Bombay High Court
Oriental Bank Of Commerce Through Its ... vs Sir Kikabhai Premchand Trust, ... on 3 March, 2008
Equivalent citations: 2008(2)BOMCR725, 2008(110)BOM.L.R.886
Author: Anoop V. Mohta
Bench: S. Radhakrishnan, Anoop V. Mohta
JUDGMENT Anoop V. Mohta, J.
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1. Being aggrieved and affected by the Judgment/order passed by the learned Single Judge in Arbitration Petition No. 311 of 2003 whereby the interim award dated 29/11/2002 passed by the learned Arbitrator has been confirmed. Therefore, this Appeal.
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2. The case of the Appellants/ Original Petitioners is as under:
In the year 1945, Respondent No. 1 Sir Kikabhai Premchand Trust settlement No. XI (the Trust) was created in Mumbai.
3. Some time in the year 1994, Shri. Manhar Lal C. Shah (Respondent No. 2) took over the Management of the Trust.
4. On 28/07/1994, M/s. Adrik Traders was registered with the Registrar of Companies with 4 directors namely Shri. Bharat M. Shah, Navnit L. Shah and 2 NRIs.
5. On 16/04/1994, the Trust opened a S.B. Account No. 64661 with the Dadar (West) Branch of the Appellant Bank, in the name of "Sir Kikabhai Prem Chand Trust Settlement No. XI"
6. On 02/09/1994, Shri. Bharat Shah son of the Chairman of the Trust, addressed a letter to the Chairman OBC requesting for the credit facility of 15 Crores against UTI Unit Scheme 1964. M/s. Adrik Traders had been projected in the letter as an associate concern of M/s. Ruby Mills managed and controlled by Shri. Manhar Lal Shah, Respondent No. 2. The Bank granted the sanction in the year 1995.
7. On 25/01/1995, M/s. Adrik Traders resolved to borrow vide resolution dated 25/01/1995, Rs. 7.21 Crores from M/s. Maharashtra State Co-operative Cotton Growers Marketing Federation Ltd., for 91 days.
8. On 14/02/1995 to 23/02/1995, M/s. Adrik Traders received the said amount between 14/02/1995 and 23/02/1995.
9. On 17/02/1995, Shri. Manhar Lal Shah Chairman of the Trust vide letter dated 17/02/1995 requested the OBC Dadar Branch to issue two COD for Rs. 55 lakhs for the period 20/02/1995 to 31/07/1995 and for Rs. 292 lakhs for the period 16/02/1995 to 31/07/1995. Along with the letter two cheques bearing No. 094958 dated 16/02/1995 for Rs. 292 lakhs and No. 094959 dated 20/02/1995 for Rs. 55 Lakhs were given to the bank filed in the name of "Yourself". Bharat Shah although a non-entity in the Trust initialled the above said letter on behalf of the trust.
10. On 07/03/1995, Shri. Manhar Lal Shah vide letter dated 07/03/1995 requested the OBC Dadar to open COD for the period 02/03/1995 to 31/07/1995 for Rs. 38 lakhs, with a cheque in the name "Yourself" bearing No. 94961, dated 02/03/1995 for Rs. 38 lakhs. Mr. Bharat Shah had also initialled the above letter.
11. On 21/03/1996, Shri. Manhar Lal Shah and Shri. Navnit Lal Shah issued three cheques in the name of "Yourself" amounting to Rs. 50 lakhs, Rs. 20 lakhs and Rs. 35 lakhs from the Trust Account maintained with the Dadar Branch, for which no instruction exists in the Branch for the disposal of the proceeds. These cheques were used for Opening CDRs in the name of Sir Kikabhai Premchand Shah a fictitious identity and not in the name of the Trust. On 21/03/1995 when the 3 cheques were issued the balance in the account of the Trust was only Rs. 15,40,013/-
12. On 22/05/1995, Demand Loan of Rs. 90 lakhs was sanctioned by Arun Bhargava against CDRs in the name of Kikabhai Premchand Shah. Page 0890 Out of which Rs. 50 lakhs was transferred to the account of M/s. Adrik Traders on 22/05/1995 and rest of Rs. 40 lakhs was transferred on 01/06/1995. However, the address given against Kikabhai Premchand Shah was C/o Ruby Mills, which shows that the fictitious account had been opened with the connivance of Shah family.
13. On 24/05/1995, the entire amount of Rs. 7.21 Crores released from MSCCGMF Ltd became due and payable by Bharat Shah.
14. On 29/05/1995, that inspite of the fact that the account of M/s Adrik Traders was showing a debit balance of Rs. 1480 lakhs, against the OD Limit of Rs. 1500 lakhs, Bharat Shah issued 3 cheques worth about Rs. 4,26,66,181/- in favour of Maharashtra State Co-operative Cotton Growers Mkt. Fed Ltd. dated 29/05/1995 in the following manner:
1. Cheque No. 7501119 for Rs. 4,07,55,000/-.
2. Cheque No. 750124 for Rs. 14,10,411/-.
3. Cheque No. 750125 for Rs. 5,00,776/-.
15. On 30/05/1995, the three CODs made with the Bank were prematurely encashed (of an aggregate face value of Rs. 3,85,00,000/-) to the tune of Rs. 3,92,46,087/ and was credited in the account of the Trust. The CODs were marked as "A/c Closed on 31/05/1995".
