A single judge bench of the Madras High Court comprising Justice Krishnan Ramaswamy while hearing an arbitration matter, where the competent authority attached the properties of the respondents under Section 3 of the Tamil Nadu Protection of Interest of Depositors (In Financial Establishment) Act, 1997 (hereinafter called as “TNPID Act”). Contrary to this, the petitioner argued that his claim was independent against the respondents and the TNPID Act does not prohibit third parties to adjudicate their claims before the appropriate forum for matters other than attachment & sale of properties u/s 3, TNPID Act. Accepting the petitioner’s argument, the court-appointed a neutral arbitrator to adjudicate the disputes of the parties.
Brief Facts:
The petitioner had lent money by virtue of a loan agreement for a sum of Rs.15,00,000/- with interest at the rate of 28.44% per annum to the respondent. Apart from the loan agreement, the respondent had also executed a Demand Promissory Note to the petitioner. However, the respondent had failed to return the said amount as agreed by him in terms of the loan agreement. Hence, the petitioner invoked Clause 17 of the said loan agreement and referred the dispute to arbitration. After initiating the arbitration proceedings, the award was passed by the learned Arbitrator. The same was challenged by the respondents herein before this Court. The said award was set aside by this Court granting liberty to the petitioner to initiate a fresh arbitration proceeding. Accordingly, the petitioner had issued a notice to the respondents under Section 21 of the Act and appointed a sole Arbitrator and a claim statement was also filed before him. The learned Arbitrator had also issued a notice to the respondents with regard to the hearing. The first respondent filed a memo before the learned Arbitrator stating that since the appointment of Arbitrator was made unilaterally, the said appointment is non-est in law and the same is against the law laid down by the Hon'ble Apex Court in Perkins Eastman Architects DPC Vs. HSCC (India) Ltd. 2019 SCC OnLine SC 1517.
Contentions of the respondent:
The respondent contended that the present issue cannot be arbitrable on the ground that both the properties of the first and second respondents have been attached by virtue of the attachment order passed by the appropriate officer in the proceedings pending before the Special Court, TNPID, Chennai in the matter of M/s. Jalagandeswara Auto Finance. He also submitted that the said M/s. Jalagandeswara Auto Finance is a financial establishment, which was conducted by the first respondent for the past 18 years. He conducted monthly chits, under which more depositors deposited their money. Further, he referred to Section 2(3) of the TNPID Act with regard to the definition of Financial Establishment, Section 3 of the TNPID Act relating to the attachment of the properties on default of return of the depositors, and Section 6 of the TNPID Act with regard to the constitution of the Special Court. By referring to the aforesaid provisions of the TNPID Act, he submitted that the present dispute cannot be referred to arbitration. Further, he contended that in the proceedings before the TNPID Court, the petitioner has been shown as the 8th respondent. Therefore, he would submit that the said present petition is not sustainable and the same is liable to be rejected.
Contentions of the Petitioner:
The petitioner contended that the present loan transaction is between the petitioner and the first respondent. The second respondent is the guarantor. The first respondent has carried on the business in the name and style of M/s. Jalagandeswara Auto Finance, as sole Proprietorship concern, and he was unable to repay the deposits received by him. Therefore, based on the complaint of the depositors, the proceedings were pending before the Special Court in TNPID, Chennai. The Competent Authority had also attached the properties of the respondents including the properties, which are mortgaged with the petitioner. Therefore, he would submit that since the said properties were attached and the attachment order was passed by the Competent Authority, the petitioner was shown as the 8th respondent in the TNPID proceedings. The petitioner was impleaded in the said proceedings only in terms of Section 7(2) of TNPID Act. Therefore, there is no impediment for this Court to appoint a neutral Arbitrator in terms of Section 11(5) of the Act.
Observations of the Court:
The court held that the TNPID Act would apply only if there is any default in making the payment to the depositors. Based on the complaint, the proceedings can be initiated before the Special Court. Upon complaint registered by the Competent Authority, the Competent Authority is also empowered to attach the properties by virtue of the Government Order. This is what happened in the case of M/s. Jalagandeswara Auto Finance, which was represented by the sole Proprietor Mr. Siva, who is the first respondent herein.
The court observed that the TNPID Act deals only with regard to protecting the depositors' interest and it only gives priority to the depositors. Further, the TNPID Act talks about the power to attach all the properties, which were purchased out of funds of the depositors and to attach personal properties of the Proprietor, Director, Partner, etc., in the event of any insufficient amount. However, if any third-party transaction is made by the first respondent, apart from the provision for attachment and sale of properties under Section 3 of the TNPID Act, there is no provision prohibiting the petitioner to agitate and adjudicate their claims before the appropriate forum. Further, the claim of the petitioner is an independent one. The first respondent had entered into an agreement with the petitioner in his individual capacity. Therefore, the court held that it had nothing to do with Jalagandeswara Auto Finance.
Even as far as the mortgaged property was concerned, the interest of the petitioner could be proved before the Special Court. Therefore, the court was of the considered view that the Special Court will not have the power to adjudicate the independent claim of the petitioner, since the said claim is in no way connected with the M/s. Jalagandeswara Auto Finance. Hence, the claim of the petitioner has to be adjudicated independently. Therefore, the Court opined that since the present dispute is arising out of a loan agreement dated 19.01.2013, in terms of Clause 17 of the agreement, the present dispute can be arbitrable and therefore, it was inclined to appoint an Arbitrator.
Decision of the Court:
The court ended up appointing an arbitrator and left it open to the parties to seek other reliefs under the Arbitration and Conciliation Act, 1996.
Case Title: M/S Shriram City Union Finance Limited vs Siva and anr.
Coram: Justice Krishnan Ramaswamy
Case No.: Arb. O.P (Com. Div.) No.576 of 2022
Advocate for the Petitioner: Mr. K.V. Ananthakrushnan
Advocate for the Respondent: Mr. K. Mukund Rao
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