M/S. Jayant Industrial Packaging Ltd vs The Saraswat Co-Operative

Naroli, Near Gujari Block, National Highway No.8, Taluka- Mangrol, Dist. Surat, Gujarat. ....Petitioners.

Vs.

1 The Saraswat Co-operative Bank Ltd.

having its registered office at Saraswat Bank Building, S.V. Sovani Peth, Girgaum, Mumbai-400 004 and its Recovery Department at 74/C, "Samadhan Building", Senapati Bapat Marg, Dadar (West), Mumbai.

2 Mr. R.A. Dalvi,

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Arbitrator, 74-C, Samadhan Building, 2nd Floor, Senapati Bapat Marg,

Tulsi-Pipe Road, Dadar (W), Mumbai- 400 028. ....Respondents.

Mr. Kamal R. Katha a/w Mr. Manish Bohra i/by M/s. JPS Legal for the Petitioners.

Mr. Y.R. Naik for Respondent No.1. Mr. G.B. Kedia a/w Mr. M. Agre i/by Mrs. Divya Sanghvi for Respondent No.2.

CORAM : ANOOP V. MOHTA, J.

JUDGMENT RESERVED ON : 21st JANUARY, 2011

JUDGMENT PRONOUNCED ON: 17th MARCH, 2011

JUDGMENT:

-

The present Petition is filed under Section 34 of the Arbitration

and Conciliation Act, 1996 (for short the Arbitration Act), challenging

the impugned award dated 31st March, 2006, passed by the Arbitrator,

appointed by the Central Registrar of Co-operative Societies, vide

order dated 23rd January, 2003, under Section 84 of the Multi-State

Co-operative Societies Act, 2002 (the MSCS Act).

2 The basic events are as under:-

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On 11/04/2004, a claim petition was filed by the Respondent-Bank

before the learned Arbitrator, Mr. R.A. Dalvi, against the Petitioners.

On 11/11/2004, an order of attachment before judgment was passed.

The execution Application No. 405 of 2004 filed by the Respondent

Bank. On 23/11/2004, Chamber Summons No. 1727 of 2004 filed in

above Execution Application.

3 On 25/08/2005, this Court in Chamber Summons No. 1727 of

2004 vacated the order of attachment.

4 On 14/09/2005, Appeal No. 791 of 2005, preferred by the

Respondents from order dated 24/08/2005 was withdrawn.

5 On 16/09/2005, a statement of defence filed by Petitioner No.2.

6 On 08/10/2005, an application by the Petitioners under Section

13/16 of the Arbitration Act, before the Arbitrator. On 24/10/2005,

an affidavit of evidence and an affidavit in rejoinder of Respondents

filed. In December, 2005, an affidavit of claims filed along with

documents before the Arbitrator including written arguments.

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7 On 31/03/2006, the impugned award passed.

8 Petitioner No.1 is, original Opponent No.1 Company. Petitioner

No.2 [since deceased, 2(a) to 2(c)], 3 and 4 were the Directors of the

Company. They were the members of the Co-operative Bank

registered under the Maharashtra Co-operative Societies Act, 1960

(for short, MCS Act). The banking financial facilities had been

provided to the Company, after due execution of various requisite

documents signed by the Directors, some time in the year 1997. On

company's immovable properties-

(i) land admeasuring 1226.78 sq. mtrs. And bearing

Plot Nos. 130 and 138, 177 and 178 under City

Survey No. 80-A and 81/1, Block No. 93 and

situated at Charma Market, Char Rasta under

Village Kim Palod, Taluka Mangrol, District Surat in

the state of Gujarat, and;

(ii) Office premises located at 104, Janaki Centre, Off.

Vira Desai Road, Andheri (West), Mumbai- 400 053

in the State of Maharashtra

created banks first charge.

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9 Some time in 1999, the Company approached the Bank and

after due discussion, rescheduled/restructured the existing credit

limits after execution of fresh documents.