16. On 30/05/1995, on the same day i.e. 30/05/1995 Rs. 385 lakhs was transferred from the account of the trust to the account of M/s. Adrik Traders (P) Ltd., to enable the Bank to clear the cheques drawn by Mr. Bharat Shah (M/s. Adrik Traders) in favour of MNCCGMF Ltd. on 29/05/1995. On 30/05/1995, another amount of Rs. 50 lakhs was transferred to M/s. Adrik Traders from M/s. Ruby Mills Ltd. (CC 100029) owned by the Chairman of the Trust Shri. M.L.Shah, to facilitate the encashment of the cheques issued in favour of MNCCGMF Ltd. On 30/05/1995, Rs. 7.46 lakhs was transferred from the Trust Account to M/s. Jayco in the form of a Pay Order prepared on an unsigned application by one Prakash Hosati favoring Jayco.
17. On 01/06/1995, Demand Loan for Rs. 90 lakhs was disbursed in the name of one Kikabhai Premchand Shah against security of CDRs for Rs. 105 lakhs (in the name of the Trust) and proceeds credited to the account of M/s. Adrik Traders by way of transfer of Rs. 50 lakhs on 22/05/1995 and Rs. 40 lakhs on 01/06/1995. Thus the entire liability of Rs. 7.21 Crores of MSCCGMF Ltd. was discharged by making up the deficiency in the following manner:
Rs. 3.85 Crores from the Trust. (31/05/1995) - Rs. 50 lakhs from Ruby Mills (31/05/1995) - Rs. 90 lakhs from Demand Loan in favour of KB Shah (22/05/1995 and 01/06/1995)
18. On 24/07/1996, the Bank allegedly issued a certificate to the Trust certifying that the Trust had Certificate of Deposits of Rs. 490 lakhs on that date inspite of the fact that the CODs of the value of Rs. 3.85 Crores had already been encashed and an amount of Rs. 3,92,46,041/- had already been credited.
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19. On 29/02/1996 M/s. Alpic Finance paid Rs. 4.75 Crores as principal and Rs. 22,30,027/- as Interest to M/s. Adrik Traders. The principal amount of Rs. 4.75 Crores was transferred to the Sundry Account on 29/02/1996. The CDRs of Rs. 105 lakhs in the name of Kikabhai Premchand Shah were also prematurely encashed and was transferred in the Sundry Account.
20. On 29/02/1996, an amount of Rs. 5.75 lakhs lying in the Sundry Account was used by making pay orders of Rs. 5.75 in the name of K.B.Shah in the following manner:
i) 542670 dated 29/02/1996 for Rs. 1.75 Crores.
ii) 542669 dated 29/02/1996 for Rs. 2 Crores.
iii) 542668 dated 29/02/1996 for Rs. 2 Crores.
That according to the Trust the Bank issued a certificate to the Trust certifying that the Trust had Certificate of Deposits of Rs. 5,51,99,890/- on that date.
21. On 29/02/1996 the Trust allegedly instructed the bank to debit its said Savings Bank Account with a sum of Rs. 23,00,110/- and to add such sum to the aforesaid maturity value of the said three certificates of Deposit and to issue a fresh Certificate of Deposit for that amount to mature on 19th June, 1996, at a maturity value of Rs. 6,05,32,535.00/-. On 29/02/1996 these deposits were then transferred to the Stock Exchange Branch of the Bank for a period of 110 days.
22. On 01/03/1996, that the Bank (Stock Exchange Branch) allegedly issued a Certificate of Deposit No. 601072 dated 1st March, 1996, to mature on 19th June, 1996 with the maturity value of Rs. 6,05,32,535/-
23. On 11/03/1996, Shri. Arun Bhargava the Chief Manager was transferred to Stock Exchange Branch from Dadar Branch in Mumbai.
24. On 12/03/1996, Shri. Bharat M. Shah opened a CC Account No. 113 with the Stock Exchange Branch under the name and style of Galore International Projects Pvt. Ltd. Bharat Shah signed account Opening form.
25. On 13/03/1996 i.e. on the very next day of his transfer Shri. Arun Bhargava granted Bharat Shah a credit facility of Rs. 4.31 Crores in the name of M/ s Galore International against the FDRs/ CDRs. The above said CDRs were not in the name of M/s. Galore International but were in the name of KB Shah a fictitious identity, therefore the Credit facility was granted against the third party FDRs. The amount of Rs. 5.75 in the name of KB Shah was converted into two FDRs of Rs. 4 Crores in Dadar Branch and Rs. 1.75 Crores in Mandvi Branch.
26. On 13/03/1996, against the balance of only Rs. 975/-as on 13/03/1996, Bharat Shah had issued a cheque of Rs. 3.25 Crores in the name of one Jitendra Kapoor and a cheque of Rs. 1.40 Crores favoring M/ s Alpic Finance.
