Bombay High Court
Rajlaxmi Multistate Credit ... vs Gajanan Vasant Shribhate on 14 October, 2025
2025:BHC-NAG:10869
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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.
1 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.
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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.
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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 Co-
operative 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
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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
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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 Multi-
State 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
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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
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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:
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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 Co-
operation 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
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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
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herein is a "Statutory Arbitration". The Act of 2002 vide Section 84
provides for the resolution of disputes arising between a Multi-State Co-
operative 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
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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
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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 processes-
promoting 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.
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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
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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. Charging of penal interest or commercial rates of interest
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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
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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
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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
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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 Co-
operative 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.
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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