10 As there were consistent defaults, the Respondent bank initiated

recovery proceedings on 19th September, 2002 by filing the application

before the learned Assistant Registrar, Co-operative Societies, Mumbai

under Section 101 of the MCS Act. As objection was raised with

regard to the jurisdiction, by an order dated 28th March, 2004, the

learned Additional Registrar directed the Respondent bank to file the

application before an appropriate forum.

11 An Application, under Section 84 of the MSCS Act read with the

Arbitration Act, was filed against the Petitioners for the due

aggregating Rs. 336.61 lacs, as on 31st August, 2004, with interest at

contractual rate at 17.75%.

12 Before that, notice dated 25th February, 2003 was issued by the

Respondent bank under the provisions of the Securitisation and

Reconstruction of Financial Assets and Enforcement of Security

Interest Act, 2002 (for short, the Securitisation Act). The Petitioners'

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challenge was rejected. Therefore, on 26th August, 2004, the

Respondent bank took possession of both the properties. Moti Naroli

factory of the Petitioners was sold on 29th December, 2004 for Rs.

1,15,11,111/-. As alleged, other factory was in possession of the bank

on the date of the award. In the meantime, inspite of the orders, the

bank sold the hypothecated properties of the Petitioners. Therefore, a

contempt Petition was filed.

13 Petitioner Nos. 2 to 4 who owned the immovable property, (not

mortgaged with the Bank),"Kanchan" situated at Plot No.7, Road No.

5, Vallabh Nagar Co-operative Housing Society Ltd., Near Cooper

Hospital, JVPD Scheme, Vile Parle, (W) Mumbai), were trying to

dispose of the same. The Respondent bank therefore, filed an

application for interim/protective relief by way of "attachment before

Judgment", and by order dated 11th October, 2004, the properties

were attached.

14 The issue with regard to the jurisdiction of such Multi State Co-

operative Bank to invoke Securitisation Act for the recovery of dues

was also in the field since December, 2002. In view of the order

passed by a Division Bench of this Court, thereby all proceedings

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initiated by the bank before the learned Assistant Registrar were

stayed.

15 The Arbitrator framed 18 issues. The Arbitrator passed the

impugned award by holding that:-

(i) Opponent No.2 was the member of the bank till his

death and Opponent Nos. 3 and 4 are also members

of the bank;

(ii) The Registrar was competent to pass order dated 28th

March, 2004 and the Bank was competent to initiate

the proceedings;

(iii) Claims are within limitation'

(iv) The Bank has proved the transactions and execution

of the documents, whereas, the Petitioners failed to

do the same;

(v) The Respondent Bank has supportive statement of

accounts and thereby granted the award of

Rs.2,20,64,525/- with future interest. The Arbitrator

has also affirmed that the Bank has secured by first

charge over the movable and immovable properties

of the Company and further secured by the joint and

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several guarantees of his Directors and therefore,

entitled to recover dues from the Directors and their

legal heirs;

(vi) The Arbitrator also held that the Legal

Representatives of Opponent No.2- i.e. 2(a), 2(b) and

2(c) are liable for the payment.

16 The operative part of the order is as under:-

"1. It is hereby declared that the Saraswat Co-operative Bank (the Bank) is entitled to recover from Opponent Nos. 2(c), 3 and 4 a sum of Rs. 2,20,64,525/- as on

31st August, 2004 together with future interest at 15% for the period from 1st September, 2004 till

realisation as also a sum of Rs. 26,780/- being Arbitration and Administrative cost of the present proceedings.

2. It is further declared that the repayment of said dues, amounting to Rs.2,20,64,525/- is secured by a first charge over immovable properties of Opponent No.1 being the factory located at village Kim Palod, Taluka

Mangrol, Dist. Surat, in the state of Gujarat and more particularly described in Schedule II to the Original Application.

3. It is also declared that the payment of all said dues to the Bank by Opponent No.1 is duly guaranteed by Opponent Nos. 2 (since deceased) 3 and 4 and as such Opponent Nos. 2 (c), 3 and 4 are jointly and severally liable to pay said dues to the Bank, the liability of Opponent No. 2 (c) to be restricted only to

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the extend of the value of estate inheritated by him from the estate of deceased Opponent No.2.

