San-A Tradubg
Co. Ltd. Vs. I.C. Textiles Ltd. [2006] Insc
254 (28 April 2006)
P.P.
Naolekar
ORDER
ARBITRATION APPLICATION NO. 8 OF 2005 AND ARBITRATION APPLICATION NO. 9 OF 2005
These applications have been filed by the applicant under Section 11(6)(c) of
the Arbitration and Conciliation Act, 1996 (hereinafter referred to as
"the Act") to seek appointment of an arbitrator in view of the
inability expressed by Mr. Manabu Nonoguchi to act as an arbitrator. The prayer
made in the applications is to appoint a suitable person to act as the sole
arbitrator in place of the nominated arbitrator under Clause 6 of the Deed of
Reserve and Charge of Property dated 22nd February, 2002 (for short "the Deed")
and to refer the disputes between the parties to him. The arbitration
applications have been filed in the following facts and circumstances.
As
alleged in the applications, on 7th June, 2001, the applicant entered into a hire purchase agreement
titled "Contract of Sale" No. QAC-3372(R) for sale/purchase of 5 sets
in 2 lots of Murata No. 7-V Mach-coner automatic cone winder magazine type 60
drums on deferred payment terms. The applicant exported the machinery in two
lots. The first shipment (2 sets) was made on 10th July, 2001 under Invoice No. 6321 and the second shipment (2 sets) was
made on 5th October,
2001 under Invoice No.
6364. The dispute is in regard to these shipments. In pursuance of the
agreement, the physical custody of the machines was handed over to the
respondent which was accepted by it. However, the title did not pass, as it was
due to pass only on payment of the last hire purchase instalment as envisaged
under the agreement. The agreement was approved by the Reserve Bank of India vide approval No. FCB/CO/2001/747.
The respondent after paying the first two instalments towards the shipments,
did not pay the next two instalments and, therefore, as envisaged in the
agreement the respondent became liable to return the custody and possession of
the machinery to the applicant.
Clause
6 of the Deed provides as under:
"In
case of any dispute, difference or issues arising under or in any manner
concerning or in connection with this Deed, the same shall be resolved by
arbitration by Mr. Manabu Nonoguchi, Area Manager, Sales Department, Murata
Machinery Ltd., Textile Machinery Department, 3rd Floor, Osaka Green Building,
2-6-26, Kitahama, Chuo-ku, Osaka 5410041, Japan, on principles of equity and
good conscience (ex equo et bono), whose award shall be final and
binding." Vide letter dated 19th June, 2003, the nominated arbitrator Mr. Manabu Nonoguchi has
expressed his inability to discharge his role as arbitrator and left it for the
parties to take steps to fill up the vacancy as and when the need arises. On 20th June, 2003, the applicant served a notice of
demand under Section 434(1)(a) of the Companies Act for winding up on the
respondent. In reply to the said notice of demand, the respondent informed on 10th July, 2003 that it had made a reference to the
Board for Industrial and Financial Reconstruction (BIFR) and had also taken the
stand that the machines were defective. Thereafter, the applicant filed an
application dated 4th
August, 2003 before
the BIFR for recovery of its unpaid dues and sought impleadment and interim
receivership. The applicant sent a notice of demand and arbitration dated 10th December, 2004 to the respondent for return of
physical custody and possession of the machines which has not been complied
with. As per the applicant, the dispute between the parties is arbitrable and
since the title in the hire purchased machines has always been and is with the
applicant the machines are not the assets or property of the company so as to
be under the purview of the BIFR. The applicant submitted that no other
petition under Section 11(6) of the Act in respect of the arbitration clause
has been filed or is pending in any other court and since the present
applications relate to an international commercial arbitration, the applicant
being a body corporate incorporated outside India, the applicant is moving the
applications under Section 11(6)(c) of the Act. The applicant prayed for relief
as mentioned hereinabove.
The
respondent entered appearance and submitted counter statement. Although the
sale and export under two shipments respectively on 10th July, 2001 and 5th
October, 2001 and the Clause of the Deed are admitted, the exercise of the
power of the Court to appoint an arbitrator is disputed on the grounds that the
respondent company is a sick company; the respondent company has already
approached the BIFR seeking declaration that the company has become a sick
unit; a case has been registered under the Sick Industrial Companies (Special
Provisions) Act, 1985 (hereinafter referred to as "SICA") which is
numbered as Case No.231/2003; and the BIFR has declared the respondent company
as a sick industrial company and Industrial Development Bank of India (IDBI)
has been appointed as the Operating Agency under Section 17(3) of SICA. On
these grounds, it is contended that the present applications for appointment of
an arbitrator filed under Section 11(6)(c) of the Arbitration and Conciliation
Act, 1996 cannot be proceeded with as the dispute raised would be the matter
for consideration by the BIFR.
