Disposed

Shreepat Mishra v. M/S Equitas Small Finance Bank Limited

Chhattisgarh HC8 Sept 2024WP227/726/2023

Case brief

AI extract

What is this about?

Vehicle-loan borrowers challenged an arbitral award passed after unilateral appointment of the sole arbitrator by respondent bank, contrary to Section 12(5) with Schedule VII. The High Court held the appointment contrary to law conferred no inherent jurisdiction on the arbitrator, making the award a nullity, and set it aside while allowing fresh proceedings.

What did the court decide?

Impugned arbitral award and interim order set aside; respondent bank permitted to initiate fresh arbitration proceedings in accordance with law.

Shreepat Mishra Vs M/S Equitas Small Finance Bank Limited — Arbitration | Chhattisgarh HC (2024)

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2024:CGHC:35121

AFR

HIGH COURT OF CHHATTISGARH AT BILASPUR

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WP227 No. 726 of 2023

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1 - Shreepat Mishra S/o- Jivnath Aged About 25 Years R/o- House No. 162/8, Vijay Nagar Kokditarai, Kirodimal Nagar, Raigarh, District : Raigarh, Chhattisgarh

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2 - Jivnath Mishra S/o- Murat Aged About 53 Years R/o- House No. 162/8, Vijay Nagar, Ward No. 6, Kokditarai, Kirodimal Nagar, Raigarh, District : Raigarh, Chhattisgarh

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... Petitioners

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versus

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1 - M/s Equitas Small Finance Bank Limited Formerly Known As M/s. Equitas Finance Limited, Rep. By Its Manager - Legal Spencer Plaza, 4th Floor, PhaseI I, No. 769, Mount Road, Anna Salai, Chennai-600002.

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2 - Sole Arbitrator Presided Over By M. Aniruthan, Sole Arbitrator, S-1, Aishwaayam Apartments No. 65, Enfield Avenue Pariyar Nagar Extension, Madipakkam, Chennai.

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3 - Branch Manager Central Bank Of India, Station Road, Raigarh I.F.S.C. Code C.B.I.N.0280799, District Raigarh CG.

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4 - Branch Manager State Bank Of India, J.S.P.L., Patrapali, Raigarh(C.G.)

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... Respondents

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For Petitioners :	Shri Sushobhit Singh, Advocate.
For Respondent No.1	Shri DP Singh, Advocate.
For Respondent No.3:	Shri Anand Shukla, Advocate.
For Respondent No.4	Shri Pravesh Sahu appears on behalf of Shri PR Patankar, Advocate.

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(Hon’ble Shri Justice Deepak Kumar Tiwari) Order On Board

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09/09/2024

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This petition has been filed under Article 227 of the Constitution of India

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for the following reliefs:-

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10.1 That, this Hon'ble may kindly be pleased to issue appropriate writ, order, direction in the nature of certiorari and quash the impugned order dated 07.06.2023 (ANNEXURE P/1) passed in Claim Petition No. MA/ESFB/33/2023 between the parties M/s. Equitas Small Finance Vs. Shreepat Mishra & another and the Hon'ble Court may quash the order dated 29.05.2023 (ANNEXURE P/2) passed in Application NO. 1/2023, Arbitration Case No. MA/ESFB/33/ 2023 between the parties M/s. Equitas Small Finance Vs. Shreepat Mishra & another.

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10.2 That, the Hon'ble Court may kindly be pleased to further direct the respondents to immediately defreezed the bank accounts of the petitioners.

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10.3 That, the respondent no. 1 may be further directed to immediately

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return the vehicle or refund the amounts obtained after the auction/sell

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of the vehicle of the petitioners.

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10.4 That, this Hon'ble Court may kindly be pleased to grant any other relief as it may deems fit and appropriate.

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Facts of the case in brief are that petitioners obtained a vehicle loan of Rs.13 Lakhs from Respondent No.1 and entered into a loan agreement on 20.09.2018(Annexure R-1/1). Out of the total loan amount, petitioners have already paid Rs.9,41,695/- and additionally have paid Rs.1,86,000/- to the authorized representative of the company Shri Ved Prakash Sen. During covid pandemic, petitioners faced financial hardship and could not pay some of the installments. Respondent No.1 declared the account to be NPA and forcibly seized the vehicle bearing registration No.CG 13 LA 5370 from yard on 20.01.2022 without issuing any notice to the petitioners and also auctioned the vehicle. Thereafter, respondent No.1 initiated arbitration proceedings before Respondent No.2/Sole Arbitrator, who was appointed unilaterally by him contrary to to the provisions of Section 12(5) read with Schedule 7 of the Arbitration and Conciliation (Amendment) Act, 2015(henceforth ‘the Act, 2015’). The sole arbitrator, without following due procedure, has passed the interim order on 29.05.2023 and directed to freeze all the bank accounts of the petitioners. In pursuance of the said direction, 3 accounts of the petitioners were freezed and made inoperative since then. The arbitrator without issuing any notice to the petitioners, proceeded to decide the arbitration application and finally decided it on 07.06.2023 wherein, it was ordered and decreed that Respondent No.1 is entitled to claim and recover Rs.5,18,106/- with interest @ 18% per annum from 15.02.2023 till the realization of the claim amount. Petitioners had earlier challenged

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the interim award before the civil court at Raigarh and the same was dismissed for want of jurisdiction vide order dated 07.08.2023 . Hence this petition.

