Rajlaxmi Multistate Credit Co-Operative Society Ltd v. Gajanan Vasant Shribhate

2025:BHC-NAG:10869 1 AA-77-2025.odt

IN THE HIGH COURT OF JUDICATURE AT BOMBAY

NAGPUR BENCH AT NAGPUR ARBITRATION APPEAL NO. 77/2025 Rajlaxmi Multistate Credit Cooperative Society Ltd., Yavatmal Regd. No. MSCS/CR.544/2012 Head Office at Mainde Chowk, Yavatmal APPELLANT :

Vs.

Gajanan Vasant Shirbhate, Aged about 54 years, Occupation - Agriculturist, R/o Kamala Park, Behind Naringe Nagar, Yavatmal, Tal. & Dist. Yavatmal.

2.

Deepak Sopanrao Dehankar Aged about 42 years, Occ. Labour, R/o Vitthalwadi, Near Sandip Talkies, Yavatmal, Tal. & Dist. Yavatmal.

3.

Yogesh Radhesham Gupta, Aged about 45 Years, Occu. Business, R/o Chapmanwadi, Yavatmal, Tal. & Dist. Yavatmal.

4.

Kishor Manohar Dhole, Aged about 45 years, Occu.Agriculturist, R/o Ujwal Nagar, Yavatmal, Tal & Dist.

Yavatmal.

: RESPONDENTS Mr. Omkar Deshpande, Advocate for Appellant Mr. J.M. Baradkar, Advocate for Respondent no.1. Mr. M.P. Kariya, Advocate for the Respondent nos. 3 and 4. CORAM: NIVEDITA P. MEHTA, J.

Date of reserving the judgment : 29.09.2025 Date of pronouncing the judgment : 14.10.2025.

2 AA-77-2025.odt JUDGMENT :

The present appeal under Section 37 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as "the Act of 1996") is preferred by the appellant, assailing the judgment and order dated 01.02.2025 passed by the learned Principal District Judge, Yavatmal in Civil M.A. No. 64/2024.

2.

The appellant is a registered Multi-State Co-operative Society having its registered office at Yavatmal, and is governed by the provisions of the Multi-State Co-operative Societies Act, 2002 (hereinafter referred to as "the Act of 2002"). It is the case of the appellant that respondent Nos. 1 and 2 approached the appellant Society with a request for sanction of a loan for the purpose of house repairs. After completion of requisite formalities and execution of necessary documents, a loan of 5,50,000/- was sanctioned and disbursed to ₹ respondent Nos. 1 and 2 on 01.03.2024. As per the loan agreement and the bye-laws of the Society, the borrowers undertook to repay the said loan amount along with interest at the rate of 15% per annum, payable either quarterly or monthly, and also agreed to pay penal interest at the rate of 2% per annum in case of default.

3 AA-77-2025.odt 3.

The borrowers, i.e., respondent Nos. 1 and 2, defaulted in repayment of the loan instalments, resulting in a substantial outstanding liability. As on 18.12.2018, the outstanding loan amount stood at 6,32,473/-, excluding future interest and charges. Despite issuance of ₹ repeated notices by the appellant Society, the respondents failed to discharge their outstanding liabilities. Consequently, on 19.12.2018, the appellant referred the dispute to arbitration. 4.

In view of the respondents being members of the Society, the dispute was one touching the constitution, management, or business of the Society. Accordingly, as contemplated under Section 84 of the Act of 2002 read with Section 23 of the Act of 1996, the dispute was referred for arbitration. The appellant proposed the name of Advocate Shri A.G. Gupta as sole Arbitrator and forwarded the said proposal to the office of the Registrar, Co-operative Societies, Maharashtra State, Pune, where a panel of Arbitrators is maintained. From the said panel, and upon due consideration, the Commissioner for Co-operation and Registrar of Cooperative Societies, Maharashtra State, Pune, appointed Shri A.G. Gupta as the sole Arbitrator by letter dated 13.12.2018. 5.

Subsequent to such appointment, arbitral proceedings commenced. Although the respondents were duly served, they neither

4 AA-77-2025.odt filed a written statement nor participated in the proceedings. The learned Arbitrator, after hearing the matter ex parte, passed an Award dated 27.04.2019 directing respondent Nos. 1 to 4 to jointly and severally pay a sum of 6,32,473.43 to the appellant Society along with ₹ future interest at the rate of 17% per annum from 19.12.2018 till realization. The Arbitrator also awarded costs in favour of the appellant. 6.