27. On 18/03/1996, on account of issuing the above-mentioned cheques worth about 4.65 Crores, a debit in the account of Galore International was created to the tune of Rs. 4.67 Crores.
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28. On 18/03/1996 a fictitious account in the name of one K.B.Shah was opened in the Stock Exchange Branch. The address in the Account Opening Form was shown as 102 Sriniketan. Sriniketan building happens to be the residence of Shri Manhar Lal Shah and Bharat Shah.
29. On 18/03/1996, Shri. Arun Bhargava on the same day proposed to the Regional Office for the sanction of Demand Loan to the tune of Rs. 5.46 Crores, against the FDR to tune of Rs. 5.75 Crores held in the name of K.B.Shah.
30. On 19/03/1996, while the note of Credit was under process, the credit was released and the amount was transferred in the account of K.B.Shah and after receiving the said credit in the name of K.B.Shah, an amount of Rs. 515 lakhs was transferred to M/s. Galore International.
31. On 16/04/1996, K.B.Shah Loan Account was closed and FDR amount was transferred in the account. On 16/04/1996, another loan was sanctioned to the tune of Rs. 1.4 Crores in the name of K.B.Shah.
32. On 18/05/1996, Shri. Bharat Shah received 3.25 Crores as the principal amount and Rs. 14,95,000/-an interest from Jitender Kapoor on 18/05/1996 and similarly Rs. 1.40 Crores as principal and Rs. 9,80,000/- from Alpic Finance.
33. On 19/06/1996, Shri. Bharat Shah wrote a letter to the Bank on behalf of the Trust.
34. On 19/06/1996, according to the Trust a letter dated 19th June, 1996, was sent by the Trust requesting the Bank to renew the deposit and prepare a fresh Certificate of Deposit falling due on 18th September, 1996, with a maturity value of Rs. 6,28,36,420.00. Mr. Bharat Shah son of Trustee Mr. M.C.Shah signed this letter. The Bank allegedly issues a certificate of Deposit No. 603684 dated 19th June, 1996, for an amount of Rs. 6,28,36,420/- due on maturity on 18th September, 1996, at the aforesaid value.
35. On 21/06/1996, Shri. Manhar Lal Shah and N.L.Shah signed an application for opening an account in the name of SKPC Trust with the Stock Exchange Branch and the account was opened as SB No. 9725.
36. On 21/06/1996, the Trust placed a further sum of Rs. 48,16,676.00 by way of a deposit with the Bank to mature on 22nd September, 1996, at a maturity value of Rs. 50,00,000/-. The Bank issued a Certificate of Deposit No. CA603976 dated 26th July, 1996 in respect of this deposit.
37. On 24/06/1996, that vide voucher dated 24/06/1996 an amount of Rs. 3.25 Crores was transferred in the Trust Account from the Account of Galore International.
38. On 28/06/1996, Rs. 25 lakhs was transferred back to the Account of Galore International from the account of the Trust in the Stock Exchange Branch.
39. On 29/06/1996, vide voucher dated 29/06/1996, an amount of Rs. 2,98,63,391.15 was transferred for the creation of COD in the name of the Trust, which in fact had never been cheated. Subsequently, on the Page 0893 direction of the Honble Supreme Court the same amount was paid to the Trust.
40. On 02/07/1996, Shri. Arun Bhargav, Chief Manager of Stock Exchange Branch committed suicide in Mumbai.
41. On 15/07/1996, the Trust by its letter to the Bank pointed out the errors in the statement and sought rectification.
42. on 21/07/1996, a xerox copy of the Certificate of Deposit No. 603684 dated 19th June, 1996 due for maturity on 18th September, 1996 at a value of Rs. 6,28,36,420.00, furnished to the Bank. The Bank informed the Trust that there did not appear to be any Certificate of Deposit of the value of Rs. 6,28,36,420.00 maturing on 18th September, 1996, in the Banks records.
43. On 30/07/1996, the Trustees sent a reminder to the Bank (Stock Exchange Branch) in respect of the aforesaid entries in the Bank Statement and asked for a rectified Bank Statement. This was followed by further letters dated 3rd August, 1996, and 20th August, 1996 also addressed by the Trust to the Bank (Stock Exchange Branch).
44. On 20/08/1996, Shri. Manhar Lal Shah writes a letter to the General Manager, OBC and mentioned Bharat Shah as a representative of the Trust to speak to the Bank with regard to the CODs/ SB A/c No. 9725 in the name of the Trust.
45. On 21/08/1997, the Bank confirms to the Trust, that the Certificate of Deposit dated 26th July, 1996, for Rs. 50,00,000/- was in order but that information was required with regard to the Certificate of Deposit No. 603684 dated 19th June, 1996 which was not appearing on the Banks records.
46. On 22/08/1996, the Trust replied to the Bank, furnishing all the details of the Certificates of Deposit Preceding the Certificate of Deposit No. 603684.
47. On 08/09/1996, the meeting between the Trust and the General Manager of the Bank took place and the Trust was asked to furnish xerox copies of its Bank Statement and was informed that the said Certificate of Deposits aggregating Rs. 3,85,00,000/- had allegedly been prematurely encashed in May, 1995. The Trusts representative denied this.
