The Hindu Business Line : An advisable alternative

THE effectiveness of the Arbitration and Conciliation Act with particular reference to a sick company came up before the Madras High Court as a reference in Mangayakarasi Apparels (P) Ltd (MAPL) vs Sundaram Finance Ltd (SFL) — 2004 44 CC B-453 Madras HC).

The factual matrix of the case was that both the parties had entered into a hire-purchase agreement in 1996. The normal clause about referring disputes to arbitration was present in this agreement too. MAPL found it beyond its capacity to repay the instalments in spite of jawboning by SFL. Unwilling to let go an amount of Rs 6 crore as charity, SFL invoked the arbitration clause and a sole arbitrator YKR was appointed.

The arbitrator was asked to award the Rs 6 crore that was due along with interest, and, in case of failure to comply with the terms and conditions of the award, SFL was to be given the right to take over the assets of MAPL and dispose of the assets a la the present Securitisation Act.

Since MAPL had registered as a sick company with the BIFR, it cried foul and claimed that they are beyond all arbitration and other acts. Not heeding this request, the arbitrator passed an order in 2001 holding that there is no bar for seeking the relief before the arbitral tribunal and Section 22 of the erstwhile SICA does not prohibit taking any such proceedings.

Fighting to the finish, MAPL sought the wisdom of the Madras High Court on whether:

a) a revision under Article 227 of the Constitution of India is maintainable against the arbitrator's order;

b) the refusal to stay the proceedings by the arbitrator is liable to be interfered with;

c) Section 5 of the Arbitration Act is a bar which excludes the jurisdiction of the Madras High Court;

d) the stay contemplated under Section 22 would apply to arbitral proceedings.

Using the ratio of decided decisions in Associated Cement Companies Ltd vs P N Sharma (1964-65, 27 FIR 204); Engineering Mazdoor Sabha vs Hind Cycles Ltd (1963-64, 24 FIR 245); Rohtas Industries vs Rohtas Industries Staff Union (1976, 49 FIR 313); and Jaswant Sugar Mills Ltd vs Lakshmi Chand (1963-64, 24 FIR 53), the Madras High Court ruled that the arbitrator appointed as a result of the arbitration clause agreed to between independent parties, though referred to a `arbitral tribunal', they are not other authorities nor are they amenable to writ jurisdiction nor to any court under Article 226/227 of the Constitution.

The fact that MAPL had not mentioned SFL as one of the creditors in the application to the BIFR did not help either.

The Supreme Court, in Estralla Rubber vs Dass Estate Pvt Ltd (2001 18 SCC 97 101), discussed in detail Article 227 of the . In this and in the Achutananda Baiday vs Prafulla Kumar Gayen (1997 5 SCC 76) and Punjab National Bank vs O. C. Krishnan (2001 107 Comp Cas 20) cases, the apex court has ruled that private arbitrator's decision is not liable to be interfered with. The Madras High Court did not see any reason to disagree with the apex court's views.

MAPL contended that no judicial authority shall intervene except where so provided in this behalf. In other words, where a matter is governed by the Arbitration and Conciliation Act, no court shall intervene except where so provided by this Act.

The Madras High Court ruled that Section 5 of the said Act that stipulates this clause shall not be pressed into service to exclude the power of judicial review under Article 226/27 of the Constitution.

Like some borrowers who have fallen upon hard times, MAPL claimed that since it had registered as a sick company with the BIFR, it is beyond all laws, penal or executory in nature, and no one could claim anything from it. The Madras High Court noticed that SFL was not mentioned at all as a creditor in the filing before the BIFR. The court also felt that since the transaction between the parties was a hire purchase one, in which there was a hypothecation of a vehicle, the omnibus protection sought to be provided by Section 22 of the erstwhile SICA would not help the cause of MAPL. The court had judicial help through the Agio Counter Trade Pvt Ltd vs Punjab Iron and Steel Co Ltd (1999 5 SCC 734) and Ananta Udyog Private Ltd vs Cholamandalam Investment and Finance Co Ltd (1995 1 CTC 206) cases.

The Securitisation Act of last year has had some impact on errant borrowers. The simplified exit scheme has been formulated to enable companies which no longer wish to remain so an honourable exit.

The present case proves that the job of private arbitrators cannot be threatened by warring borrowers heading to court, and so on.

Probably, a law to enable marginalised creditors to share the spoils of an action under the Securitisation Act or an award of damages under the Arbitration Act would make the law in this regard complete and protect the interests of lenders to a certain degree.