4. The Opponent Nos. 1, 2(c), 3 and 4 are accordingly directed to pay the Bank jointly and severally said

sum of Rs.2,20,64,525/- together with interest thereon at the rate of 15% p.a. from 31st August, 2004 till payment on or before 15th May, 2006 failing which, the Bank shall be entitled to sell the

above mentioned mortgaged immovable properties of Opponent No. 1 at the exclusive cost of the Opponent Nos. 1 to 4.

5. It is further declared that interim order of

"attachment before judgment" dated 11th November, 2004 as modified by order dated 3rd December, 2004 in respect of all rights, title and interest of Opponent

Nos. 2,3 and 4 should continue till full payment of all the aforesaid dues of the Bank and for recovery of said dues in full, the Bank is entitled to sell any portion or entire portion of 3rd, 4th, 5th, 6th,7th, and 8th

floors of the structure constructed/ to be constructed in terms of the Development Agreement dated 30th

August, 2003 entered into between Opponent Nos. 2(c), 3 and 4 and said Developer on Plot No. 7, Road No.5, J.V.P.D., Vile Parle (West), Mumbai."

17 By order dated 16th April, 2009, this Court has permitted to join

the Arbitrator as Respondent No.2, as various allegations were made

against him. The Arbitrator has filed affidavit dated 24th June, 2009.

The Arbitrator in his affidavit has stated in para 7 as under:-

"7 I say that from Roznama, it is noticed that on 09/03/2006, Mr. Ghag an Officer of the Respondent Bank filed before the Arbitrator Exhibit A-26, which

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is a Statement of Account of Opponent No.1 along with written clarification about Rs.1,15,11,111/- and Mr. Ghag also filed the records regarding

membership of Opponent Nos. 1, 2, 3 and 4 which were marked as Exhibit A-27. From the roznama it

is however seen that the same was not filed in the presence of Petitioners or their representative. There is no Exhibit after Exhibit A-27."

18 The Petitioners filed additional affidavit on 7th October, 2009.

The allegations against the Arbitrator are as under:-

"6. I say that accordingly the Ld. Arbitrator was called

upon to decide the application being an alleged challenge to his appointment and continuation as

Arbitrator. I say that the said application preferred by the Respondent No.1 Bank was rejected immediately, without even obtaining the say of the Opponents thereto in that proceeding. Hereto

annexed and marked as Exhibit "A" is a copy of the application filed by the Respondent No.1 Bank in that

proceeding. I crave leave to refer to and rely upon the Order passed therein when produced.

7. I say that it is apparent that the Ld. Arbitrator has

misconducted himself therein. I say that the Petitioners are apprehensive that the Ld. Arbitrator may have had an interest in the said Bank even prior to the disclosed date being 2007, i.e. During our

proceedings which have not been disclosed by the Respondent No.1. I say that in view of disclosed misconduct of the Ld. Arbitrator in another proceeding pending before him, the Ld. Arbitrator having interest in the Respondent No.1 Bank before passing the impugned award in our proceedings cannot be ruled out. I say that since the Ld. Arbitrator had a current account in the joint names of himself and his wife in addition to that he was receiving interest at the rate of about 3.5% on the

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credit in his saving accounts goes on to show that these accounts were prior to 2007 and could be in operation while deciding the award in the present

matter. I say that although the non disclosure of the Ld. Arbitrators interest in the Bank was in the other

proceeding, it is submitted that this Hon'ble Court be pleased to take cognizance of the said misconduct of the Ld. Arbitrator, whilst considering the grounds of misconduct taken by us in this petition."

19 The Arbitrator had been deciding the innumerable disputes

between the Bank and its members since 2003.