48. On 11/09/1996, the Trust wrote to the Regional Head of the Bank setting out the detailed facts and requested the Bank to pay the amount of Rs. 6,28,36,420.00 to the Trust on 18th September, 1996.
49. On 12/09/1996, the Bank wrote a letter dated 12/09/1996 to the Trust after examining the statements of the Saving Bank Account No. 64661 of the Trust, for the period 1st January, 1995 to 12th September, 1996, and noticed that three Certificates of Deposit issued on 24/03/1995 and 02/03/1995 for a face value of Rs. 2.92 Crores, Rs. 55,00,000/- and Rs. 38,00,000/ respectively were encashed on 30/05/1995 i.e. prior to their maturity, and that these amounts were credited to the aforesaid Saving Bank Account of the Trust. Like wise, the amount of Deposits of Rs. 50 lakhs, 20 lakhs and 35 lakhs was held under Cumulative Deposit Receipts and not in the form of Certificate of Deposits, and these deposits were also encashed and paid on 29/02/1996.
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50. On 13/09/1996, the Trust wrote a letter dated 13/09/1996, denying the premature encashment of the Certificates of Deposits on 30/05/1995.
51. On 13/09/1996, another meeting took place between Shri. M.C. Shah and the Banks representative. The Trust again denied and premature encashment.
52. On 14/09/1996, the Bank wrote a letter to Shri. Manhar Lal Shah as Chairman of the Trust stating that they have already explained how the Certificate of Deposits paid and proceeds thereof were applied as per their record. It was also observed that the records with the Trust were allegedly different from the Banks record. It was also stated that the matter was under active consideration/ investigation by the Bank and the Appellants were requested to bear with the bank till 23rd September, 1996.
53. On 17/09/1996, the Trust replied to the letter of the Bank denying giving any instructions of authority for premature encashment of the certificate of Deposits. It was also stated that in view of the Banks request it had deferred the matter up to 23rd September, 1996, the presentation of the Certificate of Deposit, which fell due on 18th September, 1996.
54. On 09/09/1996, the Trust presented for encashment, the Certificate of Deposit No. 603976 for Rs. 50,00,000.00 which fell due on 22nd September, 1996.
55. On 23/09/1996, the aforesaid Certificate of Deposit of Rs. 50,00,000.00 was duly paid by the Bank to the Appellants by issue of a pay-order dated 23rd September, 1996.
56. On 24/09/1996, the Trust sought payment of the maturity value of Rs. 6,28,36,420/- in respect of the Certificate of Deposit No. CA603684 deposited with the Bank. The Bank informed the Trust that the Certificate of Deposit was non-existent as per our branch records and returned the Certificate of Deposit.
57. By letter dated 29/09/1996, Trust and by letter dated 10th October, 1996, Solicitors of the Trust served a notice to the Bank calling upon, to make payment of the aforesaid amount (Rs. 6,28,36,420/-).
58. On 24/10/1996, the Trust lodged a complaint with the Banking Ombudsman (Maharashtra and Goa) with regard to the aforesaid matters.
59. On 02/11/1996, the Banking Ombudsman decided the matter vide order dated 02/11/1996, observing that the instant case requires thorough investigation including from the vigilance angle by examining a number of documents as well as calling of witnesses recording evidence etc. and that in the absence of such judicial powers the Ombudsman was not competent to deal with the complaint.
60. On 21/11/1996, the Trust filed Writ Petition No. 2294 of 1996 before this Court.
61. On 19/05/1997, the Central Bureau of Investigation on the complaint filed by the bank registered a Criminal case, being RC No. 4(E)/97 CBI BSFC/MUMBAI dated 19/05/1997 against one Shri. Bharat Shah son Page 0895 of the Chairman of the Trust, Late Shri. Arun Bhargava former Chief Manager of the Respondent Bank and two other employees of the Bank Under Section 120B IPC r/w 420/468/471 and 477A of the IPC and 13(2) r/ w 13(1) of the Prevention of Corruption Act.
62. On 21/07/1997, the Division Bench of Bombay High Court passed the order dismissing the Writ Petition, stating that undisputedly even before the filing of the petition by the Trust, by letter dated 12/09/1996 the Bank has already informed the Appellant about the pre-mature encashment of the deposits and by letter dated 24/09/1996 the Bank has informed the nonexistence of the deposits certificates.