It is
further contended that once the named arbitrator declined to go into
arbitration, it is not open to the applicant to seek appointment of another
arbitrator; the terms of the contract entered into between the parties are very
specific and clear; it does not contain any clause which would enable the
parties to seek arbitration; and that is why the applicant company did not seek
the consent of the respondent company for appointment of another arbitrator in
place of the named arbitrator when the said arbitrator resigned. The respondent
has prayed for dismissal of the present applications filed under Section
11(6)(c) of the Act.
It may
be mentioned here that I.A. No. 1 has been filed on 2nd December, 2005 during
the pendency of the arbitration applications by the applicant stating that vide
letter dated 21st November, 2005, the applicant addressed a letter to Mr. M. Nonoguchi,
inquiring as to his availability to act as arbitrator to adjudicate the
disputes between the parties so that this Court could be apprised of the
current position in this regard and in response thereto vide letter dated 21st
November, 2005 Mr. M. Nonoguchi has informed : " subject to orders of the Hon'ble
Supreme Court of India, I am available and prepared to act as Arbitrator".
The contents of the letter are not denied by the respondent. Thus, it is clear
that now Mr. Manabu Nonoguchi, the named arbitrator, is ready and willing to
act as an arbitrator to resolve the disputes between the parties.
It is
urged by the learned counsel for the respondent that mere reading of Clause 6
of the Deed makes it clear that the parties intended that the arbitration was
to be conducted only by Mr. Manabu Nonoguchi and, therefore, no other procedure
for appointment of another arbitrator has been provided for under the said
clause or anywhere in the agreement. The intention of the parties is clear that
none other than Mr. Manabu Nonoguchi `shall' be the arbitrator to adjudicate
upon the disputes arising between the parties. When the named arbitrator
withdrew from the office of arbitrator, Clause 6 of the Deed providing for
arbitration got exhausted and could not be revived under Section 11(6)(c) of
the Act. It is further contended that the respondent company being declared a
sick industrial concern, the BIFR being seized of the matter and the dispute
between the parties being covered under the provisions of SICA, no arbitrator
could be appointed in view of Section 22(1) of SICA. In rejoinder, it is
submitted by the counsel for the applicant that the agreement read as a whole
does not either expressly or by implication indicate that the vacancy should
not be supplied in case the named arbitrator is not willing to act; when the
agreement is silent as regards supplying the vacancy, the law presumes that the
parties intend to supply the vacancy and as such the arbitrator can be
appointed in exercise of powers under Section 11(6)(c) of the Act; the
arbitration clause does not stand exhausted and the Court can appoint an
arbitrator to adjudicate upon the disputes between the parties. It is further
urged that there is a distinction between the expressions `proceedings' and
`suit' mentioned in Section 22(1) of SICA and the expression `arbitration
proceedings' under the Arbitration and Conciliation Act cannot be termed either
as a suit or proceeding and, therefore, pendency of a reference before the BIFR
would not debar the arbitration proceedings under the Arbitration and
Conciliation Act, 1996.
In the
present case, the named arbitrator under the contract, viz., Mr. Manabu Nonoguchi,
Area Manager, Sales Department, Murata Machinery Ltd., Textile Machinery
Department, Japan vide his letter dated 29th June, 2003 expressed his inability
to discharge his role as arbitrator.
Section
15 of the Act providing for termination of mandate and substitution of
arbitrator, reads as under:
-
"Termination of mandate and substitution of arbitrator.-
-
In addition to
the circumstances referred to in section 13 and section 14, the mandate of an
arbitrator shall terminate –
-
where he
withdraws from office for any reason; or
-
by or pursuant
to agreement of the parties.
-
Where the
mandate of an arbitrator terminates, a substitute arbitrator shall be appointed
according to the rules that were applicable to the appointment of the
arbitrator being replaced.
-
Unless otherwise
agreed by the parties, where an arbitrator is replaced under sub-section (2),
any hearings previously held may be repeated at the discretion of the arbitral
tribunal.
-
Unless otherwise
agreed by the parties, an order or ruling of the arbitral tribunal made prior
to the replacement of an arbitrator under this section shall not be invalid
solely because there has been a change in the composition of the arbitral
tribunal." Under clause (a) of Section 15(1), when the arbitrator
withdraws from office for any reason, a substitute arbitrator can be appointed
according to the rules that were applicable to the appointment of the
arbitrator being replaced.
