15 July 2019

UPDATE | ARBITRABILITY OF CHIT FUND DISPUTES

The Bombay High Court recently held in the case of Dinesh Jaya Poojary v Malvika Chit Funds Private Limited that disputes relating to chit business can only be adjudicated upon by the Registrar within the meaning of Section 2(o) of the Chit Funds Act, 1982 (Chit Funds Act). This legal provision cannot be varied by an independent arbitration agreement.

Facts of the case:

• One Mr Harish Poojary (Subscriber) was a member of a chit group of the Respondent for the chit amount of Rs 3 crores with a monthly subscription of Rs. 15 lacs commencing on 28 June 2010 (Chit Fund Scheme).
  
  
• The Petitioner, on 13 August 2012 entered into a separate agreement of guarantee, to the extent of Rs 65 lacs with the Respondent (Guarantee) to guarantee the amounts dues from the subscriber. The Guarantee contained an arbitration clause, which provided for adjudication of disputes by a sole arbitrator to be appointed by the Respondent.
  
  
• The Subscriber defaulted in the payment of Rs 93,34,100 under the Chit Fund Scheme. On the said default, the Respondent, under the Guarantee, called upon the Petitioner to pay 60 lacs which was within the extent of the Guarantee. Denying the averments in the notice, the Petitioner also alleged forgery, fabrication and cheating on the part of the Respondent.
  
  
• The Respondent however, appointed a sole arbitrator and commenced the arbitration proceedings by filing the statement of claim. The jurisdiction of the arbitral tribunal was contested by the Petitioner under Section 16 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). However, this application was rejected by the arbitrator. The arbitrator passed an award directing the Petitioner to pay the entire amount of Rs. 93,34,100 with interest and cost (Award).
  
  
• The Petitioner challenged the Award under Section 34 of the Arbitration Act.

Arguments of the Parties and Findings of the Court:

• The Respondent pleaded that the Guarantee was an independent agreement, because it was entered into subsequent to the crystallization of liability of the Subscriber. Therefore, the dispute was not one relating to the chit business.
  
  
• The Petitioner pleaded that the term Guarantor has not been defined under the Chit Funds Act. Therefore the definition from the Indian Contract Act, 1872 has to be imported. In view of the same, under Section 64(1)(b) of the Chit Funds Act, a dispute with a surety of the Subscriber has to be adjudicated upon by the Registrar under the Chit Funds Act only.
  
  
• The Hon’ble Bombay High Court held that:
  
  
  • The present dispute was one between a foreman and the surety of a subscriber. It could thus only be entertained by the Registrar under the Chit Funds Act. The Registrar as provided under Section 64(1) of the Chit Funds Act is an exclusive remedy.
  • In view of the non-obstante clause in Section 64 of the Chit Funds Act, the Chit Funds Act is a special Act and would therefore prevail over the Arbitration Act. Therefore, no agreement for arbitration entered contrary to and inconsistent with Section 64 of the Chit Funds Act can be acted upon. In the circumstances, the petition was allowed.

MHCO Comment: The aforesaid judgment clarifies the applicability of the Arbitration Act to any dispute on the management of a chit business. It lays down that any agreement which creates an overlapping remedy of arbitration under the Arbitration Act cannot be enforced in relation to the chit business which is governed by the Chit Funds Act. Arbitration before the Registrar as provided under Section 64(1) of the Chit Funds Act is the only available remedy.


The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.comfor any assistance.