The Hon’ble High Court at Bombay on June 28, 2019, passed a judgement in the matter of Dinesh Jaya Poojary v. Malvika Chits India Pvt. Ltd (Arbitration Petition No. 549 of 2016) setting aside the arbitral award dated December 22, 2015 passed by the learned arbitrator.

Facts of the case:

Mr. Harish Pujary was a member (subscriber as per Section 2(r) of the Chit Funds Act) of chit group of the Respondent for the chit amount of Rs. 3 crores with the monthly subscription of Rs. 15 lacs commencing on June 28, 2010. The Respondent was a “foreman” within the meaning of Section 2(j) of the said Chit Funds Act. The said Harish Pujary was entitled for an aggregate amount of Rs.2,25,00,000/- as prized chit amount subject to deductions as applicable. The Respondent had paid the prized chit amount of Rs.2,25,00,000/- to the said Harish Pujary in the month of November 2010, December 2010, January 2011 and March 2011 as per the terms of the chit scheme. The said Harish Pujary had executed an agreement with the Respondent to pay future/balance subscription with all other amounts due and payable under the Chit Fund Scheme till the date of termination of the Chit Fund without any defaults. Mrs. Myrna Pujary, wife of the said Harish Pujary had executed an Agreement of Guarantee in favour of the Respondent thereby guaranteeing payment of future subscriptions by the subscriber i.e. Harish Pujary on the terms and conditions recorded in the said Agreement of Guarantee. The Petitioner also executed a separate Agreement of Guarantee dated August 13, 2012 with the Respondent allegedly admitting that a sum of Rs.93,34,100/- was due and payable by the said subscriber Harish Pujary to the Respondent as settlement amount. The Petitioner had allegedly agreed that the settlement amount of Rs.65,00,000/- would be paid as per time stipulated therein and in the event of the Petitioner committing default on the agreed settlement amount, he would be liable to pay the entire sum of Rs.93,34,100/-.Under clause 6 of the said Agreement of Guarantee dated August 13, 2012, the parties agreed to refer their all disputes, disagreements, differences, claims etc. arising out of and in consequences of the said agreement to the decision of a sole arbitrator to be nominated by the Respondent.

The Respondent appointed Mr. M. Sankara Narayanan as a sole arbitrator and filed statement of claim before the learned arbitrator against the Petitioner herein inter alia praying for an aggregate sum of Rs.1,94,14,928/- together with further interest on Rs.93,34,100/- @ 36% p.a. thereon from May 19, 2015 till payment and /or realization and also prayed for an order and direction to furnish security to the extent of Rs.1,94,14,928/- or deposit the sum of Rs.1,94,14,928/- with the learned arbitrator. The said claim was resisted by the Petitioner on various grounds. By an order dated October 6, 2015, the learned Arbitrator rejected the application dated September 30, 2015 filed by the Petitioner under Section 16 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) holding that he has enough and sufficient jurisdiction to proceed with and resolve the dispute between the parties. On December 22, 2015, the learned arbitrator made an award allowing the claims made by the Respondent directing the Petitioner to pay a sum of Rs.93,34,100/- with interest and cost of arbitration. A petition under Section 34 of the Arbitration Act was filed by the Petitioner.

Hon’ble High Court held that:

 i. The said Chit Funds Act, 1982 is a self-contained code. The provisions of the Arbitration Act thus would not apply to the disputes relating to the chit business.

ii. Under Sub-section (3) of Section 64 of the said Chit Funds Act, a Civil Court is barred from entertaining any suit or other proceedings in respect of any dispute referred in Sub-section (1) of Section 64 of the said Chit Funds Act. This provision also clearly indicates that if a Civil Court is barred from entertaining any suit or other proceedings, arbitral proceedings initiated by the Respondent for recovery of the amount arising out of disputes relating to chit business touching the management of chit business also cannot be entertained. Such disputes could be referred only to the Registrar for Arbitration provided in Section 64 of the said Chit Funds Act. Further, under Section 67(3)(a) of the said Chit Funds Act, the Registrar or the nominee may even pass an order for impleadment of a third party to the dispute who has acquired the interest in the property of a person who is a party to a dispute and such decision of the Registrar or the nominee on the dispute shall be binding on such third party impleaded in the proceedings before the Registrar as if he were an original party to the dispute.

iii. The learned arbitrator has clearly acted beyond the jurisdiction in entertaining the claims made by the Respondent and allowing the said claims. Even if the Petitioner had allegedly entered into any such Agreement of Guarantee with the Respondent, such Agreement of Guarantee recording arbitration agreement was contrary to Sub-section (1) of Section 64 read with Section 3 of the said Chit Funds Act.

The Hon’ble High Court set aside impugned order dated October 6, 2015 and the impugned award rendered by the learned arbitrator on December 22, 2015 and declared that the learned arbitrator did not have jurisdiction to entertain, try and adjudicate upon the dispute filed by the Respondent.