Award Against Guarantor Who Is Not Member Of Multi State Co-Op Society, Without Jurisdiction: Bombay High Court

The bench of Justice Manish Pitale ruled that a dispute, which is not covered under Section 84 (1) of the MSCS Act, would not be capable of being referred to arbitration. Thus, the Court concluded that the arbitral award was rendered without jurisdiction against the petitioner/ award debtor.

The principal borrower, M/s. Erica Healthcare Pvt. Ltd., was advanced a loan and cash credit facility by the respondent Bank, NKGSB Co. Op. Bank Ltd (a Multi-State Co-operative Society). A Deed of Guarantee was executed and the petitioner, Deepti Prakash Ghate, along with other parties, were made guarantors.

There was default in repayment of loan, leading to disputes between the respondent Bank and the principal borrower, pursuant to which arbitration proceedings were initiated under Section 84 (1) of the Multi-State Cooperative Societies Act, 2002 (MSCS Act). The petitioner, along with the principal borrower and the other guarantors, were made parties to the proceedings.

The Sole Arbitrator passed an award under which the petitioner, along with others, was held jointly and severally liable to pay a specific amount along with interest to the respondent Bank. The petitioner challenged that arbitral award by filing a petition under Section 34 of the Arbitration and Conciliation Act (A&C Act) before the Bombay High Court.

The petitioner, Deepti Prakash Ghate, argued that she was never served with a notice and was completely unaware of the entire arbitral proceedings. She added that only when the respondent Bank addressed a letter to her employer, annexing a copy of the arbitral award, that she became aware of the award. The petitioner submitted that since she was never served with the original signed copy of the award, the issue of limitation would not arise.

The petitioner further contended that the arbitral award was passed without jurisdiction. She averred that since she is not a member of the respondent Multi-State Cooperative Bank, arbitral reference under Section 84(1) could not be made against her.

The Court noted that as per Section 84(1) of the MSCS Act, disputes between members, past members and persons claiming through members and the Multi-State Cooperative Society, which touch upon the constitution, management or business of the said society, shall be referred to arbitration.

Referring to the definition of “member” contained in Section 3(n) of the MSCS Act, the Court reckoned that in order to treat a person as a member, the person must have applied for membership with the Multi-State Co-operative Society.

It further observed that the MSCS Act provides for a detailed procedure for induction as a member. This entails the submission of an application form as prescribed under the Rules and bye-laws, the Court took note.

The Court concluded that a dispute, which is not covered under Section 84, would not be capable of being referred to arbitration. The Court added: “The respondent-Bank was required to show that the dispute, which was referred to arbitration arose between the respondent Bank and a member, past member or a person claiming through a member”.

The Court referred to the documents placed on record, which showed that although the principal borrower was inducted as a regular member and other guarantors were inducted as nominal members, the petitioner never submitted any form for membership.

“Thus, it becomes clear that the petitioner never applied for membership and therefore, there is no question of she being admitted as a member of the respondent-Bank (a Multi-State Co-operative Society)”, the bench concluded.

Thus, the Court held that since the petitioner cannot be treated as a member of the respondent Bank, even if certain disputes arose between them, the respondent Bank could not have invoked Section 84(1) of the MSCS Act, for referring the said dispute for arbitration so far as the petitioner was concerned.

The bench referred to its decision in Prakash Vrundavan Thakkar versus Nagpur Nagrik Sahakari Bank Ltd. and Ors. (2014), where a Multi-State Co-operative Society sought to proceed against a guarantor who was not a member of the society. The High Court had ruled that the reference to arbitration under the MSCS Act and the consequent award passed by the arbitrator against such guarantor were unsustainable.

The respondent bank, NKGSB Co. Op. Bank, argued that even if the petitioner is not a member of the respondent Bank, arbitration can be invoked against her, in view of Section 84(2)(b) read in conjunction with Section 84(1) and Section 3(n).

Rejecting the arguments raised by the respondent, the Court ruled, “sub-section (2) of Section 84 thereof, elaborates the aspect of disputes touching upon the constitution, management or business of a Multi-State Cooperative Society. It does not dilute any requirement of Section 84(1) of the Act of 2002, which pertains to disputes that can be referred to arbitration and the parties to such disputes that can be referred to such arbitral proceedings”.

The bench held that as per the decision of the Apex Court in State of Maharashtra versus M/s. Ark Builders Pvt. Ltd. (2011), the period of limitation would start to run only when the original signed award is served on the petitioner. Observing that the petitioner was served with a copy of the award through her employer, the Court ruled that such method of service of the copy of the award would not trigger limitation.

Thus, since the original signed copy of the award was never served on the petitioner, the period of limitation was never triggered, the Court said.

“In the light of above, this Court finds that the petitioner has made out a case for interference with the impugned award under Section 34 of the Arbitration and Conciliation Act, 1996, for the reason that the arbitral award was rendered without jurisdiction, as the disputes could not have been referred for arbitration under Section 84(1) of the Act of 2002, in so far as the petitioner was concerned. In view of the above, the impugned award is set aside, in so far as the petitioner is concerned.”

While ruling that the arbitral award was rendered without jurisdiction, the Court allowed the petition and set aside the arbitral award passed against the petitioner.

Case Title: Deepti Prakash Ghate versus NKGSB Co. Op. Bank Ltd.

Citation - 2023 LiveLaw (Bom) 25

Dated: 07.01.2023 (Bombay High Court)

Counsel for the Petitioner: Mr. Vishal Pattabiraman a/w. Mr. Mittal Munoth,

Counsel for the Respondent: Mr. Joel Carlos

Click Here To Read/Download Order