The
procedure for filling the vacancy arising out of the arbitrator's withdrawal
from office is provided under Section 15. It says that in addition to the
grounds covered by Sections 13 and 14, the mandate of an arbitrator shall
terminate when he withdraws from his office for any reason or under an
agreement of the parties. The Section provides that the substitute arbitrator
is to be appointed according to the same rules which were applicable to the
appointment of the arbitrator who is to be replaced. Sub-section (2) of Section
15 contemplates appointment of the substitute arbitrator in place of the
arbitrator who refuses to act as an arbitrator, as per the rules applicable to
the appointment of the arbitrator. Sub-section (2) of Section 11 of the Act
provides that in the absence of any agreed procedure for appointment of the
arbitrator or arbitrators, sub-section (6) of Section 11 would apply whereunder
a party may request the Chief Justice or any person or institution designated
by him to take necessary measures, unless the agreement on the appointment
procedure provides other means for securing the appointment. By virtue of
sub-section (12) of Section 11, in international commercial arbitration, the
reference to Chief Justice in sub-section (6) shall be construed as a reference
to the Chief Justice of India.
The
submission of the learned counsel for the respondent that as the named
arbitrator has refused to act as an arbitrator, the arbitration agreement
itself comes to an end, cannot be accepted because Section 15 provides for a
remedy for appointment of another arbitrator when the arbitrator appointed by
the parties as provided in the agreement refuses to act an arbitrator.
Settlement of dispute between the parties through medium of an independent
person in whom both parties repose confidence is the basic foundation on which
the law of arbitration stands and is founded. When the agreement provides for
reference of a dispute to a particular individual and such agreed arbitrator
refuses to act, the next appointment could be made as agreed by the parties,
but where no such procedure is prescribed authorizing appointment of another
arbitrator then the agreement clause cannot operate. It, therefore, follows
that in case where the arbitration clause provides for appointment of a sole
arbitrator and he had refused to act, then the agreement clause stands
exhausted and then the provisions of Section 15 would be attracted and it would
be for the Court under Section 11(6) to appoint an arbitrator on the procedure
laid down in Section 11(6) being followed unless there is an agreement in the
contract where the parties specifically debar appointment of any other arbitrator
in case the named arbitrator refuses to act. In the present case, I do not find
any such stipulation in the contract entered into between the parties whereunder
the parties have specifically debarred appointment of a fresh arbitrator if the
named arbitrator refuses to act and perform his function as arbitrator. In the
absence of any specific condition debarring appointment of a fresh arbitrator,
it cannot be said that the arbitration clause in the contract agreement stands
obliterated on the named arbitrator's refusal to perform his function.
Under
Section 22 of SICA, where in respect of any industrial company an inquiry under
Section 16 is pending or any scheme referred to under Section 17 is under
preparation or consideration or a sanctioned scheme is under implementation or
where an appeal under Section 25 relating to an industrial company is pending,
then, notwithstanding any other law or the memorandum and articles of
association of the industrial company or any other instrument having effect under
the Companies Act or other law, no proceedings for the winding up of the
industrial company or for execution, distress or the like against any of the
properties of the industrial company, shall lie or be proceeded with except
with the consent of BIFR. The proceedings in suit for the recovery of money or
for the enforcement of any security against the industrial company or of any
guarantee in respect of any loans or advances granted to the industrial company
is prohibited unless consent of BIFR is obtained. Section 22(1) of SICA has
specified certain types of proceedings which would come within the purview of
the Section, namely, the proceedings for winding up of the company or for
execution, distress or the like against any of the properties of the industrial
company or for the appointment of a Receiver in respect of the properties of
the industrial company. In Maharashtra Tubes Ltd. vs. State Industrial &
Investment Corporation of Maharashtra Ltd. and Another., (1993) 2 SCC 144 (in para
10), it is held by this Court that the words `or the like' which follow the
words `execution' and `distress' are clearly intended to convey that the
properties of the sick industrial company shall not be made the subject matter
of coercive action of similar quality and characteristic till the BIFR finally
disposes of the reference under Section 15 of the said enactment. The
legislature has advisedly used an omnibus expression `the like' as it could not
have conceived of all possible coercive measures that may be taken against a
sick undertaking.