63. On 02/09/1998, the Respondent Trust filed the Special Leave Petition against the order of the high Court and this Honble Court disposed of the SLP filed by the Trust, stating that the Bank shall pay Rs. 2,98,63,391/- together with interest thereon at the rate of 5% p.a. with six monthly rests from 29/06/1996 till the date of payment (i.e. Rs. 33,94,388/-). The Bank shall also pay to the Trust the difference between the sums of Rs. 6,28,36,420/ and Rs. 2,98,63,391/-amounting to Rs. 3,29,73,029/ together with interest at the rate of 5% with six monthly rests from 18/09/1996 (i.e.Rs. 34,83,949/-). The said amount of Rs. 3,29,73,029/- together with the interest amount of Rs. 34,83,949/-aggregating to Rs. 3,64,56,978/-shall be paid by the Bank to the Trust within two weeks of the Trust furnishing security of immovable property at Bombay or such other security as may be offered by the Trust to the satisfaction of the Prothonotary and Senior Master of the Bombay High Court at Bombay for the sum of Rs. 3,64,56,978/-
64. The dispute as to the liability of the bank regarding the liability to pay the said amount of Rs. 3,29,73,029/-together with the dispute as to the rate of interest payable on the said amounts of Rs. 2,98,63,391.15 as well as Rs. 3,29,73,029/-was referred to the Sole Arbitrator Shri. Y.V.Chandrachud, former Chief Justice of India.
65. On 09/11/1998, the learned Sole Arbitrator Justice Y.V.Chandrachud held first arbitration meeting at his residence and directed the parties to file statement of claim/ reply/rejoinder and the filing of documents, inspection and discovery within 10 weeks.
66. In the year 2000, after conducting detailed and thorough investigation for about 3 years and after collecting comprehensive documentary evidence, the CBI has filed the charge sheet in the above case against 9 accused persons including the Chairman of the Appellant Trust Shri. Manhar Lal Shah and one trustee Navnit Lal Shah (Appellant Nos. 2 and 4 before this Honble Court) besides Bharat Shah, the son of Appellant No. 2.
67. On 11/08/2001, the instant charge sheet has also been placed on record vide Application dated 11th August, 2001 filed before the learned Sole Arbitrator on behalf of the Respondent Bank.
68. On 08/09/2001, that after hearing both the parties, the learned Sole Arbitrator framed one preliminary issue and 13 other issues to be decided during the course of arbitration proceedings. The preliminary issue reads as under:
Page 0896 If there was no mandate from the Public Charitable Trust for pre-mature encashment and credit/utilization of the Trust CODs, whether the allegation that one or two of the Trustees colluded with a Trustees son and with Bank officials in wrongfully diverting the Trust funds/ CODs can in law be a defense to a claim by the Public Charitable Trust for recovery of Trust funds/ CODs from the Bank.
69. In the month of October, 2001, pursuant to the charge sheet filed by the CBI in October, 2001, the Appellant Bank filed an application seeking amendment of the Reply filed by the Appellant Bank to the statement of Claim filed by the Claimants and requested to allow the amendment by the insertion of certain paragraphs in the preliminary submissions in the Written Statement to the Statement of Claim filed by the Claimants.
70. On 07/03/2002, the learned Sole Arbitrator after hearing both the sides, vide Order dated 07/03/2002, directed to amend the Reply only to the extent of adding the following:
The Trust, through its Chairman Manhar Lal Shah, his son Bharat Shah and a Trustee Navnit Lal Shah, colluded with Arun Bhargava, General Manager of the Respondent, for perpetrating a fraud on the Respondent.
71. On 25/03/2003, the learned Sole Arbitrator on allowing the application of amendment made by the Appellant bank framed second preliminary issue, to be decided with the main preliminary issue framed by the learned Sole Arbitrator during the proceedings held on 08/09/2001. The second preliminary issue read as under:
If the Trust is assumed to be guilty of fraud as a result of the collusion between the chairman, Manhar Lal shah, his son Bharat Shah and the Trustee navnit Lal Shah with Arun Bhargava, General Manager of the Respondent, for perpetrating a fraud on the Respondent, whether a claim either by the Trust or by the Trustees is legally maintainable.
72. On 29/04/2002, the Bank filed I.A. No. 5 of 2002 craving indulgence of the Honble Supreme Court to pass appropriate order in respect to the Arbitration proceeding pending before Justice Y.V. Chandrachud, in the light of the Charge Sheet filed by the CBI, against the Claimants themselves. The CBI which registered the Criminal case with regard to the same facts and allegations, after detailed and minute investigation, had filed the Charge Sheet in the competent Court at Mumbai, which reveals that not only Bharat Shah, the son of the Chairman of the Claimant Trust, but also Appellants No. 2 and 4 i.e. the Chairman Manhar Lal Shah and one Trustee Shri. Navnit Lal Shah were actively involved in the fraud perpetrated upon the Respondent Bank and the Honble Supreme Court dismissed the same when the learned Counsel appearing for the Claimants Trust stated that they will not raise objections in regard to the Sole Arbitrator dealing with the issues relating to fraud, as and when the matter is dealt with by him on the ground that it would prejudice their defence to the charges of fraud, in the criminal proceedings.
73. On 29/06/2002, the Bank also moved an application before the learned Charity Commissioner, Maharashtra, seeking suspension of the Page 0897 Chairman and the Trustee of the Respondent Trust, in exercise of the powers Under Section 41D of the Bombay Public Trust Act, as they had committed misfeasance/ Breach of Trust in respect of the Trust by misappropriating the funds of the Trust and thereby acting in the manner which was inconsistent with the position as a trustee.
74. On 29/11/2002, the learned Arbitrator after hearing both the parties passed the interim award deciding the preliminary issues against the bank, and making certain observations, which adversely affects the whole case of the bank.
