Arbitration Petition No. 779 of 2010

10th June, 2013

Petitioner Counsel: Ms. Sapana Rachure,T.N. Tripathi & Co.
Respondent Counsel: Mr. D.J. Bhange,Halai & Co.

Cases Cited:
Suresh Prabhu Vs. Bombay Mercantile Co-op. Bank Ltd., 2008(1) ALL MR 232 =2007(5) Bom. C.R. 205 [Para 11]
Ratansi R. Gada Vs. Abhyudaya Co-operative Bank Ltd. & Anr., 2011(7) ALL MR 102=2011(3) Bom.C.R. 117 [Para 12]

JUDGMENT

JUDGMENT :- The Petitioners, Sicom Limited, in view of Assignment Deed dated 31 March 2010, continued to challenge impugned award dated 24 July 2009, passed by the sole Arbitrator appointed under Section 84 of the Multi State Co-operative Societies Act, 2002 (for short, "MSCS Act") by invoking Section 34 of the Arbitration and Conciliation Act, 1996 (for short, "the Arbitration Act").

2. The operative part of the award is as under:-

Order:-

a) The Opponent No.1 namely Tim Tim Far East Export Trading Pvt. Ltd. is liable to pay to The Shamrao Vithal Cooperative Bank Ltd. a sum of Rs.1,83,03,147/- as on 31.03.2004 together with simple interest @ 8% p.a. from 01.04.2004 till full realisation along with Arbitration Fee Rs.18,980/- inclusive of administrative cost.

b) It is further declared that above dues of the Disputant Bank are secured by a first charge on High Tech Plant & Equipment acquired by Opponent No.1 out of Disputant Bank's loan of Rs.1,41,00,000/-. As such the Disputant Bank is entitled to take possession of said plant and machinery and sell the same for recovery of its said dues.

c) i) It is further declared that the Disputant Bank is entitled to receive from Opponent No.7 Bank namely Central Bank of India, an amount of its prorata share out of the sale proceeds of the immovable properties of Opponent No.7 namely Central Bank of India.

ii) It is further declared that after adjusting the amount of sale proceeds of specific plant machinery as stated in para (b) above as also the amount of Disputant Bank's prorata share receivable from Opponent No.7 Bank as stated in para (c) above, the balance amount if any which remains still due and payable to the Disputant Bank, The Disputant Bank shall be entitle to recover the same jointly and severally from Opponent Nos. 2,3 & 4. However, the Disputant Bank would not be entitle to demand the payment of said dues from Opponent No. 2, 3 & 4 unless realisation of amount due to it by sale of hypothecated movables as stand in (b) hereinabove and as also till amount of prorata share as stated in (c) hereinabove is received in full by the Disputant Bank. It is made further clear that any settlement made by Disputant Bank with Opponent No.7 Bank in that regard would amount to discharge of the Opponent Nos. 2, 3 & 4 from their guarantee obligations."

3. It is to be noted that:-

3.1 The Petitioners are a Nationalized Bank, having their Central Office and Branch Office at the address mentioned hereinabove. Respondent No.1 is a Co-operative Bank deemed to be registered under the Multi State Co-operative Societies Act, 2002. Respondent No.2 is the principal borrower Company, incorporated under the Companies Act, 1956. Respondent No. 3 to 7 were the Guarantors and Directors of Respondent No.2 Company. Respondent No. 8 is the Sole Arbitrator claims to have been appointed as Arbitrator under Section 84 of the MSCS Act.

4. On 20 April 2000, Respondent No.2 approached Respondent No.1 Bank for availment of Term Loan of Rs.215 lakhs in addition to the Term Loan of Rs.550 lakhs and Working Capital facility of Rs.35 lakhs already availed from the Petitioners-Bank. On 1 June 2000, Respondent No.1 Bank sanctioned Rs.160 lakhs as Term Loan and Rs.100 lakhs as Letter of Credit facility. The said facilities were sanctioned against security of blocked asset of the Company on Pari Passu basis with the Petitioners' Bank. No security document was executed in favour of Respondent No.1 Bank.

