pledged book-entry securities. (6) A participant shall not create a pledge over any book-entry securities entered in any sub- accounts maintained under his account with the central depository without the authorization of the sub-account holder concerned. (7) No pledge of any book-entry securities may be made except as provided in this section. (8) Except as otherwise provided in this section the provisions of the Contract Act, 1872, shall be applicable to pledging of book-entry securities. Explanation.---For the purpose of this section, the account-holder or sub-account holder, as the case may be, pledging any book-entry securities shall be called the "pledgor", the eligible pledgee in whose favour a pledge of book-entry securities
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is made be called the "pledgee" and the book-entry securities when blocked are called the "pledged book-entry securities"." The provisions of section 12 above are, in particular, relevant for resolving the controversy between the contesting parties as will become evident when the issues are considered in the light of the evidence produced on record. 11. Section 35 of the CD Act empowers a central depository, such as the CDC, to frame regulations with the prior approval of the SEC. This power has been exercised by the CDC, which has framed regulations called the Central Depository Company of Pakistan Limited Regulations (the "Regulations"). Chapter 11 of the Regulations governs the pledge of book-entry securities in the central depository system. Regulation 11.1.2 stipulates that a pledge of book-entry securities shall be effected by entering the number of securities covered by a pledge transaction in favour of the pledgee. Regulations 11.3.2 and 11.3.3, which relate to the pledgee's call option and the manner in which it is given effect in the central depository system, have a bearing on the case in view of the arguments of learned counsel for the defendants. These Regulations read as under:-- 11.3.2. If: (a) a Pledge Call Transaction complies with Reg !Dation 11.3.1; and (b) the Pledge Group shows that there are sufficient number of Book-entry Securities entered in a Pledged Position in the Source Holding in favour of the Eligible Pledgee Transmitting the Transaction, the CDC shall: (c) deduct, in relation to the Pledge Group, the number of Book-entry Securities specified in the Pledge Call Transaction from the Pledged Position in favour of the Eligible Pledgee in the Source Holding; and (d) enter that number of Book-entry Securities in the Available Balance of the Target Holding. 11.3.3. A Pledge Call takes effect when, under Re gulation 11.3.2, the CDC deducts Book-entry Securities Specified in the Pledge Call Transaction from the Pledged Position in favour of the Eligible Pledgee in the Source Holding and adds them to the Available Balance of Target Holding." As will be noted these Regulations attempt to set out the actual process, whereby a call on the pledged securities is made by a pledgee and is given effect by CDC. 12. After having noted the above-referred statutory provisions and Regulations, I now take up for consideration Issues Nos.3 to 13. Issue No.3. 13. Learned counsel for LSE did not elaborate as to this suit was time-barred nor did he refer to any Article of the Schedule to the Limitation Act to justify the preliminary objection as to limitation. As noted above, the suit has been filed under section 11 of the CD Act. No period of limitation has been specified in the Limitation Act for the filing of suits under the CD Act. In the circumstances, in my opinion, Article No.120 of the Schedule to the Limitation Act will apply. It provides for a six years' period of limitation starting from the date on which the right to sue accrues. According to the plaintiff, the cause of action accrued to him on 9th and 10th April, 2001 when the CDC wrongly allowed transfer of the pledged shares from his sub- Account No.577 and the LSE illegally sold the said shares. The suit was filed on 8-4-2004, which is within three years from the aforesaid acts of LSE and CDC. The suit was thus, well within time. Issue No.3 is decided accordingly. Issue No.4. 14. It was argued on behalf of LSE that the plaintiff was not an aggrieved party because the shares in question had been pledged by Tanvir Malik from his main account and not by the plaintiff. To support this contention, learned counsel for LSE referred to Exhibits P-1 to P-9. These are printed forms bearing the title "Stock Pledging Form". The forms have been filled in and have been signed
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and stamped by the LSE (Clearing House) and Tanvir Malik. Starting from the form dated 18-1-2000 (Exh.P-9) to the four forms dated 30-5-2000 (Exh.P-1 to Exh.P-4), these documents appear to be memorandums of pledges created and recorded in the central depository system of the CDC. Exhs.P-1 to P-9 at most, constitute a paper record of various pledge transactions for the convenience of LSE and Tanvir Malik. 15. The aforesaid documents (Exh.P-1 to Exh.P-9) are not generated by the central depository system of CDC and, being in physical form, are by definition, not electronic book-entries in such system. These exhibits do not, indeed, could not by law override the central depository system. At this point; reference may usefully be made to the provisions of section 12 of the CD Act, reproduced above which does not recognize any pledge of book-entry securities outside the central depository system, least of all a paper record to which CDC is not a party. Subsection (7) of section 12 supra expressly stipulates that "no pledge of any book-entry securities may be made except as provided in this section". 16. It should be evident from the above that the question whether the plaintiff was an aggrieved party in this case, has to be decided with reference to the provisions of the CD Act. It is common ground between the parties that the pledged shares were book-entry securities and were part of the plaintiffs sub-Account No.577 in the central depository system of the CDC. Subsection (5) of section 4 of CD Act, in clear terms, provides that "the title to book-entry securities entered in a sub-account shall vest in the sub-account holder". There is no warrant in law for the suggestion that the plaintiff who, admittedly, was the owner of the pledged shares and who claims that his shares were unlawfully sold, would not be an aggrieved party. On the contrary, section 8(5) of the CD Act, reproduced above, in unequivocal terms recognizes the right of a sub-account holder (such as the plaintiff) to claim compensation from a central depository. The right to sue is vested in the sub-account holder himself. He is not dependant on the participant for enforcing his rights. 17. The argument that only Tanvir Malik (not the plaintiff) is the aggrieved party in this case is also in conflict with the contents of paragraph 4 of the preliminary objections in the written statement filed by LSE. It has been acknowledged therein by LSE that the shares "were pledged by the plaintiff to clear the outstanding liabilities" of Tanvir The entire tenor of the written statement of LSE also recognizes the plaintiff as the owner-pledgor of the pledged shares. It is, therefore, not open to LSE to argue, contrary to its pleadings, that the plaintiff was not the pledgor of the shares and, therefore, was not an aggrieved party. Here it may be added that one of the principal functions of LSE is to establish and operate a clearing house for the trading of securities. Clause iii (3) of the Memorandum of Association of LSE requires this. Learned counsel for the parties are agreed that only members of the LSE can effect transactions through the Clearing House. It is only for this reason that an individual investor is obliged to act through a member of the LSE while transacting any trade of securities listed on the LSE. The role of a member, in this context, is that of an agent only at most. 18. The LSE has framed regulations, as mandated by clause iii (3) of its Memorandum of Association under which the Clearing House is to function. These, inter alia, cover exposure limits of members of the LSE, default of members and the procedure for recovery of losses. A tripartite arrangement is necessitated in all cases where a trade in shares is being transacted by a member of the LSE on behalf of an investor. As a result, shares and securities, which are owned by investors, are pledged by a member on behalf of such investor to secure the member's default towards the Clearing House of the LSE. Such tripartite…
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