20 The Petitioners' Application under Section 13 of the Arbitration

Act was rejected in the year 2008, whereby a challenge was raised to

his appointment and the continuation of the Arbitration, without

obtaining the say of the other side. Therefore, the objections/

grounds as contemplated under Section 24(3), Section 34 (2) (a) (iv)

and (2) (b) (ii) of the Arbitration Act have been raised in the petition,

basically by relying on the Supreme Court Judgment in Oil and

Natural Gas Corporation Ltd. Vs. Saw Pipes Ltd. 1

21 The Respondent-contesting Bank supported the impugned

award on all counts; including the allegations of misconduct against

the Arbitrator stating it to be without substance; non supply of Exhibit 1 2003 5 SCC 705

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Nos. 25, 26 and 27 though produced behind their back, caused no

prejudice and; the Arbitrator has considered the sale proceeds of the

property already sold. Therefore, prayed to dismiss the Petition.

22 The order dated 24th August, 2005 passed by this Court (Mr.

A.M. Khanwilkar, J.) which, as informed, has attained finality. The

relevant paras and operative part of the order is as under:-

"9. As mentioned earlier, there is nothing in the Act of

2002 to suggest that the Arbitrator can exercise similar powers as can be exercised by the Civil Court

to pass order of attachment before passing of the decree even in relation to property outside the scope of reference pending before it. To get over this position, Counsel for the Petitioners relied on Section

97 of the Act of 2002. Section 97 of the Act, however, is a provision which creates legal fiction by

providing that the Central Registrar or Arbitrator or any person authorised by him in writing in this behalf be deemed to be a Civil Court for the purposes of Article 136 of the Schedule to the Limitation Act,

1963. The legal fiction is for this limited purpose. No more, and no less. In other words, Section 97 of the Act of 2002 cannot be construed to mean vesting of the powers similar to that of the Civil Court in the

Arbitrator, who is to exercise powers under the Act of 2002 albeit for the recovery of any amount by attachment or by sale without attachment of any property, etc. Similarly, the provision such as Section 96 of the Act also does not empower the Arbitrator to exercise similar powers as that of the Civil Court. Sub-section (2) only provides that the attachment order passed under sub-section (1) by the Arbitrator shall be executed by a Civil Court having jurisdiction in the same way as an attachment order passed by

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itself and shall have the same effect as such order. That does not mean that the Arbitrator can exercise similar powers of the Civil Court of attachment

before decree so as to cover property beyond the scope of reference before it.

10. Viewed in this perspective, I find substance in the stand taken on behalf of the Applicant that the order of attachment passed in respect of subject property

being Kanchan Bungalow of the ownership of the Applicant which is admittedly not the mortgage property and not referable to the scope of proceedings pending before the Arbitrator under Section 84 of the

Act, was not amenable to order of attachment before

passing of the Award. Accordingly, this Chamber Summons ought to succeed in terms of pryaer clauses

(a) and (b).

23 The Arbitrator inspite of above, ordered/directed to sell the

property and/or any portion of the property to recover the dues of the

bank. This part of the award is totally without jurisdiction and it is

null and void. The Arbitrator is bound to follow the order passed by

the High Court. The Arbitrator just cannot sit over like an Appellate

Court over such High Court order. Mere denial of the Arbitrator and

even by the bank in this regard, noway sufficient to defend such

action of passing of award/order, inspite of clear directions given by

the High Court. It is a clear breach of the order passed by the High

Court.

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24 The Arbitrator in view of Section 97, if case is made out, may

pass an appropriate order pending the Arbitration proceedings, but

once the Arbitration proceeding is concluded, Section 97 of the MSCS

Act, nowhere empowered the Arbitrator to put the order of

attachment before judgment, for execution in such fashion. There is

no specific provisions in the MSCS Act to enforce and/or to set

executed the award passed by the Arbitrator appointed under Section

84 of the MSCS Act. Therefore, pending such procedure or

enforcement, the Arbitrator has no power and jurisdiction to attach

the property and/or appoint receiver and/or direct/permit the bank to

sell the property without waiting for the award to be final and binding

and/or enforceable. The whole action/award, therefore, in this

regard is apparently without jurisdiction and contrary to the law.

