Arbitrator Under MSCS Act Can Presume Membership If Not Specifically Denied: Bombay High Court

The Aurangabad Bench of the Bombay High Court on 30 March, held that membership of a cooperative society is a jurisdictional fact for invoking arbitration under Section 84 of the Multi-State Cooperative Societies Act (MSCS Act). However, if such membership is not specifically denied, the arbitrator may presume its existence from the material on record.

Justice Arun R. Pedneker allowed the appeal filed by Yash Multi State Rural Co-operative Credit Society Ltd. (the Society) and set aside the order of the Principal District Judge, Ahmednagar, which had interfered with the arbitral award, restoring the award in favour of the Society. He held:

“Ordinarily the Society grants loans only to members of the Society. Accordingly, no issue is framed as regards whether the borrowers are the members of the Society and further no evidence is lead to that effect. In this factual situation the Arbitrator had not committed any error.”

The Society issued a loan of Rs. 1,20,00,000 to the respondents, who were its nominal members. When the borrowers failed to repay the loan, it issued a recovery notice dated 26 September 2022.

The Society thereafter invoked arbitration under Section 84 of the MSCS Act and filed a reference before the statutory arbitrator seeking recovery of the outstanding dues. On 19 October 2023, the arbitrator allowed the Society's claim and directed the borrowers to pay Rs. 1,65,51,739 along with interest.

Aggrieved, the borrowers challenged the award before the Principal District Judge, Ahmednagar under Section 34 of the Arbitration and Conciliation Act, 1996. By an order dated 7 November 2024, the District Judge set aside the award. The Bench relied on the decision in Vrundavan Thakkar v. Nagpur Nagrik Sahakari Bank Ltd. and observed that unless the dispute is between members and the society, the arbitrator cannot assume jurisdiction under Section 84 of the MSCS Act.

The District Judge observed that the Society had not produced any document establishing their membership and therefore held that the arbitrator lacked jurisdiction.

Before the High Court, the Society argued that the MSCS Act recognises nominal membership, and societies grant such membership to borrowers for the purpose of availing loans. The Society further submitted that in such cases societies do not issue a separate membership certificate.

It also contended that the loan documents themselves showed that the borrowers had applied as members of the Society and that the borrowers had never disputed their membership either in the recovery notice or in the arbitral proceedings.

The High Court observed that the borrowers had not specifically denied their membership in their pleadings and had only raised general objections regarding the jurisdiction of the arbitrator. It noted that it was nowhere pleaded that the borrowers were not members of the Society.

The Bench further held that the judgment in Vrundavan Thakkar was distinguishable because the guarantors in that case had specifically raised the issue of membership, which the court adjudicated. In the present case, however, the borrowers never disputed their membership, and the loan application itself indicated that they were members of the Society.

The Court therefore held that the arbitrator had committed no error in not framing a specific issue regarding membership and that the District Court had wrongly interfered with the award.

Accordingly, the Court set aside the impugned order of the District Judge and restored the arbitral award in favour of the Society.