5. On 20 December 2000, Respondent No.1 Bank had revised the proposal for grant of Term Loan facility and sanctioned Term Loan of Rs.141 lakhs to Respondent No.2. The sanction of earlier financial assistance granted vide letter dated 1 June 2000 was cancelled. Respondent No.1 Bank claimed that the Term Loan was secured by the mortgage over the block assets of the concerned Respondents which included (i) Leasehold land bearing Survey Nos. 13/1A, 13/1, 13/2, 13/5, 15/5 and 70/7, admeasuring about 3 acres 75 gunthas at Ajiwali, Taluka Khalapur District Raigad; (ii) Plot bearing No.A-20 in Patalganga Industrial Area, within the village limits of Kaire and outside the limits of Municipal Counsel in Rural Area, Taluka Khalapur, District Raigad, admeasuring about 4050 sq. meters and structures standing thereon; (iii) Residential Flat situated at Laurel House, Edan Garden Apartments, Manpada, Thane (West). On 17 January 2001, 31 January 2001 and 24 December 2001, Respondent No.1 claimed that the Petitioners had issued No Objection to Respondent No.1 Bank to have a pari passu charge on the assets subject to condition that the Term Loan of Rs.141 lakhs should be disbursed through the Petitioners. On the basis of the letters, the Respondent Bank has been claiming pari passu charge on the assets of Respondent No.2 including MIDC Plot No.A-20 without there being and security document executed in their favour.

6. On 19 January 2004, a notice issued by Respondent No.1 to the other Respondents, demanding due amount of Rs.66,52,140.00. On 16 January 2004, the Petitioners filed original Application No. 27 of 2004 before the Debts Recovery Tribunal Pune, inter alia for recovery of Rs.18,39,20,823.50 and for enforcement of mortgage and hypothecated security offered by Respondent No.2. On 2 May 2005, Respondent No.1 intervened in the Original Application and lodged its claim before the DRT, Pune. On 26 November 2007, the order passed by the DRT, Pune, remitting alleged claim of Respondent No.1 to be filed before the appropriate Forum as the DRT was not having jurisdiction to entertain a claim of a Co-operative Bank. On 31 December 2007, the Original Application was allowed and pursuant thereto, Recovery Certificate dated 11 January 2008, was issued by the Tribunal. The Tribunal after verification of the security documents declared that the various assets as set out in the Recovery Certificate are mortgaged to the Petitioners and the same are ordered to be sold in execution of the Recovery proceedings.

7. On 21 April 2008, Respondent No.1 filed a claim petition before the Arbitrator. The Petitioners were joined as Party Opponent No.7, pursuant to order of 26 August 2008 passed by the Arbitrator. On 5 May 2009, the Petitioners filed Written Statement and vehemently disputed and denied the alleged claim of Respondent No.1. It was denied that any valid pari passu charge was created in favour of Respondent No.1 over the assets of Respondent No.2. It was submitted that Respondent No.1 Bank was not party to the mortgage created by Respondent No.2 in favour of the Petitioners and no document was produced to prove the charge in favour of Respondent No.1/Bank.

8. The challenge of the Petitioners are limited only to the extent of order passed against the Central Bank, now in view of assignment, against the Petitioners, who were neither party to the Arbitration dispute between the Disputant Bank and the borrower-guarantor, nor the member of the Respondent-member of original Applicant, at any time. The Central Bank was made party before the learned Arbitrator by order dated 26 August 2008. The learned Arbitrator passed the order as recorded above against the Bank-Petitioners. There is no challenge made by the original and the contesting parties. The award has attained finality so far as the original opponent and the Disputant Bank are concerned. The Petitioners Bank moved an Application for declaration that the Applicant Bank has not made pari-passu charge on the assets of original Respondent Nos. 1 to 6, which are security of the repayment of its loan advanced by the Petitioners Bank. The learned Arbitrator has passed the award against the PetitionersBank.

9. The scope and purpose of appointment of Arbitrator under the MSCS Act is quite limited. No third person and/or party can be permitted to proceed and/or proceeded against, as it would be beyond the scope and power of the Arbitrator, appointed by the Registrar under the MSCS Act. The present Section 34 Petition, filed by the Petitioners, who were party to the Arbitration proceedings, though they are not member and/or original party to the recovery claim initiated by the Respondent Bank.

10. The specific issues were framed with regard to the charge in favour of the Petitioners-Bank. The learned Arbitrator held specifically that the Disputant Bank is entitled to share with opponent No.7 (the Petitioners) the sale proceeds of the immovable properties of opponent No.1 (borrower). The findings are also given against the Petitioners-Bank, as recorded above.

