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CASE NO.: Arbitration Petition  8 of 2005

PETITIONER: SAN-A TRADUBG CO. LTD.

RESPONDENT: I.C. TEXTILES LTD.

DATE OF JUDGMENT: 28/04/2006

BENCH: P.P. Naolekar

JUDGMENT: JUDGMENT

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.

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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 :  "\005 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.

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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: "15.  Termination of mandate and substitution of  arbitrator.- (1) In addition to the circumstances referred to in  section 13 and section 14, the mandate of an arbitrator shall  terminate -  

(a)     where he withdraws from office for any reason; or (b)     by or pursuant to agreement of the parties.

(2)     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.

(3)     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.

(4) 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

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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

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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)

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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.