Rajlaxmi Multistate Credit v. Gajanan Vasant Shribhate & Ors.

The case of Rajlaxmi Multistate Credit v. Gajanan Vasant Shribhate & Ors. (Arbitration Appeal No. 77/2025) was decided by the Hon’ble Bombay High Court on 14 October 2025 by Justice Nivedita P. Mehta. This case deals with important legal questions relating to statutory arbitration under the Multi-State Co-operative Societies Act, 2002 and its relationship with the Arbitration and Conciliation Act, 1996.

The judgment provides clarity on whether mutual consent is required for appointment of an arbitrator in statutory arbitration, whether charging interest under an arbitral award violates public policy, and whether guarantors can be made parties to arbitration proceedings under the Societies Act.

The case is significant because it strengthens the understanding of statutory arbitration and reinforces the principle that a special law prevails over a general law.

Facts of Rajlaxmi Multistate Credit v. Gajanan Vasant Shribhate & Ors. Case

Rajlaxmi Multistate Credit Cooperative Society Ltd., the Appellant, is a registered Multi-State Co-operative Society governed by the Multi-State Co-operative Societies Act, 2002. Its registered office is located in Yavatmal.

Respondent Nos. 1 and 2 approached the Appellant Society seeking a loan for the purpose of carrying out house repairs. After completing the required formalities, the Society sanctioned and disbursed a loan of ₹5,50,000 on 1 March 2024. Respondent Nos. 3 and 4 stood as guarantors for the said loan.

Under the terms of the loan agreement and the bye-laws of the Society, the borrowers agreed to repay the loan amount along with interest at the rate of 15% per annum. However, Respondent Nos. 1 and 2 failed to repay the loan instalments, resulting in a substantial outstanding amount.

The Appellant Society issued repeated notices to the respondents demanding repayment of the dues. Despite these efforts, the respondents failed to discharge their liability. As a result, the Appellant referred the dispute to arbitration on 19 December 2018.

The dispute was referred under Section 84 of the Multi-State Co-operative Societies Act, 2002 read with Section 23 of the Arbitration and Conciliation Act, 1996. The Commissioner for Co-operation and Registrar of Co-operative Societies, Maharashtra State, Pune, appointed Shri A.G. Gupta as the sole arbitrator on 13 December 2018.

After the appointment, arbitration proceedings commenced. The respondents were duly served with notices of the proceedings. However, they neither filed a written statement nor participated in the arbitration.

The arbitrator proceeded ex parte and passed an award dated 27 April 2019. The award directed the respondents to jointly and severally pay a sum of ₹6,32,473.43 to the Appellant along with future interest at the rate of 17% per annum from 19 December 2018 until realisation. Costs were also awarded in favour of the Appellant.

The respondents challenged the arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996. The learned District Judge set aside the arbitral award by judgment dated 1 February 2025.

Aggrieved by this decision, the Appellant filed an appeal under Section 37 of the Arbitration Act before the Bombay High Court.

Issues Before the Court

The Bombay High Court in Rajlaxmi Multistate Credit v. Gajanan Vasant Shribhate & Ors. considered the following issues:

• Whether the appointment of an arbitrator under Section 84 of the Multi-State Co-operative Societies Act, 2002 requires mutual consent under Section 11 of the Arbitration and Conciliation Act, 1996.
• Whether the arbitral award is liable to be set aside on the ground that charging of interest is in conflict with public policy of India under Section 34(2)(b)(ii) of the Arbitration Act.
• Whether Respondent Nos. 3 and 4, being guarantors, are amenable to arbitration proceedings under the Multi-State Co-operative Societies Act, 2002.

Contentions of the Parties

Contentions of the Appellant

The Appellant contended that the arbitral award was valid and was passed in accordance with the law. It was argued that the loan agreement did not prohibit charging of interest, and therefore, the award could not be said to violate any principle of justice.

It was further submitted that Section 84 of the Societies Act provides a statutory mechanism for arbitration. Therefore, the appointment of an arbitrator under this provision does not require mutual consent of the parties under Section 11 of the Arbitration Act.

The Appellant also argued that the District Judge failed to appreciate the statutory framework of the Societies Act, which provides for arbitration as a mandatory remedy. It was contended that Section 34 of the Arbitration Act does not apply in its entirety to statutory arbitration proceedings governed by a special law.

Contentions of the Respondents

Respondent Nos. 1 and 2 argued that the Appellant had not produced any material to show that they were members of the Society within the meaning of Section 3(n) of the Societies Act. On this basis, they contended that the arbitration proceedings were not maintainable.

