Heard finally by consent of the parties.
2 The Petitioners (original-Respondent Nos. 1, 4 and 5) have challenged award dated 13 July 2011 passed by the sole Arbitrator (Respondent No.4), under Section 34 of the Arbitration and Conciliation Act, 1996 (for short, the Arbitration Act) and Section 84 of the Multi-States Co-operative Societies Act, 2002 (for short, MSCS Act).
3 The operative part of the impugned award is as under:-
1) I, Suresh B. Pawar, Arbitrator, under Section 84 of the Multi State Co-operative Societies Act, 2002 do hereby declare that the Applicant Bank is entitled to recover from the Opponents, jointly and severally a sum of Rs.15,80,25,186.54 with interest thereon @ 12.50% p.a. from 01.08.2010 till realization of claim. Hence, all Opponents do pay jointly and severally to the Disputant Bank Rs.15,80,25,186.54 with costs of Rs.25,000/- and interest thereon @ 12.50% p.a. from 01.08.2010 till realization of claim.
2) The applicant Bank is entitled to dispose of the mortgaged as well as hypothecated securities of all Opponents to recover the dues.
3) Amount if any, paid by the Opponents or recovered by the Applicant Bank by any means after filing of this arbitral proceedings, be appropriated towards this claim.'
4 On 19 September 2007, the Board of Directors of Original Applicant Bank accepted the membership of (original Respondent Nos. 1 to 5) now, Petitioner Nos. 1 to 3 and Respondent Nos. 2 and 3. On 8 October 2007, Petitioner No.1 applied for loan of Rs.9.00 crores for setting up of hotel project and Respondent Nos. 2 and 3 and Petitioner Nos. 2 and 3, stood as guarantors. Out of Rs.9.00 crores, Rs.7.10 crores were sanctioned as Long Term Loan and Rs.1.90 crores sanctioned as hypothecation loan. On 7 November 2007, Petitioner Nos. 1 to 3 and Respondent Nos. 2 and 3, executed the loan documents agreeing to repay the loan as per the terms and conditions mentioned in the sanction letter. Petitioner No.1 also submitted the resolution of the Board of Directors accepting the terms and conditions of the loan and authorizing Respondent No.3 and Petitioner No.2, to execute all the documents on behalf of Respondent No.1 as per sanction letter.
On 6 May 2008, Petitioner No.1 applied for additional term loan of Rs.80.00 lakhs for purchase of shop No.18, 18A and 18B at Mahesh Residency Kandivli (West), Mumbai-67. On 29 May 2008, the Applicant sanctioned the additional loan of Rs.80.00 lakhs against the mortgage of shop No.18, 18A and 18B at Mahesh Residency Kandivli (West). On 31 May 2008, Petitioner Nos. 1 to 3 and Respondent Nos. 2 and 3, executed all the loan documents as required as per sanction letter. On 29 January 2009, Petitioner No.1 again applied for additional Term Loan of Rs.4.00 crores and O.D. Facility of Rs.25.00 lakh for meeting escalation of cost of hotel project and for setting up of ice-cream parlor. On 28 February 2009, the Board of Directors of the original Applicant sanctioned additional term loan of Rs.4.00 crores and O.D. facility of Rs.25.00 lakhs.
The hotel and related projects proceeded in part, but could not continue successfully for long.
5 On 8 December 2009, Petitioner No.1 invited offers by paper advertisement for sale of hotel, but could not be sold. On 6 August 2010, Respondent No.1 Bank issued recall notice under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (for short, SARFAESI, Act). On 18 August 2010, by reply letter Petitioner No.1 admitted the liability and sought time for repayment.
6 On 26 August 2010, statement of claim filed before the learned Arbitrator under Section 84 of the MSCS Act. On 26 August 2010 the order of attachment before judgment was passed. On 14 December 2010, the Receiver came to be appointed by consent of the parties. On 15 January 2011, letter by Petitioner No.1 proposing to sell hotel to repay loan and appreciating the co-operation extended by Respondent No.1. On 28 April 2011, written statement of Petitioner No.1 to 3 are filed.