25 It is relevant to note that once the award is passed by the

Arbitrator, appointed under the MSCS Act, for the enforcement of the

said award, the provisions of Arbitration Act are applicable. There is

no provision under the Arbitration Act like Sections 96 and 97 of the

MSCS Act except Section 17 which empowers the Arbitrator to pass

appropriate order of protection of the subject matter and/or properties

involved in the disputes pending arbitration. Section 9 empowers the

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Court to pass appropriate order, prior, during and even after the

conclusion of the Arbitration proceedings, till the award get executed.

Therefore, even pending the enforcement proceedings and/or Section

34 and/or Section 37 Appeal and/or pending enforcement, only the

Court has power to pass protective and injunctive orders.

26 Admittedly, the bank has invoked Securitization Act for recovery

of the unpaid amount. One property, at Surat, had already been

auctioned. Therefore, having invoked Securitization Act, the

invocation and appointment of the Arbitrator under Section 84 of the

MSCS Act, that resulted into the impugned award, is also a matter of

debate. Two proceedings for recovery of bank dues in such fashion,

definitely caused injustice and harassment to the borrower parties like

the Petitioners. Whether the provisions of Securitization Act can be

invoked by the Multi State Co-operative Bank like the Respondent, is

also a matter of debate. Though settled by this Court, but the Special

Leave Petitions are pending in the Supreme Court.

27 Under the Arbitration Act, the parties, by consent, appoints the

Arbitrator of their choice. They can select their own procedure to

conduct the Arbitration Proceedings. They are free to accept and

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provide their own rules and regulations for Arbitration Proceedings

before the Arbitrator appointed/selected by them. But under the

MSCS Act, the Registrar appoints the Arbitrator. There is no question

of any choice or consent. The Arbitrator, who is appointed by the

Registrar unilaterally, needs to follow the procedures so described and

prescribed under the Arbitration Act. That covers Sections 12 to 16 of

the Arbitration Act also. In the present case, Respondent No.2

Arbitrator was appointed in the year 2003, as informed, had decided

as many as, 1300 Arbitration Petitions filed by the Bank. The

Petitioners, as recorded, even raised objection under Section 13 of the

Arbitration Act. The Arbitrator and his wife at the relevant time were

share holders/ members of the bank since 2007. The Arbitral Tribunal

never disclosed his interest in the bank affair and/or of their

membership. The Petitioners' application was also rejected without

hearing. Therefore also, the Petitioners have raised additional ground

as the application under Section 12/13 was rejected and has passed

the impugned award. The submission therefore so raised by the

learned counsel appearing for the Petitioners on grounds of

misconduct and bias of the Arbitrator, just cannot be overlooked.

28 There is nothing on record to show that the Arbitrator directed

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and/or permitted the parties to lead their respective evidence. There

is nothing on record to show that the parties have agreed and/or

decided not to lead or file affidavit of evidence and/or accepted to

proceed with the Arbitration on the basis of documents placed/filed

on record.

29 The Arbitrator, in my view, is bound to follow the principles of

natural justice and fair-play. The practice and principles of the Code

of Civil Procedure (for short, the CPC) and the Evidence Act are also

relevant, for taking any decision by any judicial body/authority. The

Arbitrator who decides the rights and disputes between the parties is

also bound to follow these principles, unless agreed by the parties

otherwise.

30 In the present case, the Arbitrator received Exhibits A-25, A-26

and A-27 and exhibited without knowledge and intimation to the

Petitioners. The copies were also not supplied to the Petitioners.

However, the Arbitrator relied upon those documents while passing

the final impugned award. The Arbitrator himself in his affidavit dated

24th June, 2009, as quoted above, admitted that those documents

were not filed in the presence of the Petitioners and/or their

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representatives. From the affidavit of the Arbitrator, it is not clear to

whom the copy of Exhibit A-25 was supplied.

31 The Arbitrator ought not to have taken the fresh and new

documents on record, without the consent of the Petitioners. The

copies of those documents ought to have been furnished to the

Petitioners. The Arbitrator has strongly relied upon these documents.

There is nothing to show that the Petitioners were heard on these

documents.