75. On 01/02/2003, the learned Arbitrator during proceedings clarified that the order passed by him on 29/11/2002 shall be treated as interim award and the claimants were directed to affix the stamp of the requisite value to the order. The prayer of the Appellant bank to lead oral evidence on issue with regard to cheating/forgery was turned down on the ground that the findings in the preliminary issue is very clear and therefore, no such oral evidence is required at this stage. The counsel for the Appellant bank on being informed that the order on preliminary issue which is being treated as interim award, sought time to challenge the same by taking appropriate proceedings.
76. On 17/04/2003, the Appellant Bank moved I.A. No. 6 of 2003 in Civil Appeal No. 4577/1998 seeking permission from the Honble Supreme Court to challenge the Award before the appropriate Court in accordance with law.
77. On 16/09/2003, the Appellants Bank challenged the interim award dated 29/11/2002 before this Court being Arbitration Petition No. 311 of 2003 and this Court vide order dated 16/09/2003 dismissed the Petition of the Appellants.
78. On 30/09/2003, the Respondent Trust moved an application, speaking to the minutes of the order dated 16/09/2003, asking for the correction of certain factual inaccuracies in the order. The Application was taken up for hearing in the Court and was opposed by the Appellants Bank, as the Trust was seeking the correction in para 9 of the order, wherein the learned Judge has given the finding that the Chairman and his son has misused the funds of the Trust for their personal gains. The learned Single Judge, after hearing both the parties, dismissed the Application of the Respondent Trust, and rejected the prayer of the Trust to make the correction in the order. Hence this Appeal.
79. Admittedly, the following issue has been framed on 07/03/2002 and on 25/03/2003 while allowing the application for amendment made by the Appellants and the second preliminary issue as reproduced in para 68, by observing that the second preliminary issue to be decided with the main preliminary issue during the proceedings held on 08/09/2001. The learned Senior Counsel appearing for the Appellants, therefore, basically contended that apart from other grounds, the second preliminary issue as ordered ought to have been decided by giving full opportunity to the parties, specially in view of the order dated 25/03/2003 when the learned Arbitrator ordered that the second preliminary issue is to be decided with Page 0898 the main preliminary issue. The learned Counsel appearing for the Respondents, however, resisted the said contention basically by submitting that there was no necessity to lead the evidence in the matter as the learned Arbitrator proceeded on demurrer of the Respondents. The finding given by the Arbitrator in this regard based upon the demurrer is as under:
23. The simple answer to this contention is that the Claimants are a Public Charitable Trust. Even assuming for the sake of argument that the fraud was committed by one or two Trustees and the Chairmans son in collusion with the officers of the respondent, the Trust would be entitled to recover from the Respondent the funds which were admittedly deposited by it with the Respondent. It is important to bear in mind that the claim is made by a public charitable trust to recover the Trust funds. The beneficiaries of the Trust are not the Trustees but the public at large. The trust has established a Hospital which will be denied the benefit of the Trusts funds, if the Respondent is permitted to refuse to repay the Trust moneys to the Trust. The Trust has an identity of its own, which is distinct from the identity of the Trustees who manage the affairs of the Trust. In repaying the moneys back to the Trust, the Trustees will not be, in any sense, benefited by the repayment. It is, therefore, wrong for the Respondent to contend that it will be making payment once over again to the Claimant Trust. The Trust has never received its moneys.
Finally, learned Counsel for the Respondent contended that the Trustees must first sue themselves to recover the dues of the Trust and, it is only if they fail in that action that, the Respondent Bank can be sued by the Trust. I find it quite difficult to appreciate this submission. Firstly, it involves a revolutionary concept of a person suing himself. And, secondly, it overlooks the distinction between the independent identity of the Trust and the position of the Trustees as persons who administer the affairs of the Trust.
For reasons aforesaid, my answer to the Preliminary issue is that, if there was and is no mandate from the claimants for premature encashment and credit or utilization of the Trusts CODs, the allegation that one or two of the Trustees and the son of the Chairman of the Trust colluded with the officers of the Respondent Bank in wrongfully diverting the Trusts Funds/CODs cannot in law be a defence to the claim made by the Claimants, a Public Charitable Trust, for recovery of the Trusts Fund/CODs from the Respondent Bank.
80. After going through the record and the rival contentions as raised, the Arbitrator has dealt with only one Preliminary issue as reproduced above i.e. para 25 of the above dated 29th November, 2002.
81. The second issue having once framed with objection to be heard alongwith first preliminary issue, based on the assumption that the Trust is guilty of fraud as a result of the collusion between the Chairman, Manhar Lal Shah, his son Bharat Shah and the Trustee Navnit Lal Shah with Arun Bhargava, General Manager of the Respondents for perpetrating a fraud on the Respondents (The Appellants Bank) not deciding the maintainability of the claim either by the Trusts or by the Trustees, is not Page 0899 correct. In our opinion, it goes to the root of the matter, for the simple reason that there is no denial to the averments about the allegations of fraud, as a result of collusion, and therefore, unless said assumption is rebutted by the Respondents, the finding with regard to the preliminary issue about the no mandate of the claim for premature encashment as reproduced above is incorrect.