7 Some of the dates and the events referred by the learned counsel appearing for the Petitioners:-
On 21 June 2011, Respondent No.1 filed their written submissions. The Petitioners filed their application for permission to produce their witnesses. Respondent No. 4 rejected the application of the Petitioners to produce witnesses on flimsy grounds. On 1 July 2011, the Petitioners filed applications for framing points for determination and for amendment to the written statement of the Petitioners. On 5 July 2011, Respondent No.4 was dismissed both the applications. On 7 July 2011 at 5.30 p.m. Respondent No.4 furnished two orders dated 5 July 2011 in their entirety to the Petitioners. On 12 July 2011, the Petitioners filed applications for (i) speaking to the minutes of the order passed on the application for framing points for determination, (ii) speaking to the minutes of the order passed on the application for amendment to the written statement, (iii) recalling the order dated 21 June 2011 passed by Respondent No.4 and, (iv) permission to cross-examine the deponent of the claim affidavit.
8 On 13 July 2011, Respondent No.4 was pleased to pronounce the operative part of the orders on all the aforesaid applications tendered on behalf of the Petitioners on 12 July 2011. Pursuant to the liberty granted by Respondent No.4 on 12 July 2011, the learned counsel for the Petitioners had tendered two case laws in support of applications for speaking to the minutes referred to hereinabove on 13 July 2012. Respondent No. 4 dictated his findings thereon to the stenographer and immediately pronounced the operative part of the orders on the aforesaid applications.
The copies of the orders passed on the four applications filed and argued on 12 July 2012 were not even furnished to the Petitioners.
Respondent No.4 directed the learned counsel appearing for the Petitioners to immediately commence final arguments. On the application of the learned counsel appearing for the Petitioners for adjourning the case for a short while to enable the Petitioners to consider the aforesaid orders, Respondent No.4 rejected the same. Immediately, on the conclusion of the arguments, Respondent No.4 was pleased to announce that the operative part of the order will be passed first and communicated within one hour. The reasons would be communicated within three-four days.
9 The Petitioners filed an application under Sub-section (2) of Section 13 read with sub-section (3) of section 12 of the Arbitration Act requesting Respondent No.4 to decide upon impartiality and in the meantime to stay further proceedings. Till date, the decision, if any, passed by Respondent No. 4 thereon has not been communicated to the Petitioners. On 18 July 2012 the Petitioners received the award.
10 The following case laws cited by the learned counsel appearing for the Petitioners:-
i) PrakashKumar Sinha Vs. Konkan Mercantile Co-operative Bank Limited (2012(6) Mh.L.J. 274)
The Arbitrator must take note of basic principle of Civil Procedure Code and/or Evidence Act before assessing and/or giving finding based upon documents and material placed on record.
Arbitrator acted in breach of his role as enunciated (particularly with reference to Sub-paragraphs (x), (xiii), (xvii), (xxi) and (xxiii).
The initiation of Arbitration proceedings is nothing but the statutory Arbitral Tribunal created under the MSCS Act.
ii) M/s. Paradise Industrial Corporation Vs. M/s. Kiln Plastics Products (1976) 1 SCC 91).
iii) Modula India Vs. Kamakshya Singh Deo (1988) 4 SCC 619).
Though the defence is struck off the defendant is entitled to appear, cross-examine the Plaintiff's witnesses, yet on the basis of the evidence on behalf of the plaintiff the decree cannot be passed against him.
iv) Booz Allen and Hamilton INC. Vs. SBI Home Finance Limited & Ors. (2011) 5 SCC 532).
A lis for sale, foreclosure or redemption of mortgaged property should only be tried by a public forum and not by an Arbitral Tribunal.
