Bombay High Court Dismisses Multi-Credit Society's Appeal, Upholds Setting Aside Of Arbitral Award Over Borrowers' Membership

The Nagpur Bench of the Bombay High Court on 17 March dismissed an arbitration appeal filed by Rajlaxmi Multistate Credit Co-operative Society Ltd, declining to interfere with an order setting aside an arbitral award passed in its favour in a loan recovery dispute.

A Single-Judge Bench of Justice Pravin S. Patil held that the arbitral award suffered from patent illegality as the arbitrator had wrongly assumed jurisdiction without establishing that the borrowers were members of the society.

Justice Patil held:

“In the present case, in my opinion, not deciding the issue whether the respondent Nos.1 and 2 are members of the society or not is the patent illegality committed by the Arbitrator. It is not established by the appellant/society even before this Court that they are members of the society, consequently, the jurisdiction exercised under Section 84 of the Act of 2002 automatically goes and consequently proceeding decided by Arbitrator are vitiated."

The dispute relates to a loan transaction in which the society initiated proceedings on 27 March 2021 seeking recovery of about Rs. 1,29,34,497 along with interest from the borrowers and guarantors. The arbitrator's award dated 25 June 2022 held the respondents jointly and severally liable to repay the amount with interest at 19% per annum.

The borrowers challenged the award before the Principal District Judge at Yavatmal, contending that they were not members of the society and therefore the dispute could not have been referred to arbitration. The District Court accepted this contention and set aside the award.

Before the High Court, the society argued that the District Judge had exceeded the limited scope of interference under arbitration law. However, the Court held that interference was justified where the award suffers from patent illegality or is passed without jurisdiction.

The Court observed that the failure to establish membership goes to the “root of jurisdiction”, rendering the arbitral proceedings invalid. It also noted that no documentary evidence such as membership applications, approvals, or bye-laws was produced to establish that the borrowers were members and deemed the mere reliance on ledger entries insufficient.

The Bench observed:

“From these documents, it is revealed that, Appellant to establish the fact that, respondent Nos. 1 and 2 are the member of the society, has only relied upon the ledger book showing the share capital in their names as a proof of membership. Except this, no other document is placed on record.”

Accordingly, the High Court refused to interfere with the arbitral award and dismissed the appeal.

For Appellant: Advocate Saurav P Rajurkar

For Respondents: Advocate R.R. Deo