82. Normally, it is difficult to the Arbitral Tribunal to decide the issue of fraud. However, in the present facts and circumstances of the case, and pursuant to the order of Supreme Court, parties agreed to get the issue of fraud decided by the Arbitrator. Having once accepted the position, unless the same issue is decided by giving full opportunity to the parties and specially to the Appellants, who have made the averments about the fraud and collusion, the interim award in question based upon the order dated 29th November, 2002 is unsustainable, at this stage of the proceeding.
83. The Arbitrator has not allowed the Petitioners Appellants bank to lead oral evidence. The allegations of fraud and or collusion, apart from facts and circumstances of the case, specially when there is no denial of allegations on fraud, and/or based upon the demurrer , the Arbitral Tribunal has passed the order dated 29th November, 2002. In our opinion, the case tilt in favour of the Appellants rather than the Respondents. Unless rebutted, if allegations are sufficient to have a detailed trial, the grant of interim award dated 29th November, 2002 by overlooking the second preliminary issue, is in total breach of settled principle of law. The learned Judge even did not refer the submission as raised with regard to the second preliminary issue. The learned Judge as well as the learned Arbitrator answered the issue No. XVIII without giving opportunity to lead evidence with regard to this issue, merely, because Criminal prosecution has already been lodged against the Trustees of the Trusts and the Bank officials. Having once framed the preliminary issue an order to decide together, there was no reason to decide other issue at this interim stage in this fashion without giving opportunity to the parties to lead evidence. The interim award, therefore, as passed in this background, is unsustainable.
84. There is no dispute that the Trust has an identity of its own which is distinct from the identity of the Trustees, but having framed the issue even on demurer, the second preliminary issue prima facie, assumed that the Trust is also guilty of fraud, as a result of collusion, as alleged. In that case unless such assumption is rebutted by leading evidence, at this stage,the grant of interim order of such nature is not correct. It is not only trustee but the involvement of trust through trustee, unless clarified otherwise, just cannot be overlooked to maintain the interim order, at this stage. The submission that it would be making payment, knowingly inspite of assumption of guilty of collusion and fraud by the trust and the trustees, apart from double payment to the trust or the trustees is correct. There is nothing on the record to show that the trust by resolution or by any other means informed or communicated the Bank not to release the fund eventhough instructed by such trustees. When the transactions are interlinked, the role and the independent identity of the trust and the Page 0900 trustees also interlinked and cannot be separated for the purpose of interim order, pending trial and investigation on fraud.
85. It is not correct to say that there was no mandate from claimants (the trust) for premature encashment and credit or utilisation of the trusts CODs. Once the presumption, in view of second preliminary point, is that the trust and the trustees, are guilty of fraud and wrongfully diverted the trust funds by collusion, in this background, if it is a case of collusion therefore the mandate or no mandate of the trust for premature encashment, is irrelevant. The intent of the beneficiaries can be taken note of after full trial.
86. Admittedly, the Petition under Section 34 in question is against the impugned interim award. Under the Act, the award which also means interim award is as under:
(c) "arbitral award" includes an interim award;
87. In Satwant Singh Sodhi v. State of Punjab and Ors. based on the old Arbitration Act 1940 wherein there was no such definition of interim award, the Apex Court has observed as under:
6. The question whether interim award is final to the extent it goes or has effect till the final award is delivered will depend upon the form of the award. If the interim award is intended to have effect only so long as the final award is not delivered it will have the force of the interim award and it will cease to have effect after the final award is made. If, on the other hand the interim award is intended to finally determine the rights of the parties it will have the force of a complete award and will have effect even after the final award is delivered.
88. In McDermott International Inc. (supra) , the Supreme Court has clarified while dealing with Section 2(c) read with Sub-section (6) of Section 31 in reference to "partial award" and/or "interim award" as under:
68. The 1996 Act does not use the expression "partial award". It uses interim award or final award. An award has been defined under Section 2(c) to include an interim award. Sub-section (6) of Section 31 contemplates an interim award. An interim award in terms of the said provision is not one in respect of which a final award can be made, but it may be a final award on the matters covered thereby, but made at an interim stages.
69. The learned arbitrator evolved the aforementioned procedure so as to enable the parties to address themselves as regards certain disputes at the first instance. As would appear from the partial award of the learned arbitrator, he deferred some claims. He further expressed his hope and trust that in relation to some claims, the parties would arrive at some sort of settlement having regard to the fact that ONGC directly or indirectly was involved therein. While in relation to some of the claims, a finality was attached to the award, certain claims were deferred so as to enable the learned arbitrator to advert thereto at a Page 0901 later stage. If the partial award answers the definition of the award, as envisaged under Section 2(c) of the 1996 Act, for all intent and purport, it would be a final award. In fact, the validity of the said award had also been questioned by BSCL by filing an objection in relation thereto.
70. ...We may state that both the partial award and the final award are subject matter of challenge under Section 34 of the Act.
