2013 (4) TMI 413 - HC - Companies Law

Arbitration and Conciliation - petitioners seeks to challenge the awards made by the learned arbitrator under section 84 of the Multi State Cooperative Societies Act 2002 allowing the claims made by the first respondent - first petitioner in Arbitration Petition is a private limited company. One of the Director of first petitioner Mr. Abdul Latif Mahmood Dadan expired leaving petitioner no. 3 to 6 as his legal heirs - It was the case of the first respondent that the first petitioner committed default in making payment of the various amounts towards the term loan cash credit over draft and over drawn/adjustment accounts. According to the first respondent guarantors were also jointly and severally liable to the first respondent in respect of the said facilities - whether the learned arbitrator did not have jurisdiction to entertain the dispute in view of the position that section 91 of the Maharashtra Cooperative Societies Act was applicable to respondent no.1 bank when the dispute was filed by the first respondent before the cooperative court - Held that - On perusal of the award as well as interim order passed by the learned arbitrator it is clear that though the plea of the legal heirs claiming the property in question to be self acquired property and not having been inherited the same from the borrowers and/or guarantors and though such plea not having been controverted by the applicant the learned arbitrator could not have overlooked these facts and could not have confirmed the order of warrant of attachment on the properties of the legal heirs. The award shows patent illegality committed by the learned arbitrator in the impugned award on this issue. The learned arbitrator ought to have clarified in the impugned award that the legal heirs were liable only to the extent they had inherited any property from the estate of the deceased borrowers and/or guarantors. Not be accepted the submission made by the learned counsel appearing for the bank that the issue as to whether the properties in question which were attached by an order passed by the learned arbitrator were inherited by the legal heirs or not from the borrowers and/or guarantors has to be decided only in the execution proceedings and were not to be decided by the learned arbitrator. The learned arbitrator ought to have considered section 96 of the Multi State Act 2002 with sections 35 and 36 of the Arbitration and Conciliation Act 1996 and section 52 of the Code of Civil Procedure 1908 in the impugned award while attaching the properties. Section 96 of the Multi State Cooperative Societies Act 2002 cannot be read in isolation. A legal heirs and representatives are entitled to raise an issue that the deceased has left no assets or that they were not in a possession of any property left by the deceased or the same was not available to them in the arbitration proceedings itself. In my view the learned arbitrator is bound to decide the said issue in the impugned award itself after considering the material facts and documents into consideration. Perusal of the impugned award indicates that the learned arbitrator has considered all other aspects in the matter on merits and have rendered a finding of fact against the borrowers and the guarantors which findings are not perverse and thus no interference is warranted with such finding of facts. The learned arbitrator was right in passing a decree against the borrowers and the guarantors and was right in directing the legal heirs to pay the amount directed to be paid by the borrower/guarantor whose legal heirs they were. The learned arbitrator however was bound to decide the issue whether properties sought to be attached were inherited by the legal heirs from the debtors or not. The award by which the personal properties of the legal heirs are attached and the attachment order having been allowed to continue till recovery of the entire amount by the bank from the parties is perverse and patently illegal and that part of the award deserves to be set aside. Resultantly part of the award and order of warrant of attachment directing that the attachment of the properties described in schedule of the properties is set aside. The order of attachment of the properties passed by the learned arbitrator attaching the properties is set aside and remitted back to the learned arbitrator for disposal in accordance with law. Arbitrator shall decide whether properties in question were inherited by the legal heirs of the deceased debtors/guarantors and to what extent they are liable expeditiously and not later than six months from today. During the pendency of the proceedings before the learned arbitrator petitioners shall not sell alienate encumber part with possession or create any third party rights in respect of the properties which were subject matter of attachment.

Summary

Issues Involved:
1. Jurisdiction of the arbitrator.
2. Limitation of claims made by the Bank.
3. Violation of principles of natural justice.
4. Alleged bias of the arbitrator.
5. Impleadment of legal heirs in arbitration proceedings.
6. Attachment of properties of legal heirs.
7. Rejection of counterclaims without reasons.
8. Application of res judicata.

Detailed Analysis:

1. Jurisdiction of the Arbitrator:
The petitioners argued that the arbitrator lacked jurisdiction as the dispute should be adjudicated by the cooperative court. The court noted that the first respondent bank was converted into a Multi-State Cooperative Bank, thus ceasing to be governed by the Maharashtra Cooperative Societies Act. The Cooperative Court's order returning the plaint was accepted by both parties, and the petitioners filed counterclaims before the arbitrator without raising jurisdictional issues. The court held that the petitioners waived their right to challenge the arbitrator's jurisdiction under section 4 of the Arbitration & Conciliation Act, 1996.

2. Limitation of Claims Made by the Bank:
The petitioners contended that the claims were barred by the law of limitation. The court referred to section 85 of the Multi-State Cooperative Societies Act, 2002, which states that limitation for recovery claims starts from the date the member ceases to be a member. Since Petitioner No. 1 continued to be a member, the claims were not barred by limitation. The court also cited the Supreme Court's judgment in L.S. Synthetics Vs. Fairgrowth Financial Services Ltd., emphasizing that special statutes override the Limitation Act.

3. Violation of Principles of Natural Justice:
The petitioners claimed the award violated natural justice principles as the arbitrator did not verify the claims or allow cross-examination. The court found that neither party requested to consider the evidence from the Cooperative Court or sought to cross-examine witnesses before the arbitrator. The arbitrator decided based on pleadings and documents, and no prejudice was caused to the petitioners.

4. Alleged Bias of the Arbitrator:
The petitioners alleged bias, claiming the arbitrator was associated with the bank. The court found no such issue was raised before the arbitrator, and no application under section 12 read with section 13 of the Arbitration and Conciliation Act, 1996, was made. The arbitrator was appointed by the Central Registrar, not the bank, and no evidence of bias was provided.

5. Impleadment of Legal Heirs in Arbitration Proceedings:
The petitioners argued that legal heirs were improperly impleaded as they were not parties to the arbitration agreement. The court referred to section 84 of the Multi-State Cooperative Societies Act, 2002, which includes disputes involving legal heirs. The court held that legal heirs claiming through a member are bound by the arbitration clause and liable for the deceased member's obligations.

6. Attachment of Properties of Legal Heirs:
The court addressed whether the properties of legal heirs could be attached without determining if they inherited any property from the deceased borrowers/guarantors. The court noted that the arbitrator did not decide if the properties were self-acquired or inherited, despite the legal heirs providing uncontroverted evidence. The court ruled that the arbitrator should have clarified the liability extent and set aside the attachment order, remitting the issue back to the arbitrator for determination.

7. Rejection of Counterclaims Without Reasons:
The petitioners contended that their counterclaims were rejected without reasons. The court found that the evidence from the Cooperative Court was not part of the arbitration record, and the petitioners did not request its inclusion. The arbitrator's decision was based on the available pleadings and documents, and no procedural error was found.

8. Application of Res Judicata:
The petitioners argued that the arbitration proceedings were barred by res judicata due to the Cooperative Court's order. The court held that the Cooperative Court's order was not an adjudication on merits but a jurisdictional decision. Thus, the arbitration proceedings were not barred by res judicata.

Conclusion:
The court upheld the arbitrator's findings on the merits but set aside the attachment orders on the properties of legal heirs, remitting the issue back to the arbitrator for determination. The petitions were disposed of with no order as to costs.