Delhi High Court: Section 85(1) of the MSCS Act to Govern Arbitration Between Co-op Society and Member & Not Limitation Act

Delhi High Court: Section 85(1) of the MSCS Act to Govern Arbitration Between Co-op Society and Member & Not Limitation Act

The Delhi High Court coram comprising of Justices Rajiv Shakdher and Girish Kathpalia while adjudicating an appeal filed under Section 37(1)(c) of the Arbitration and Conciliation Act, 1996 ruled that the limitation period for reference of money dispute between the cooperative society and its defaulting member to arbitration, would be governed by the Multi State Co-operative Societies Act, 2002 (MSCS Act), and not as per the Limitation Act, 1963.

The Respondent No. 2 (the principal borrower) had availed a loan from Respondent No. 1- M/s Bombay Marcantile Coop Bank, for purchase of a new car against hypothecation, for which the appellant- Najmus Sehar, stood as a guarantor.

Thereafter, the Respondent No. 2 defaulted on the loan, the respondent- cooperative bank invoked arbitration proceedings against the Respondent No. 2(principal borrower) as well as the appellant (guarantor), which culminated into an ex-parte arbitral award passed in favor of the respondent bank and against the appellant.

Dissatisfied, the appellant challenged the arbitral award by filing an application under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act) before the District Judge, which was dismissed.

Unwavering, the appellant filed an appeal under Section 37 of the A&C Act before the Delhi High Court.

The learned counsel for appellant contended that the arbitral award was wrongly passed ex-parte insofar as the appellant despite being a respondent to the claim was not served with notice of the arbitral proceedings. Secondly, it was argued that the loan having been advanced on 14 January, 1998, the reference to the arbitral tribunal on 23 May, 2014 was clearly barred by limitation. Thirdly, it was contended that role of the appellant being merely a guarantor and the Respondent No. 2 being principal borrower and alive, the dispute ought to have been raised only against Respondent No. 2.

On the other hand, learned counsel for Respondent No. 1 supported the impugned order and contended that the appeal was devoid of merit. Learned counsel for Respondent No. 1 contended that notice of the arbitral proceedings was duly served on the appellant by way of publication since the appellant kept avoiding service of the same. On the issue of limitation, learned counsel for Respondent No. 1 referred to the provision under Section 85(1)(a) of the Multi State Co-operative Societies Act, 2002 and claimed that there was no breach of limitation period.

While dismissing the contention raised by the appellant, the Court said, “To begin with, argument advanced on behalf of the appellant that Respondent No. 2 being the principal borrower, in the absence of any action against Respondent No. 2, there can be no action against the appellant who was ‘merely’ a guarantor, is contrary to the fundamental legal position that liability of guarantor is co-extensive with that of the principal borrower and both of them are jointly and severally liable to the lender.”

Averting to the present case, the Court observed that the arbitral proceedings were conducted against not just the appellant but against the principal borrower (Respondent No. 2) as well as co-guarantor (Respondent No. 3), and the same culminated into the arbitral award.

With respect to the issue of limitation, the Court discerned, “the rebuttal argument advanced on behalf of appellant that vide Section 85(2) of the Multi State Co-operative Societies Act, the dispute required to be referred to arbitration shall be regulated by the provisions of the Limitation Act as if the dispute were a suit, completely ignores that the said provision operates in disputes other than those mentioned in sub section (1) of Section 85 of the Act.”

The bench while referring to Section 85(1) (a) of the MSCS Act, highlighted that the said provision clearly provides that where a dispute relates to recovery of money including interest payable to a co-operative society by its member, the period of limitation for referral to arbitration would be computed from the date on which the member dies or ceases to be a member of the society. Further, the same is notwithstanding anything contained in the Limitation Act.

The bench remarked, “On the face of it, the provision under Section 85(1)(a) of the Act would appear to be an extraordinary provision of law. But on a brief traverse through the concept, it appears to have been created in order to ensure nurturing of the bond between the co-operative society and its member till death of the member or cessation of his membership, coupled with the upkeep of fiduciary interest of the co-operative society.”

Hence, the provision under Section 85(1)(a) of the MSCS Act, while dealing with the limitation period for reference of money dispute between the cooperative society and its defaulting member to arbitration, carves an extraordinary niche out of the general law of limitation. And that is in absolute consonance with the basic purpose of creation of this statute, stated the Court.

Reverting to the present case, the Court noted that the appellant was not only a member but also a shareholder of the respondent-cooperative bank.

“That being so, for the purposes of recovery of money with interest payable by the appellant to the Respondent No. 1, the limitation period for referral of dispute to arbitration would be governed by Section 85(1)(a) of the Act and not by the provisions of the Limitation Act,” said the Court.

The Court was of the considered view that since the appellant was alive and had not ceased to be a member of the Respondent No. 1 bank, as on 23 May, 2014, limitation period for referral of dispute had not even commenced and therefore, the referral to arbitration was not bad in law.

The bench thus, dismissed the appeal.