Even if some of the issues or questions in a mortgage suit could be decided by a private forum, the issues in a mortgage suit cannot be dissected and divided.
11 The learned senior counsel appearing for Respondent No.1 relied on a judgment of the Supreme Court. (RahejaUniversal Limited Vs. NRC Limited and Ors.) (2012) 4 SCC 148). This was the Judgment referring to restructuring scheme and BIFR Jurisdiction as contemplated under Sections 15 to 21, 22 and 22A of the Sick Industrial Companies (Special Provisions) Act, 1985 (for short, SICA Act).
12 Admittedly, the Arbitrator was appointed under Section 84 of the MSCS Act. The Arbitrator was not appointed by consent of the parties. The learned Arbitrator therefore, even otherwise considering Section 19 read with Section 34 of the Arbitration Act bound to take note of basic principles of CPC and Evidence Act before assessing and/or giving findings relying upon the documents and material on record as there was other agreed procedure. This Court in PrakashKumar (Supra), referring to SahyadriEarth Movers Vs. L & T Finance Limited (2011(4) Mh. L. J. 200), has already observed as under:-
'14. The relevant factor here again is that the aggrieved parties normally select their own procedure and Arbitrator/Judge to settle their disputes through the Arbitration proceedings. But, in view of specific provisions of MSCS Act-2002, the parties have no choice to select their own Arbitrator to decide the dispute between the parties. Therefore, such Arbitrator appointed under any act just cannot claim that the provisions of CPC and/or Evidence Act are not applicable. The initiation of Arbitration proceedings referring to the Arbitration Act in my view, is nothing but the statutory Arbitral Tribunal created under the provisions of MSCS Act-2002 and the Arbitration Act. Therefore, it is also necessary for such Arbitrator while deciding any issue for and/or against the parties, he must take note of the basic principle of CPC and/or the Evidence Act before assessing and/or giving finding based upon the documents and material placed on record.'
13 So far as Clause 2 of the Award whereby, the learned Arbitrator has directed/permitted the Respondent Bank to dispose of the mortgaged, as well as, the hypothecated securities of all Opponents to recover the dues, need to be interfered with. The learned Arbitrator, as recorded above, is even otherwise bound by the provisions of the Arbitration Act. Therefore, there is no question of issuing such direction to dispose of the mortgaged, as well as, the hypothecated securities while passing the final award against the borrower/guarantor. The Arbitration Act provides the remedy, once the award attains finality to execute the same and/or to take appropriated steps to dispose of the mortgaged, as well as, the hypothecated securities. Such composite order of granting decree, as well as, passing final award on execution of the same, is impermissible. This Court in JayantIndustrial Packaging Limited, Mangrol Vs Saraswat Co-operative Bank Limited (2011(4) Mh.L.J. 128) has observed as under:-
'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 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.'
14 The Petitioners have raised various grounds and referred various circumstances, based upon which the receiver was appointed and the Arbitration proceeded accordingly till the date of award. It appears that the order of appointment of receiver by the Court remained intact till this date. However, it is relevant to note that this Court has appointed the Court receiver in place of receiver appointed by the Arbitrator and thereby restrain to sell the property. The learned Arbitrator still, by the impugned award directed to dispose of the property as recorded above. There is nothing on record to show that any leave or permission was obtained and/or on record to justify such order, pending the appointment of the receiver by the High Court.
15 The Apex Court recently in Booz Allen and Hamilton INC. (Supra) observed that the complicated issues with regard to the sale or redemption of mortgaged property needs to be adjudicated in Civil Court and not before or by the Arbitral Tribunal. We are concerned with the statutory Arbitration under Section 84 of the MSCS Act. However, considering the scheme and purpose of Section 84 of the MSCS Act, in the present case no further discussion is required in view of the other reasonings given in the matter.