The said award was challenged by the respondents under Section 34 of the Act of 1996 before the Principal District Judge, Yavatmal. The learned District Judge, vide judgment dated 01.02.2025, set aside the arbitral award on two principal grounds:

(i) That the appointment of the Arbitrator was in violation of Section 11 of the Act of 1996 due to lack of mutual consent; and (ii) That the Award directed charging of interest upon interest, which was contrary to public policy, as per the ruling in M/s. Zenith Fire Services (India) Pvt. Ltd. vs. Charmi Sales, (2013) 7 ALL MR 332. It was held that the loan agreement did not contain any express provision permitting interest on interest, and hence the arbitral award violated fundamental principles of justice.

7.

Challenging the aforesaid judgment, the present appeal has been preferred. The learned counsel for the appellant contends that the

5 AA-77-2025.odt learned Principal District Judge failed to appreciate the statutory scheme under the Act of 2002, which provides for arbitration as a statutory remedy under Section 84. It is submitted that when an Arbitrator is appointed in accordance with the statutory framework governing MultiState Co-operative Societies, there is no requirement of mutual consent under Section 11 of the Act of 1996. It is further argued that Section 34(2) of the Act of 1996 does not apply in its entirety to statutory arbitrations governed by the special legislation. 8.

The learned counsel for the appellant also submits that respondent No. 1 had appeared before the Arbitrator but failed to file a written statement and did not raise any objection to the appointment of the Arbitrator. It is contended that for the first time, the respondents questioned the appointment of the Arbitrator only at the stage of filing the application under Section 34 before the District Court, which is impermissible. It is further urged that respondent Nos. 3 and 4 stood surety for the loan and thus are equally liable along with the borrowers. 9.

On the other hand, learned counsel appearing for respondent Nos. 3 and 4 submits that they are not members of the appellant Society and, therefore, the arbitration proceedings initiated under Section 84 of the Act of 2002 are not maintainable as against them. It is contended that

6 AA-77-2025.odt under Section 3(n) of the Act of 2002, the definition of "member" does not include guarantors unless they have been admitted in accordance with the bye-laws and rules of the Society. It is also argued that the appointment of the sole Arbitrator was made unilaterally by the appellant and without obtaining the consent of the respondents, thereby violating the mandate of Section 11 of the Act of 1996. Hence, the arbitral award is vitiated.

10.

The learned counsel for respondent Nos. 1 and 2 submits that under section 3(n) "member" means a person joining in the application for registration of a Multi State Credit Cooperative Society and includes a person admitted to membership after such registration. However, the appellant has not placed any material on record to indicate that the applicants were admitted to the membership of appellant society. Further, he submits that the proposal for appointment of Shri A.G. Gupta as Arbitrator was initiated by the appellant Society through resolution dated 08.09.2018 and forwarded to the Registrar's office by letter dated 12.10.2018. However, the said letter did not disclose the specific dispute or case for which the Arbitrator was proposed to be appointed. It is, therefore, contended that the appointment procedure is vitiated. It is also sought to be canvassed that the award imposes interest upon interest, which is impermissible under settled law unless expressly

7 AA-77-2025.odt provided in the statute or contract. Reliance is placed on the judgment reported in M/s D.Khosla and Company Vs. Union of India, ALL MR 2024 SC 3937, wherein the Hon'ble Supreme Court has held that unless specifically authorised, interest upon interest is not legally sustainable. 11.

Both parties have relied upon various judgments to support their respective contentions. The appellant has placed reliance on Fancy Builders Pvt. Ltd v. The Memon Cooperative Bank Ltd., 2015 SCC Online Bom 4915; Saba Chemicals v. Siddhartha Bhattacharya, 2015 SCC Online Bom 2112; and Mr. Niwas v. Punjab and Maharashtra Co-op. Bank, 2014 SCC Online Bom 4683. The respondents have relied upon M/s. Zenith Fire Services vs. Charmi Sales 2013 (7), ALL MR 322; M/s D. Khosla and Company Vs. Union of India, AIR 2024 SCC 3937; The Saraswat Coo-operative Bank Ltd. vs. M/s Jaynit agencies and others 2015 (5) All MR 245.

12.

Having considered the submissions made by learned counsel for both parties, and upon perusal of the record of the arbitral proceedings, the award, and the impugned judgment passed by the learned Principal District Judge, the following issues arise for determination:

8 AA-77-2025.odt A.

Whether the appointment of the sole Arbitrator under Section 84 of the Act of 2002, without express consent of the respondents, is legally valid?

