Brokers liable for loss from tech glitches

Stock brokers will be held accountable for glitches that clients face while trading through their online platforms. A recent Delhi High Court order has put the onus on brokers to ensure smooth connectivity for investors opting to trade online, providing legal recourse to several clients who have lost an opportunity to log profitable trades due to technical failure at the brokers’ end. 

The Delhi High Court ruling pertains to a legal suit filed by Vivek Sharma, a retail investor against Reliance Securities — first with NSE’s arbitration panel and then with the Tees Hazari Sessions Court, New Delhi and subsequently with the Delhi High Court. 

The NSE arbitrator and the lower court ruled in favour of Vivek Sharma; the High Court upheld the lower court’s ruling that brokers are liable for any opportunity loss (in making a profitable trade) incurred by the client as a result of technical glitches in the online platform. ET has reviewed the rulings of the High Court, the Sessions Court and the NSE Arbitration panel. 

“The ultimate onus of having adequate system capacity installed primarily lies with stock brokers and their companies,” the lower court ruling said. The lower court went on to say that financial losses suffered by Sharma, which are attributable to the system failure , can’t be regarded as notional losses. 

“If a member of internet trading facility places a sale order of a particular number of shares at a certain price in a highly volatile market and his order is not executed then and there for reasons beyond his control and is kept pending for hours together and then he looses valuable hard-earned money. In such a scenario, if delayed execution of an order results in ascertainable financial loss on this score owing to deficiency in service by stock broker, it is only the stock broker who has to account for such losses,” the lower court verdict, which was upheld by High Court, said. 

Brokers will also be held responsible for not executing trades if it is not able to electronically receive funds from an investor’s bank account (that’s, delay in electronic fund transfer from banks), the lower court ruling, which was upheld by the High Court, said. Reliance Securities declined comment for the story. The Delhi High Court’s ruling is significant as stock exchanges are flooded with complaints with regards to trading services offered by broking firms. 

The past 10 months have seen the National Stock Ex-change logging around 1,169 complaints relating to unsatisfactory service by brokers. A good number of them deal with connectivity and system-related issues and non-execution of client order, the CEO of a broking outfit said. 

“There is nothing much we can do about it... technology is just coming off age in the country. There are gaps which brokers will never be able to fill,” the CEO said. “This order upholds the public policy of India and safeguards the interests of consumers who suffer financial losses on account of deficiency in service by large broking houses,” said Shreyas Vyas, a securities lawyer at Khare Legal Chambers.

judgements on procedural deficiencies

Below are the extracts from judgments on procedural deficiencies, as mentioned by hHn’ble Supreme Court of India. 

a) “A procedural law is always in aid of justice, not in contradiction or to defeat the very object which is sought to be achieved”. [ Saiyad Mohd. V Abdulhabib, (1988) 4 SCC 343] 

b) “A Party cannot be refused just relief merely because of some mistake, negligence, inadvertence or even infraction of the rules of procedure. The Rules of Procedure are intended to be a handmaid to the Administration of Justice and they must therefore be construed liberally and in such manner as to render the enforcement of substantive rights effective”. [Ram Manohar Lal Vs NBM Supply, AIR 1969 [17-03-1969 SC]

c) “Common sense should not be kept in the cold storage when pleadings are construed. Parties win or lose on substantial questions, not on technical tortures and Courts cannot be "abettors". [Noronha V Prem Kumari, AIR 1980.] 

d) “Every venial defect or error not going to the root of the matter cannot be allowed to defeat justice or afford an excuse to the Government or a Public Officer to deny just claim”. [Jones V Nicholls, (1844) 13 M & W 361.]

BORROWERS MUST APPROACH TRIBUNAL, NOT HIGH COURT

The Supreme Court (SC) stated last week a borrower and his guarantors who have been served with a notice under the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act has a remedy under the Act and should not rush to the high court. In this case, Kanaiyalal vs State of Maharashtra, State Bank of India advanced loans against mortgage of certain property. The loan was declared as non-performing asset and the bank proceeded to take over the mortgaged property. The guarantors moved the Bombay high court against the bank’s move. It rejected the petition stating they had tried to avail of the remedy earlier by moving the debt recovery tribunal.

Director of firm not be dragged to court if not directly responsible

A director of a company should not be dragged to a criminal court when documents prove he was not responsible for issuing cheques which were dishonoured, the SC stated last week. The Calcutta high court had asked a former director of Rifa Healthcare (India) who had resigned from the company to stand trial for the issuance of 18 cheques. He showed from documents he had left the company and therefore the case against him should be quashed. But the high court insisted it was his duty to show the trial court he had indeed quit the company. Therefore, he should face the trial first. He appealed to the SC against the order. The SC set aside the ruling in the case, Harshendra Kumar vs Rebatilata Kole, stating it was evident from the records of the company and the registrar of the companies he had left the firm at the time of issuing the cheques.

The place where cheque is deposited would have jurisdiction to entertain complaint u/s 138 N I Act

Court Name: The Hon'ble Delhi High Court                Case No. : Crl. M.C. 555 of 2010

Title of the case: Patiala Casting P. Ltd.  V/s  Bhushan Steel Ltd.

Date of Order:  August 11th, 2010 

Facts of the case:

The complainant was given the cheque in question  payable at  Bank  of  Baroda,  SSI  Mandi,  Gobindgarh,  Punjab.  But the  complainant  deposited  this cheque  with  their  banker  Punjab  National  Bank,  Partap  Ganj  Branch,  Delhi,  since  the complainant  was  having  its  head  office  and registered  office  at  Delhi. The  cheque got dishonoured and was returned back unpaid by the banker of the petitioners on account of “exceeds arrangements”. A demand notice demanding the cheque amount was sent by the complainant from  his head office at Delhi and despite notice the cheque amount was not paid. On this basis, a complaint was filed in Delhi. 

Held:

I  consider  that  where  the  registered/  head  office  of  complainant  is  at  Delhi, cheque for encashment is deposited by complainant at Delhi, notice of demand is served from Delhi and amount of cheque is not paid despite notice, the court of MM at  Delhi would  have  jurisdiction  to  entertain  complaint  under  Section  138  of  Negotiable Instruments act.