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Learned counsel for the petitioners submits that impugned award itself is bad in the eye of law and is a total nullity being contrary to the provisions of Section 12(5) read with Schedule 7 of the Act, 2015. Learned counsel for the petitioners would further submit that as the loan agreement was executed in the year 2018 after the enactment of Arbitration and Conciliation Amendment Act, 2015(3 of 2016), unilateral appointment of the sole arbitrator is not valid in the eye of law. He would further submit that it is inconceivable in law that a statutorily ineligible person can nominate a person. He submits that in the matter of TRF Limited vs. Energo Engineering Projects Limited {(2017) 8 SCC 377}, the Managing Director, as per the arbitration clause, appointed a former Chief Justice of High Court as an arbitrator and after such appointment, the appellant TRF limited preferred an application under Section 11(5) read with Section 11(6) of the Arbitration and Conciliation Act, 1996(henceforth ‘the Act,1996’) for appointment of an arbitrator under Section 11(2) of the said Act. The said foundation was structured on the basis that under Section 12(5) of the Act, 2015(3 of 2016) read with 5th and 7th Schedules to the amended Act, the Managing Director had become ineligible to act as arbitrator and as a natural corollary , he had no power to nominate and finally at para 54, it has been held that one cannot have a building without the plinth. When the identity of the Managing Director, as a sole arbitrator, is lost, the

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power to nominate someone else as an arbitrator is obliterated and the

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appeals were allowed. Relevant para 54 reads as under:-

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54. In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so.

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He would further submit that in the matter of Dharma Prathishthanam v. M/s. Madhok Construction Pvt. Ltd.{ AIR 2005 SC 214} while dealing with the issue under the Arbitration Act, 1940, appointment of sole arbitrator unilaterally and unilateral reference by one party without consent of other party was held to be illegal and award passed by the Arbitrator was held to be nullity and void ab initio .

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In the matter of Perkins Eastman Architects DPC and another vs. HSCC (India) Ltd. { AIR 2020 SC 59}, the law has been reiterated that

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a person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator and after following the dictum in the matter of TRF Limited (supra), the following observation was made at para 15 and 16 which read as under:-

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15. It was thus held that as the Managing Director became ineligible by operation of law to act as an arbitrator, he could not nominate another person to act as an arbitrator and that once the identity of the Managing Director as the sole arbitrator was lost, the power to nominate someone else as an arbitrator was also obliterated. The relevant Clause in said case had nominated the Managing Director himself to be the sole arbitrator and also empowered said Managing Director to nominate another person to act as an arbitrator. The Managing Director thus had two capacities under said Clause, the first as an arbitrator and the second as an appointing authority. In the present case we are concerned with only one capacity of the Chairman and Managing Director and that is as an appointing authority.

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We thus have two categories of cases. The first, similar to the one dealt with in TRF Limited(supra) where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be the test, similar invalidity would always arise

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and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this Court in TRF Limited(supra), all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an Arbitrator on its own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an Arbitrator.

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16. But, in our view that has to be the logical deduction from TRF Limited(supra). Paragraph 50 of the decision shows that this Court was concerned with the issue, “whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator” The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in

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determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited(spura).

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Learned counsel for the petitioners would further submit that the similar issue came up for consideration before the High Court of Gujarat at Ahmedabad also in Special Civil Application No.728/2023 along with other connected matters wherein an ex-parte award was passed in Chennai and the same was challenged in the writ petition at Gujarat High Court raising similar nature of objection which was allowed and the exparte award was set-aside. At Para 19 and 20, the following was materially observed:-

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19 . Therefore, even though the petitioners are required to challenge the award under Section 34 of the Act, the petitioners have been able to show exceptional circumstances and bad faith on the part of respondent NBFC to invoke the remedy under Article 226 and 227 of the Constitution of India whose ambit is broad and pervasive as held by the Hon’ble Supreme Court in case of Bhaven Construction (Supra) after considering the position of law with regard to the challenge to the arbitration proceedings under Article 226 and 227 of the Constitution of India. Therefore, in the exceptional circumstances as emerging from the facts of these petitions, these petitions are entertained instead of relegating the petitioners to avail appropriate remedy under Section 34 of the Act.