B.

Whether the arbitral award is liable to be set aside for charging interest on interest being in conflict with public policy of India under Section 34(2)(b)(ii) of the 1996 Act?

C.

Whether respondent Nos. 3 and 4, being guarantors are amenable to the arbitration proceedings under the Act of 2002? These issues are addressed as under:

13.

Issue A: Whether the appointment of the Arbitrator under Section 84 of the Act of 2002 requires mutual consent under Section 11 of the Act of 1996?

The Learned Counsel for the appellant has, vide pursis dated 29.9.2025 has filed an order passed by the Commissioner for Cooperation and Registrar of Co-operative Societies, M.S., Pune dated 13.12.2018. The order clearly indicates that Advocate Arun G. Gupta is appointed as an arbitrator for resolution of disputes, touching the constitution, management or business of the MSCS as per the provisions of the Act of 1996, read with Section 84 of the Act of 2002. The order clearly indicates that the arbitrator is appointed for the disputes

9 AA-77-2025.odt mentioned in Annexure A appended thereto. Annexure A, at Sr. No. 32 shows that an amount of Rs. 5,50,000/- was extended as Loan to the Respondent No.1. An outstanding amount of Rs.5,42,782/- as on 16 April 2018 is pointed out, and it appears that until then 21 instalments were shown to be pending. Annexure A is titled as "List of proposed cases to be filed in the arbitrator court". It is the clear that the arbitrator is appointed for resolution of arbitrable disputes. In this context, it is now relevant to advert to the findings of the learned Court below vide the impugned order. As regards appointment of the sole arbitrator is concerned, the learned Court has placed reliance on Section 11 of the Act of 1996 to hold that the appointment of the sole arbitrator was improper due to absence of mutual consent of the respondents. For this, the learned Court below has relied on M/s. Zenith Fire Services (India) Ltd. Vs. Charmi Sales (2013) 7 ALL MR 332 (para

14) to conclude that there is clear violation of the mandate of Section 11 as regards consent of the respondents to appoint an arbitrator and such unilateral appointment of arbitrator is void. It appears that such reliance is placed primarily on the premise that all Arbitration must comply with the consensual mechanism outlined in the Act of 1996. However, the learned Court below has totally lost sight of the fact that the arbitration between the parties

10 AA-77-2025.odt herein is a "Statutory Arbitration". The Act of 2002 vide Section 84 provides for the resolution of disputes arising between a Multi-State Cooperative Society and its members, officers, employees or sureties through arbitration and the procedure for appointment of arbitrator is governed by the rules and notifications issued under the Act. Importantly, the Act allows the Registrar or Competent Authority to appoint an arbitrator from a pre-approved panel without requiring mutual consent of the parties.

It is a well settled principle of statutory interpretation that special laws override general laws in case of a conflict. The maxim Generalia specialibus non derogate, which means general law cannot derogate the special law is befitting in the present case. The Act of 1996 is a general law providing for a dispute resolution mechanism. Whereas, the Act of 2002 is a special legislation which, under Section 84, provides for a dispute resolution by way of Arbitration and procedure therefor is to be adopted as per the Act of 1996.

It would be apt to discern that only for the purposes of dispute resolution the Act of 2002 under Section 84 relies on procedure mandated under the Act of 1996. Act of 2002 is a special statute and therefore the general statute that is Act of 1996 cannot override the provisions of Act of 2002. Nay, no inconsistency is pointed out in Act of

11 AA-77-2025.odt 2002 vis-à-vis the Act of 1996 as required under Section 2 (4) of the Act of 1996.

Statutory arbitration refers to a situation where a law mandates arbitration for certain types of disputes, rather than the parties voluntarily agreeing to it. The Act of 1996 provides a framework for these mandatory proceedings and the same are conducted under the general provisions of the Act. The Act of 2002, being a special enactment governing Co-operative Societies' functioning across multiple states, has its own self dispute resolution mechanism under Section 84 of the Act of 2002 (that is reference to Arbitration).