32 Even though the statement of account as produced by the bank

as per the bankers book of evidence and certified by its authorized

officer and Exhibit A-27, yet it is necessary for the Arbitrator to

provide the copy of the documents and opportunity to the Petitioners

and ought not to have taken on record without their consent and/or

knowledge. The parties have always right to explain and provide

detail comments and/or place on record with other supporting

documents and/or deny the statement, so that the Arbitrator can pass

and/or arrive at a proper conclusion, specially when it is monetary

claim of the bank based upon the respective accounts and adjustments

including of the interest, penal interest and charges claimed by the

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Bank.

33 In the present case, the property was also sold by the bank in the

year 2004. The requisite adjustment at the relevant time certainly

could have affected finally the bank statement. Exhibit A-26 was a

Certified Statement of Account with Balance.

34 The submission/reasoning given by the Arbitrator that the

copies of the documents and/or the contents of the documents are

well within the knowledge of the Petitioners therefore, though taken

behind their back, it causes no prejudice, in my view, in the present

facts and circumstances, is unacceptable. It is relevant to note that

even the Respondent Bank Officer Mr. Ghag's arguments was

entertained in absence of the Petitioners, on 9th March, 2006 though

the Petitioners had filed their written submission on 4th March, 2006.

Therefore, taking over all view of the matter, the Arbitration

proceedings in the present case as conducted is contrary to the

provisions of Section 19, 24(3), 34 of the Arbitration Act, apart from

principles of natural justice and fair-play.

35 Though asked, neither the bank nor the Arbitrator explained the

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rate and date of penal interest which they have charged. The same is

also not permissible to be charged by the bank in such fashion. It is

obligatory on the part of the bank to provide the update accounts, so

that the appropriate defence can be raised by the borrower including

the case of adjustment.

36 The learned counsel appearing for the Respondent Bank makes

statement that after the impugned award was passed, the remaining

property (office property) which was attached in the Securitization

Proceedings, has also been disposed of. The amount so received now,

shall be adjusted.

37 The Contempt proceedings as initiated, recorded above, is also

dismissed.

38 The aspect of two parallel proceedings, one under the

Securitization Act and second before the Arbitrator for the recovery of

the amount dues and payable to the bank is also relevant. Apart from

causing a great injustice and hardship to the parties, there is always a

possibility of conflict of views and/or the decisions.

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39 The principle of res-judicata cannot be overlooked as

contemplated under the CPC, as in such cases where the parties, the

cause of action, the documents, the evidence and the authority and

jurisdiction of respective authorities, under the Securitization Act, the

Debt Recovery Tribunal and/or the Appellate Tribunal and under the

MSCS Act, are similar in all respect, as both authorities are

empowered to take final decisions.

40 Normally, there is no question of taking fresh affidavit of the

Arbitrator in Section 34 Application. For the first time in the Court,

but in the present facts and circumstances, and as already directed by

this Court after recording the reason and as there are allegations made

against the Arbitrator, the affidavit of the Arbitrator become part of

the present proceedings. Even the Court has permitted the Petitioners

to file additional affidavit to bring on record the subsequent events

basically revolving around the allegations against the Arbitrator and to

expose his conduct. After going through all these additional affidavits

on record, show that the Arbitration proceedings commenced and

concluded just by overlooking the basic object and purpose of the

Arbitration Act. The whole Arbitration proceedings have been

conducted and concluded contrary to the provisions of the Arbitration

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Act.

41 Taking over all view of the matter, the present award need to be

quashed and set aside.

42 Accordingly, the following order.

i) The impugned award dated 31st March, 2006, is

quashed and set aside and the matter is remanded

back for fresh hearing.

ii) The Arbitrator to give full opportunities to all the

parties in all respect and pass award/order after

hearing both the parties.

iii) The liberty is granted to the parties to apply and/or

submit proposal for settlement, if any.

iv) A fresh Arbitration Proceedings be initiated after

giving notice to the parties.

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v) The Petition is accordingly allowed. No order as to

costs.

(ANOOP V. MOHTA, J.)

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