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

Registered office at Moti Naroli, Near Gujari Block, National Highway No. 8, Taluka Mangrol, Dist. Surat, Gujarat.

2 Hargovinddas Ramjibhai Mehta, Since deceased through his Legal Representatives Mr. Vijay Mehta 3 Yogesh H. Mehta 4 Mukesh H. Mehta, All Nos. 2 to 4 having office at Moti 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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ssm 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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ssm 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4 On 14/09/2005, Appeal No. 791 of 2005, preferred by the Respondents from order dated 24/08/2005 was withdrawn.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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ssm 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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ssm 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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ssm 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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ssm 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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ssm 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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ssm

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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ssm

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

costs.

(ANOOP V. MOHTA, J.)

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