16 There is no serious dispute that on 1 July 2011, the application for framing issues for determination; and for amendment to the written statement whereby the counter claim of more than Rs.16 crores was raised towards the damages by the Petitioners-borrowers. The same were rejected on 5 July 2011 itself. On 12 July 2011 the applications were filed for clarification of the orders so passed and also to recall the order of 21 June 2011 whereby, the Petitioners' Application for permission to produce their witnesses was rejected, mainly on the ground that the stage was to file written arguments. The Application for permission to cross-examine the deponent of the claim affidavit was also rejected along with these applications and passed the award on 13 July 2011.
17 The learned Senior Counsel appearing for the Respondent No.1 supported the orders mainly on the ground that the learned Arbitrator based upon the admissions; and as no serious disputes about the execution of the banking documents; and alleged admission of the Petitioners to make the payment in installments and further applications were filed just to delay the proceedings therefore, the award cannot be stated to be illegal and/or unlawful, the same needs no interference.
18 The opportunity was not given to the Petitioners to lead evidence to establish their case by rejecting the application for permission to produce their witnesses and directed to file their written arguments. This in my view, amounts to breach of natural justice. No opportunity can be denied to the parties in such fashion as it goes to the root of the rights of their defence. The Arbitration Act itself required that the Arbitrator must give full and fair opportunity to both the parties. The Arbitral Tribunal as constituted in view of Section 84 of the MSCS Act required to adjudicate the disputes between the parties by following due procedure of law; the denial of such opportunity definitely affects the rights of the contesting parties.
19 The Application to cross-examine the witnesses of the Respondents in support of the claim was also denied. The rights to cross-examine the witnesses of the claimant, just cannot be denied in such fashion. The Apex Court in M/s. Paradise Industrial Corporation (Supra), Modula India (Supra) and SheshraoRaibhan Ingale (Supra) has reiterated that even when a defence is struck off the defendant is entitled to cross-examine the plaintiff's witnesses. The Plaintiff even otherwise, needs to prove his case. The decree cannot be passed by accepting the case of the plaintiff on the 'admission' of the documents in every matter. The explanation is always possible.
20 It is settled that the right of cross-examination is also integral part of natural justice principles, apart from Order 18 Rule 4 and Order 19 Rule 3 of the CPC. (Ayaaubkhan Noorkhan Pathan Vs. State of Maharashtra & Ors. (AIR 2013 SC 58). The Apex Court reiterated as under:-
'30 The aforesaid discussion makes it evident that, not only should the opportunity of cross-examination be made available, but it should be one of effective cross-examination, so as to meet the requirement of the principles of natural justice. In the absence of such an opportunity, it cannot be held that the matter has been decided in accordance with law, as cross-examination is an integral part and parcel of the principles of natural justice.'
21 The Division Bench of this Court in ShailajaBitesh Sagar & Ors. Vs. Virgina Anthony Misquitta & Ors. (2013(1) Bom. C.R. 419)has observed in the following words.
'21. In our view, denying the opportunity to the defendant Nos.1(A), 1(B) and (1F) to file written statement would frustrate the rights rather than to achieve justice on technical grounds when rights of the plaintiffs can be protected by imposing cost on the defendants and by expediting the hearing of suit.'
22 The Apex Court in BieccoLawrie Limited & Anr. Vs. State of West Bengal & Anr. (2009) 10 SCC 32)has not accepted the similar contention that observance of principles of natural justice and/or fair play and equity would be merely useless formality since he had admitted the charges. Here, the case is of 'admission' of the banking documents. The issue is the adverse material and the documents so used by the Arbitrator. The right to fair hearing, opportunity and equal treatment are the basic rights and requirement of any judicial, as well as, the quasi judicial tribunal to follow before passing any adverse order. These elements are missing in the present case. (NatwarSingh Vs. Director of Enforcement & Anr. (2010) 13 SCC 255).