It was also argued that the arbitrator was appointed unilaterally without obtaining their consent. According to the respondents, this violated the requirement under Section 11 of the Arbitration Act, and therefore, the arbitral award was invalid.

Respondent Nos. 3 and 4, who were guarantors, contended that they were not members of the Society. Therefore, they argued that arbitration proceedings under Section 84 of the Societies Act could not be initiated against them.

Rajlaxmi Multistate Credit v. Gajanan Vasant Shribhate & Ors. Judgment of the Court

Issue 1: Requirement of Consent for Appointment of Arbitrator

The Bombay High Court held that mutual consent of the parties is not required for appointment of an arbitrator under Section 84 of the Multi-State Co-operative Societies Act.

The Court observed that Section 84 provides a statutory mechanism for resolution of disputes through arbitration between a co-operative society and its members, officers, employees, or sureties. The procedure for appointment of an arbitrator is governed by the provisions of the Societies Act and the rules framed under it.

The Court applied the well-established principle of statutory interpretation that a special law overrides a general law. The Arbitration and Conciliation Act, 1996 is a general law governing arbitration, whereas the Societies Act is a special legislation dealing specifically with co-operative societies.

Relying on the maxim generalia specialibus non derogant, the Court held that the provisions of the Societies Act prevail over the Arbitration Act in case of conflict.

The Court also explained the concept of statutory arbitration. It stated that statutory arbitration arises when a law mandates arbitration for certain disputes, and such arbitration does not depend on agreement between the parties.

In the present case, the arbitrator was appointed by the competent authority in accordance with the statutory procedure. The absence of consent from the respondents did not affect the validity of the appointment.

The Court also noted that the respondents did not object to the appointment at the initial stage and did not participate in the arbitration proceedings despite being served with notice.

Accordingly, the Court held that the appointment of the arbitrator was valid.

Issue 2: Whether the Award Violates Public Policy

The Court examined whether the arbitral award could be set aside on the ground that it involved charging of interest.

The Court referred to the terms of the loan agreement. Clause 7 provided for interest at the rate of 15% per annum calculated on periodic rests and charged on daily balance until full repayment. Clause 8 provided for additional penal interest at the rate of 2% per annum on defaulted amounts.

The Court observed that the parties had contractually agreed to payment of interest and penal interest. Therefore, the arbitrator’s award of interest was in accordance with the agreed terms.

The Court further noted that the arbitrator had awarded simple future interest at the rate of 17% per annum from the date of reference until realisation. This did not amount to improper charging of interest.

The argument that the award involved interest on interest was found to be unsupported by evidence.

The Court relied on the decision in ONGC Ltd. v. Saw Pipes Ltd., where it was held that an arbitral award can be set aside only if there is patent illegality going to the root of the matter.

The Court clarified that commercial rates of interest, including penal interest, do not violate public policy unless they are unconscionable, excessive, or prohibited by law.

In the present case, there was no material to show that the interest awarded was unlawful or against public policy. Therefore, the arbitral award could not be set aside on this ground.

Issue 3: Liability of Guarantors

The Court considered whether Respondent Nos. 3 and 4, being guarantors, could be subjected to arbitration under the Societies Act.

The Court held that the scope of Section 84 of the Societies Act is broad and includes disputes involving guarantors and sureties. The provision specifically includes persons who provide guarantees in relation to transactions of the Society.

The Court rejected the argument that only members of the Society can be parties to arbitration proceedings.

The Court also referred to Section 128 of the Indian Contract Act, 1872, which provides that the liability of a guarantor is co-extensive with that of the principal debtor unless otherwise agreed.

Since Respondent Nos. 3 and 4 had voluntarily undertaken liability as guarantors, they could not avoid arbitration proceedings by claiming that they were not members of the Society.

Accordingly, the Court held that the guarantors were amenable to arbitration proceedings under the Societies Act.

Key Legal Principles

• Statutory arbitration under the Multi-State Co-operative Societies Act does not require mutual consent of the parties.
• A special law prevails over a general law, and therefore, the Societies Act overrides the Arbitration Act in matters of statutory arbitration.
• Charging of interest in accordance with contractual terms does not violate public policy unless it is unlawful or unconscionable.
• Guarantors can be made parties to arbitration proceedings under the Societies Act, and their liability is co-extensive with that of the borrower.

Conclusion

The Bombay High Court in Rajlaxmi Multistate Credit v. Gajanan Vasant Shribhate & Ors. upheld the validity of statutory arbitration under the Multi-State Co-operative Societies Act.

It held that mutual consent is not required for appointment of an arbitrator, that contractual interest does not violate public policy, and that guarantors are bound by arbitration proceedings.

The decision reinforces the importance of statutory frameworks and supports a structured and efficient system of dispute resolution.