The procedure adopted in the present case, namely the forwarding of the societies proposal to appoint Shri Gupta as arbitrator to the Registrar and subsequent appointment by the Commissioner, is in consonance with the procedure under the Act of 2002. Therefore, the absence of individual consent from the respondents does not render the appointment of the arbitrator invalid. Moreover, the respondents have never objected to such appointment of arbitrator at the initial stage, nor have they raised any jurisdictional objection during the arbitration proceedings. In fact, perusal of the arbitration award clearly indicates that the notices of the proceedings were duly served upon Respondents, however, they failed to appear before the arbitrator, because of which

12 AA-77-2025.odt the arbitration proceedings were proceeded ex parte vide order dated 30.3.2019.

In this context, a valuable reference can be made to the recent judgment of Hon'ble Supreme Court in Bank of India v. M/s Sri Nangli Rice Mills Pvt. Ltd. & Ors., 2025 SCC OnLine SC 1229. The Hon'ble Apex Court has clarified that under Section 11 of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 disputes between creditors must mandatorily be arbitrated under the Act of 1996. In doing so, the Supreme Court eliminated the need for any written agreement referring the dispute to arbitration and effectively ousted the jurisdiction of the Debt Recovery Tribunal.

Thus, the Hon'ble Apex Court's findings echoes the broader legislative trend across multiple statutes to channel certain categories of disputes away from the court system into expert, time-bound arbitral processespromoting the overall efficiency and stability of these regulated sectors. Therefore, the interpretation adopted by the Learned Court below leads to a conflation of consensual Private Arbitration under the Act of 1996 and Statutory Arbitration under the Act of 2002, which is legally untenable. Consequently, as regards Issue No. A, I hold that the appointment of arbitrator under Section 84 of the Act of 2002 does not require consent of respondent and the same is valid.

13 AA-77-2025.odt 14.

Issue B:

Whether the arbitral award is liable to be set aside for charging interest on interest being in conflict with public policy of India under Section 34(2)(b)(ii) of the 1996 Act?

It is argued that the appellant has charged interest upon interest, which is not permissible. The learned Court below has held that the Customer Ledger Account for Term Loan clearly indicates that interest is being charged on interest. Such finding is returned by relying on M/s. D. Khosla and Company (supra), wherein it is categorically held that ordinarily the courts are not entitled to award interest upon interest, unless specifically provided either under any statute or under the terms and conditions of the contract.

In this context, it would be relevant to refer to the Agreement of Term Loan dated 01.03.2014 executed between the appellant and respondents. Clause 6 mandates that the borrower undertakes to repay the loan as per the agreed schedule of the repayment and default if caused by the borrower in repayment. The borrower and co-borrower shall be rendered/termed as the defaulter and immediate action for recovery shall be taken. Clause 7 clearly states that it is agreed by the borrower that the interest at the rate of 15% per annum shall be calculated with monthly/ quarterly/ half yearly/ yearly rest, and shall be charged on the daily balance until the same is fully liquidated. Clause 8

14 AA-77-2025.odt states that it is further agreed by the borrower that the defaulted amount shall carry additional penal interest at 2% per annum till the date of full and final realisation.

It is thus clear that there is a contract for payment of interest and penal interest between the parties. It appears that the interest is charged on daily balance due upon the loan account and therefore, it cannot be said that charging of interest is improper. Needless to mention, if at all the respondents were aggrieved by the same, there is no explained reason on record to point out as to why the proceedings were not attended before the arbitrator by the respondent and such objection was ever taken by them. Further, the interest awarded by the Arbitrator was simple future interest at 17% per annum from the date of reference until realisation, along with the principal outstanding.

While the ledger entries may reflect cumulative dues (including unpaid interest), the award itself does not impose compound interest, nor does it direct that interest be charged upon the interest component. The award merely quantifies the outstanding liability and provides for a future interest rate. In ONGC Ltd. v. Saw Pipes Ltd., (2003) 5 SCC 705, the Supreme Court held that an award could be set aside for patent illegality only if such illegality appears on the face of the award and goes to the root of the matter.

15 AA-77-2025.odt especially when provided for in bye-laws or loan agreements does not by itself violate public policy unless it is usurious, unconscionable, or expressly prohibited by law.

Further, in UHL Power Company Ltd. v. State of Himachal Pradesh, (2022) 4 SCC 116, the Court reiterated that courts exercising jurisdiction under Section 34 of the Act of 1996 are not appellate courts and cannot re-appreciate evidence or substitute their own reasoning unless the award is irrational or perverse.

In the absence of a specific contractual or statutory prohibition, the arbitrator's award of interest even if arguably on a higher side cannot be said to be in conflict with public policy of India. As such, the finding of learned Court below that interest is wrongly charged by the appellant, is not based on healthy factual and legal interpretation. 15.