Similarly,
in Shree Chamundi Mopeds Ltd. vs. Church of South India, AIR 1992 SC 1439, this
Court explained the words `or the like' as follows :
"The
words `or the like' have to be construed with reference to the preceding words,
namely `for execution', `distress' which means that the proceedings which are
contemplated in this category are proceedings whereby recovery of dues is
sought to be made by way of execution, distress or similar proceedings against
the property of the Company." It is, thus, apparent from the wording of
Section 22(1) and the above decisions of this Court that the proceedings
covered under Section 22 are the proceedings of coercive nature, be that legal
or otherwise, which would come within the purview of expression `proceedings'
as mentioned in the Section but it would not cover all proceedings. Section 22
(1) incorporated certain types of proceedings which would fall within its ambit
and which are the proceedings for winding up of the industrial company or the
proceedings for execution and distress against any of the properties of the
industrial company or the proceedings for the appointment of a Receiver in
respect of the properties of the industrial company.
From
the nature of the proceedings referred to in this Section, it is clear that
only the proceedings which have the shape and effect of coercive nature would
come within the ambit of Section 22(1) and for taking up such proceedings the
permission of BIFR is required.
By Act
12 of 1994, Section 22(1) was amended by insertion whereby a suit for the
recovery of money or for the enforcement of any security against the industrial
company or of any guarantee in respect of any loans or advances granted to the
industrial company would not be maintainable unless consent of BIFR is
obtained. In Kailash Nath Agarwal and Others vs. Pradeshiya Industrial &
Investment Corporation of U.P. Ltd. and Another, (2003) 4 SCC 305, the question
arose as to the scope of the protection afforded to the guarantors under
Section 22(1) of SICA. The company was declared sick by BIFR in terms of
Section 3(1)(o) of SICA. An operating agency was appointed under Section 17(3).
While the proceedings before BIFR were pending, three separate notices of
demand were served on the appellants as personal guarantors in respect of the
loans granted to the company by the respondent Pradeshiya Industrial &
Investment Corporation of U.P. Ltd. and it was said in the notices that the
Corporation would take legal measures to recover its outstanding dues from each
guarantor. It was contended by the guarantors that in view of Section 22(1) of
SICA, the Corporation could not enforce its demand against the appellants under
the permission of BIFR is obtained. This Court has drawn a distinction between
the proceedings taken up under the U.P. Public Moneys (Recovery of Dues) Act,
1972 and a suit contemplated under Section 22 of SICA. This Court has held in Kailash
Nath Agarwal (supra) that having regard to the judicial interpretation of the
word `suit', it is difficult to accede to the submission of the appellants that
the word `suit' in Section 22(1) of SICA means anything other than some form of
curial process and the Court found it difficult to widen the scope of the word
`suit' so as to cover proceedings against the guarantor of an industrial
company. By virtue of amendment to Section 22 of SICA, no suit for the recovery
of money or for the enforcement of any security against the industrial company
or of any guarantee in respect of any loans or advances granted to the
industrial company, shall lie and adjudication is prohibited of the liability
of the industrial company or the guarantor. Section 22 further prohibits taking
up of the proceedings of the nature which would be coercive for recovery of
money against a sick undertaking. Proceeding in arbitration is neither a suit
under sub-section (1) of Section 22 of SICA nor the proceedings thereunder and,
therefore, there is no prohibition under Section 22 of SICA to take up the
arbitration proceedings to adjudicate the liability of the parties to the
arbitration proceedings. In my view, Section 22 of SICA does not debar the
arbitration proceedings under the Arbitration and Conciliation Act, 1996. The
objections to the arbitration proceedings raised by the respondent fail for the
aforesaid reasons and are rejected.
Mr.
Manabu Nonoguchi was appointed as an arbitrator by the parties. Normally, the
parties are the best judge for deciding as to who will be the person capable
and competent to adjudicate the disputes raised considering his experience,
knowledge and competence in a particular trade or business to which the
disputes relate and taking these factors into account the parties have
appointed Mr. Manabu Nonoguchi as an Arbitrator, in case a dispute arises
between the parties. Unfortunately, for some reason, the named arbitrator
refused to act as an arbitrator. However, during the pendency of these
arbitration applications, I.A. supported by affidavit has been filed stating
that the named arbitrator is ready and willing to take up the arbitration.
Considering this fact, it would be appropriate if Mr. Manabu Nonoguchi, Area
Manager, Sales Department, Murata Machinery Ltd., Textile Machinery Department,
Osaka 541-0041, Japan is appointed as an Arbitrator to adjudicate upon the
disputes arising between the parties. I, accordingly, appoint him as
Arbitrator.
He
shall take up the steps in accordance with law and shall make all possible endeavour
to decide the disputes expeditiously.
Arbitration
Application Nos. 8 and 9 of 2005 stand disposed of.
Back