23 The Apex Court in State of Goa Vs. Praveen Enterprises, (2011(7) SCALE 131)has observed as under:-
'24. Section 23 of the Act enables the claimant to file a statement of claim stating the facts supporting his claim, the points at issue and the relief or remedy sought by him and enables the respondent to state his defence in respect of those claims. Section 2(9) provides that if any provision [other than section 25(a) or section 32(2)(a)], refers to a 'claim', it shall apply to a 'counter claim' and where it refers to a 'defence', it shall also apply to a defence to that counter claim. This would mean that a respondent can file a counter claim giving the facts supporting the counter claim, the points at issue and the relief or remedy sought in that behalf and the claimant (who is the respondent in the counter claim) will be entitled to file his defence to such counter claim. Once the claims and counter claims are before the arbitrator, the arbitrator will decide whether they fall within the scope of the arbitration agreement and whether he has jurisdiction to adjudicate on those disputes (whether they are claims or the counter claims) and if the answer is in the affirmative, proceed to adjudicate upon the same.'
25. …..The pleadings of the parties were filed before the arbitrator, and the reference covered all disputes between the parties in the suit. Accordingly, the counter-claim could not be made at any earlier stage. Refusal to consider the counter-claim for the only reason given in the award does, therefore, disclose an error of law apparent on the face of the award.'
26. …....'The object of providing for counter claims is to avoid multiplicity of proceedings and to avoid divergent findings. The position of a respondent in an arbitration proceedings being similar to that of a defendant in a suit, he has the choice of raising the dispute by issuing a notice to the claimant calling upon him to agree for reference of his dispute to arbitration and then resort to an independent arbitration proceedings or raise the dispute by way of a counter claim, in the pending arbitration proceedings.'
24 The amendment was sought to the written statement, though late, to the extent of Rs. 16 crores and more. The learned Arbitrator rejected the counter claim by the same order. I am inclined to observe that the merits and demerits of the counter claim ought not to have been disposed off in such fashion. The rejection of counter claim itself, has caused injustice and hardship to the Petitioners. The other allegations/averments made in the written statement and the defence, also disposed off without giving opportunity to the Petitioners, by rejecting all the applications, as referred above.
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/> 25 The grant of claim so prayed is always subject to the adjustment of amount of counter-claim, if any. The award therefore, so passed by rejecting the counter-claim without giving opportunity to the Petitioners therefore, also an additional factor to interfere with the award. In view of above, I am inclined to observe that this is a case where the interference of the Court under Section 34 of the Arbitration Act is necessary. There is nothing mentioned and dealt with specifically about the other pending legal proceedings between the parties. The order so passed is in breach of natural justice, fair play and equity; and the award so passed is illegal; and liable to be quashed and set aside. The citation of RahejaUniversal Limited (supra) is of no assistance in the facts and circumstances. 26 However, considering the facts and circumstances and as without going to the merits of the matter and for the reasons recorded above, the award is quashed and set aside, still I am inclined to grant opportunity to both the parties to represent their case again before the same Arbitral Tribunal and/or other. The learned Arbitrator to adjudicate and decide the issues after giving opportunity of hearing to all the parties. The Arbitral Tribunal may grant opportunity to lead any evidence, if required. The hearing is expedited. The parties to take steps in accordance with law. All the points are kept open. 27 Therefore, taking over all view of the matter, I am inclined to pass the following order: ORDER a) Impugned award dated 13 July 2011 is quashed and set aside and the matter is remanded back for rehearing. b) The Arbitral Tribunal to give full opportunity to both the parties and pass the award in accordance with law. c) Considering the facts and circumstances, the learned Arbitral Tribunal to dispose of and/or pass the order/award as early as possible. d) The Court appointed Receiver to continue till the final decision by the Arbitral Tribunal. Liberty to apply for appropriate order/direction. e) The liberty is granted to the parties to apply and/or submit proposal for settlement, if any. f) The parties to take steps. g) All the points are kept open. h) There shall be no order as to costs.