89. In the present case, therefore, though there is no specific objection about the maintainability of the Appeal, considering the rival issues raised, it is necessary to observe that in the facts and circumstances of the present case, the petition under Section 34 of the Act is maintainable in view of the nature of the interim award in question. By the interim award, the learned Arbitrator has decided the issue finally, though on demurrer and directed the Appellants to release the payment accordingly. In a matter like this, where there is material to show the interlinked transactions amongst the Bank, the Trust, the Trustees apart from others like MNCCFMF Ltd. , M/s. Jayco, Kikibhai Premchand Shah, M/s. Alpic Finance, K.B. Shah, M/s. Adrik Traders Pvt.Ltd. and M/s. Ruby Mills Limited owned by Chairman of the Trust Shri M.L.Shah, father of Mr. Bharat Shah and when there is a presumption of guilt against them that trust is also involved alongwith the other Trustees, the order of release of such money at this stage, without detail trial is not correct and specially further without considering the second preliminary issue though the Arbitrator ordered to be heard alongwith the first preliminary issue. Therefore, the nature of such interim award in a way concluded the issue against the Appellants and thereby determine the rights of the parties, with this regard, finally. The Appellant and such other parties in such conditions cannot be rendered remediless. They cannot compel to wait in till the final award.
90. Normally, the Courts should be slow in interfering with the interim order passed by the Arbitrator. But there is no total bar that such award including interim award cannot be challenged in no circumstances.
91. The law is reiterated again by the Supreme Court in O.N.G.C. Ltd. v. Garware Shipping Corporation Ltd. which is as under:
There is no proposition that the Courts could be slow to interfere with the arbitrators Award, even if the conclusions are perverse, and even when the very basis of the Arbitrators award is wrong. In any case this is a case where interference is warranted and we set aside the norms prescribed by the Arbitrator as upheld by the learned Single Judge and the Division Bench.
92. In McDermott International Inc. v. Burn Standard Co., Ltd. and Ors. J.T. 2006 (11) S.C. in para 55, Supreme Court has observed as under:
55. The 1996 Act makes provision for the supervisory role of courts, for the review of the arbitral award only to ensure fairness. Intervention of the Court is envisaged in few circumstances only, like, in case of fraud or bias by the Arbitrators, violation of natural justice, etc. The Page 0902 court cannot correct errors of the Arbitrators. It can only quash the award leaving the parties free to begin the arbitration again if it is desired. So, scheme of the provision aims at keeping the supervisory role of the court at minimum level and this can be justified as parties to the agreement make a conscious decision to exclude the courts jurisdiction by opting for arbitration as they prefer the expediency and finality offered by it.
93. In the present case, as noted it is a case of fraud and misrepresentation by the Respondent Trust and the Trustees, based upon the demurrer. The Honble Supreme Court has elaborated again the principle of demurrer as under in Ramesh B. Desai and Ors. v. Bipin Vadilal Mehta and Ors. (2006) 5 SCC
14. The plea raised by the contesting respondents is in fact a plea of demurrer. Demurrer is an act of objecting or taking exception or a protest. It is a pleading by a party to a legal action that assumes the truth of the matter alleged by the opposite party and sets up that it is insufficient in law to sustain his claim or that there is some other defect on the face of the pleading constituting a legal reason why the opposite party should not be allowed to proceed further.
In Exphar SA v. Eupharma Laboratories Ltd. , it was ruled that where an objection to the jurisdiction is raised by way of demurrer and not at the trial, the objection must proceed on the basis that the facts as pleaded by the initiator of the impugned proceedings are true. "
The fraud vitiates everything. It is, therefore, clear that the assertion made by the Respondents must be assumed to be true for the purpose of determining the issue in question. Therefore, the Appellate Court can interfere with, as such interim order which is wrong and also vitiated because of violation of principle of natural justice.
94. We are inclined to accept the submission as raised by the learned Senior counsel appearing for the Appellants that pendency of the CBI enquiry and or criminal case, apart from the pendency of the Criminal prosecution on charges of fraud and collusion, the impugned interim award without giving opportunity to the Appellants ought not to have been passed in the present matter. The matter of this type needs detail trial. We are inclined to interfere with the order passed by the learned Single Judge as well as the Arbitrator.
95. The learned Counsel appearing for the Respondents contended that there was no such ground raised in the petition about the non-consideration of the second preliminary issue, and therefore, in view of Page 0903 Pushpa P. Mulchandani v. Admiral Radhakrishin Tahilani , such ground is not permissible as it is barred by limitation. The learned Senior counsel appearing for the Appellants in reply to this, has pointed out the grounds specially No. 24 and 26. We are convinced that there are grounds raised. Therefore, there is no force in the contention as raised.
96. Even otherwise, we are satisfied that the learned Arbitrator as well as the learned Single Judge ought to have decided the second preliminary issue along with this issue as ordered initially by the Arbitrator.
97. Therefore, taking an overall view of the matter, the award and the order passed by the learned Single Judge being vitiated, therefore, same is set aside. The petition under Section 34 of the Arbitration Act, filed by the Petitioners-Appellants, is granted. The Appeal as well as petition is allowed, accordingly. No costs.