Issue C : Whether respondent Nos. 3 and 4, being guarantors are amenable to the arbitration proceedings under the Act of 2002? The contention of respondent Nos. 3 and 4 that they are not "members" of the Society and hence not bound by arbitration under Section 84 of the Act of 2002 is misplaced. It is undisputed that these respondents executed guarantee bond dated 01.03.2014 in favour of the Society for the loan advanced to respondent Nos. 1 and 2. This bond was

16 AA-77-2025.odt entered with full knowledge of the bye-laws and rules governing the Society, including dispute resolution through arbitration. The scope of Section 84 of the Act of 2002 is broad and includes sureties and guarantors as persons who can be made parties to a dispute referable to arbitration. The expression used in Section 84(1)(c) includes any person providing guarantee in relation to the transaction of the Society. Hence, the dispute with respondent Nos. 3 and 4 is squarely covered under the statutory arbitration mechanism. It is a settled law that a guarantor's liability is co-extensive with that of the principal debtor under Section 128 of the Indian Contract Act, 1872, unless otherwise provided.

Therefore, respondent Nos. 3 and 4 cannot escape liability merely by claiming non-membership, as they voluntarily assumed liability by signing binding legal documents. As such, respondent Nos. 3 and 4, being guarantors are amenable to the arbitration proceedings under the Act of 2002.

16.

Learned Counsel for Respondent No.3 and 4 made an additional effort to cement an argument by placing reliance on the judgement of this Court in The Saraswat Co-operative Bank Ltd. V. M/s. Jaynit Agencies & Ors., 2012 (5) ALL MR 245, that the conduct of the

17 AA-77-2025.odt arbitrator goes to the root of the matter and affect the proceedings, basically when appointment is made without consent of parties and further to contend that even though a plea of limitation is not raised, in view of Section 3 (1) of Limitation Act, the arbitrator is bound to consider crucial aspect of limitation in all monetary claims. With due respect, this judgement is not applicable in the present case as the factual matrix in both is different. Here, there is no allegation as regards the conduct of the arbitrator and therefore the same cannot be considered.

Further, as regards consent required is concerned, in the aforesaid case, Section 13 proceedings were filed with an objection that the same arbitrator in other matters was disqualified and withdrew from the arbitration proceedings. Therefore, it is held in the said judgment that if the arbitrator was disqualified and himself withdrew from the proceedings, the arbitrator should have returned the matter back as was done by him in other cases. However, this is not the issue in present case and therefore, as regards this observation is concerned, the same would not apply.

Further, the issue of limitation as canvassed, with due respect, would not apply in the present case as it is ex facie apparent from the Ledger Account for term loan relied upon by the appellant that the

18 AA-77-2025.odt outstanding was shown against the respondent till March 2018 as there were pending dues. The arbitrator was appointed vide order dated 13.12.2018 and the award was passed on 27.4. 2019. Therefore, by no stretch of imagination, can it be said that the claim of the appellant was beyond limitation.

17.

In summation, the impugned judgment passed by the learned Principal District Judge is legally unsustainable on all the counts discussed supra.

18.

First, it fails to distinguish between consensual arbitrations and statutory arbitrations. The appointment of the Arbitrator was done in accordance with the procedure prescribed under the Multi-State Cooperative Societies Act, 2002 and does not require mutual consent under Section 11 of the Arbitration and Conciliation Act, 1996. 19.

Second, the finding regarding charging of interest upon interest lacks any evidentiary basis and misapplies the doctrine of public policy. The arbitral award merely enforces the terms already agreed to. There is no material to show the award suffers from patent illegality.

19 AA-77-2025.odt 20.

Third, the guarantors who voluntarily executed the guarantee bond also fall within the ambit of statutory arbitration under the Act of 2002.

21.

The learned Court below has, committed a fundamental error in law by equating statutory arbitration with consensual arbitration and by intervening in the arbitral award without satisfying the threshold under Section 34 of the Act of 1996. The award in question does not suffer from any infirmity warranting interference. Accordingly, the arbitration appeal deserves to be allowed and is allowed. The impugned judgment dated 01.02.2025 of the learned Principal District Judge, Yavatmal in Civil M.A. No. 64/2024 is hereby set aside, and the arbitral award dated 27.04.2019 stands restored.

No order as to costs.

(NIVEDITA P. MEHTA, J.) MP Deshpande Signed by: Mr. S.K. NAIR Designation: PS To Honourable Judge Date: 14/10/2025 18:31:31