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20 . In light of above discussion and considering the facts of the case,

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it becomes evident that from the very inception i.e. from the stage of appointment of the sole arbitrator, the proceedings were vitiated and the impugned ex parte arbitral awards are therefore rendered unsustainable. The impugned awards are therefore liable to be quashed and set aside with a liberty to the respondent NBFC to initiate fresh proceedings in accordance with the settled legal position as held by the Hon'ble Division Bench of this Court in case of Pahal Engineers vs. The Gujarat Water Supply and Sewerage Board(Special Civil Application No.8727 of 2019) dated 30.01.2023 by appointing the arbitrator either with the consent of the petitioners or by approaching this Court under Section 11 of the Act.

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At last, learned counsel for the petitioners submits that in view of

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such backdrop, the instant petition may be allowed.

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On the other hand, learned counsel for Respondent No.1 would submit that the Writ petition itself is not maintainable. He placed reliance on the matter of Bhaven Construction v. Executive Engineer, Sardar Sarovar Narmada Nigam Limited and Another{ (2022) 1 SCC 75} and referred to para 20 while submitting that petitioners have failed to demonstrate any exceptional case or bad faith on the part of the decree holder to invoke remedy available under Article 227 of the Constitution of India. He further submits that petitioners are only having the remedy to invoke provision under Section 34 of the Arbitration Act, 1996. He further submits that as the seat of Arbitrator is at Chennai, therefore, this Court has no jurisdiction to entertain the writ petition. He further placed reliance on the matter of Indus Mobile Distribution Pvt. Ltd. v. Datawind Innovation Pvt. Ltd. And others {AIR 2017 SC 2105} and referred to para 20, 21, which read as under:-

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20. A conspectus of all the aforesaid provisions shows that the moment the seat is designated, it is akin to an exclusive jurisdiction clause. On the facts of the present case, it is clear that the seat of arbitration is Mumbai and Clause 19 further makes it clear that jurisdiction exclusively vests in the Mumbai courts. Under the Law of Arbitration, unlike the Code of Civil Procedure which applies to suits filed in courts, a reference to “seat” is a concept by which a neutral venue can be chosen by the parties to an arbitration clause. The neutral venue may not in the classical sense have jurisdiction – that is, no part of the cause of action may have arisen at the neutral venue and neither would any of the provisions of Section 16 to 21 of the CPC be attracted. In arbitration law however, as has been held above, the moment “seat” is determined, the fact that the seat is at Mumbai would vest Mumbai courts with exclusive jurisdiction for purposes of regulating arbitral proceedings arising out of the agreement between the parties.

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21 . It is well settled that where more than one court has jurisdiction, it is open for parties to exclude all other courts. For an exhaustive analysis of the case law, see Swastik Gases Private Limited v. Indian Oil Corporation Limited, (2013) 9 SCC 32. This was followed in a recent judgment in B.E. Simoese Von Staraburg Niedenthal and Another v. Chhattisgarh Investment Limited, (2015) 12 SCC 225. Having regard to the above, it is clear that Mumbai courts alone have jurisdiction to the exclusion of all other courts in the country, as the juridical seat of arbitration is at Mumbai. This being the case, the impugned judgment is set aside. The injunction confirmed by the impugned judgment will continue for a period of four weeks from the date of pronouncement of this judgment, so that the respondents may take necessary steps under Section 9 in the Mumbai Court. Appeals

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are disposed of accordingly.

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I have heard learned counsel for the parties at length and perused the documents annexed with the petition.

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In the matter of Bhaven Construction( supra), it has been categorically observed that ambit of Article 227 is broad and pervasive and it is well settled that High Court should be circumspect in interfering in any arbitration proceedings and the interference is restricted to orders which are patently lacking inherent jurisdiction.

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In the case at hand, in the loan agreement itself, a clause exists with regard to the appointment of an arbitrator unilaterally and the said clause is in the teeth of the amendment in the Arbitration Act in the year 2015 in terms of Section 12(5) of the Act, 1996 read with Schedule 7. Now, the law is well settled that a person having any interest in the dispute or in the outcome thereof is ineligible not only to act as an arbitrator but is also rendered ineligible to appoint anyone else as an arbitrator.

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10.Admittedly, in the instant case a unilateral appointment of arbitrator was made contrary to law. Therefore there was patent lack of inherent jurisdiction of the arbitrator and the settled law discussed in the matter of TRF Limited ( supra) and Perkins Eastman Architects DPC( supra ) clarifies the legal issue that the award itself is a nullity in the eye of law and void ab initio and is liable to be set aside.

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The case law, which has been relied upon by counsel for Respondent No.1 in the matter of Indus Mobile Distribution Pvt. Ltd.( supra ) is distinguishable on facts and the ratio laid down therein is not applicable to the facts and circumstances of the present case.

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In view of aforesaid discussion, the impugned award is hereby set aside, however, respondent No.1 is at liberty to initiate fresh proceedings in accordance with settled legal proposition, in accordance with law.

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13.With the aforesaid observation, this petition is disposed of.

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14.No order as to costs.

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Sd/-

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(Deepak Kumar Tiwari)

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JUDGE

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Avinash