11. The learned Arbitrator in view of clear provisions of MSCS Act, has no jurisdiction to entertain and consider the claim of Disputant Bank against the Petitioners. The Petitioners are not a member of the Respondent Bank. The scope of jurisdiction under Section 84, is quite limited and cannot be extended in such fashion against the party who is not the member. Therefore, there was no question of passing and/or giving any declarative award in respect of the charges. The Arbitrator just cannot go beyond the definite jurisdiction under the MSCS Act, basically against the person who is not the member of the Disputant Bank. (Suresh Prabhu Vs. Bombay Mercantile Co-op. Bank Ltd), 2007(5) Bom. C.R. 205 : [2008(1) ALL MR 232].

12. I have already considered the scope and purpose of Section 84 of the MSCS Act, read with Section 34 of the Arbitration Act in Ratansi R. Gada Vs. Abhyudaya Co-operative Bank Ltd. & Anr. 2011(3) Bom.C.R. 117 : [2011(7) ALL MR 102].

"9. The general principle of section 34 of the Arbitration Act as laid down by the Apex Court in various judgments and as observed by this Court (Anoop V. Mohta, J.) in (Jigar Vikamsey Vs. Bombay Stock Exchange Limited)1, 2010(1) Bom. C.R. 908 (O.S.), applicable even to the award passed under section 84 of the MSCS Act by the Arbitrator."

13. The learned Arbitrator has no jurisdiction to decide the issue of mortgage in Arbitration proceeding under the Act, even on merits, as no documents were placed by the Respondent-Disputant Bank to establish any charge or mortgage over the property. The property cannot be mortgaged and/or transferred without written and registered documents. The award and the direction in favour of the Respondent Bank to receive from the Petitioners realization of the assets mortgaged to the Petitioners at pro-rate basis, is perverse without any evidence and unsustainable in law. The learned Arbitrator erred in law by overlooking that the Petitioners are the registered mortgagee in respect of the properties which has been accepted by the Competent Court in terms of the referred certificate dated 11 January 2008 issued in Original Application No. 27 of 2004. "No objection letter" cannot be the document to claim charge or share the realization.

14. It is settled that such complicated and complex issue regarding such mortgage is beyond the scope of Arbitration and/or power of the Arbitrator. I am inclined to observe that the learned Arbitrator has excceded its jurisdiction and pass the award by overlooking the basic provisions of law, apart from its own jurisdiction to decide and/or pass award inspite of the specific order/judgment passed by the Competent Tribunal under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short "SARFAESI Act"), in favour of the Petitioners. The learned Arbitrator therefore, has misconducted himself by observing that the Petitioners were responsible for non-completion of the formalities relating to the creation of charge in favour of the Disputant Bank and further that the Disputant Bank has exclusive hypothetical charge on the machineries. The impugned award is therefore, perverse, contrary to law and it is against the basic principles of law and the Arbitration.

15. The award is not challenged by any other party, except the Petitioners. The findings so recorded and operative order so passed, in my view, need to be adjudicated afresh including issue of jurisdiction of the Tribunal to deal with the subject/issues as contested. Therefore, as it is difficult to dissect the award only in respect to the Petitioners and as the learned Arbitrator must adjudicate the power and its own jurisdiction before passing such final order against the Petitioners-Bank therefore, I am inclined to remand the matter for adjudication on the issues so discussed above, referring to the Petitioners charge, mortgage and related rights between the Petitioners and Disputant Bank, including the jurisdiction of the Arbitrator to deal with the same. If the Arbitrator has no jurisdiction, considering the scope of MSCS Act, the appropriate order needs to be passed by giving opportunity to the concerned parties, who were present and participated in the proceedings.

16. However, considering the dispute so raised and the issue so involved, the learned Arbitrator to adjudicate and decide the issue preferably within three months from the date of receipt of the order, based upon the material available on record.

17. Resultantly, the following order:-

ORDER

a) The impugned Award dated 24 July 2009 is quashed and set aside.

b) The matter is remanded back for reconsideration before the Arbitral Tribunal.

c) The Arbitral Tribunal to grant opportunity to the parties to lead evidence, if any.

d) The learned Arbitrator/Tribunal to pass fresh award preferably within three months from the date of receipt of the order.

e) Hearing is expedited.

f) The parties to take steps, accordingly.

g) There shall be no order as to costs.

Ordered accordingly.