Arth Micro Finance Private Ltd. And Ors. Vs Shivalik Small Finance Bank Ltd. (Supreme Court of India)
Arbitration May Rhyme with It, but Cannot Be Arbitrary: Supreme Court Sets Aside Biased Appointment and Freezing Orders
Arbitration Initiated Without Consent Held Non Est in Law
The Supreme Court has set aside the constitution of an Arbitral Tribunal and three drastic interim orders passed by it after finding that there was no material establishing the appellants’ consent to the appointment.
The Court observed that although the contract contained an arbitration clause, the respondent could not unilaterally constitute an Arbitral Tribunal and describe the appointment as consensual without evidence of actual consent.
The appellants had specifically objected to the appointment and alleged that the Tribunal had close links with the respondent. Despite this objection, the Tribunal proceeded to freeze several bank accounts, permit the respondent bank to take possession of the appellants’ movable and immovable properties, and direct the transfer of funds from the appellants’ accounts to the respondent.
The Supreme Court declared that the very initiation of the arbitration was non est in law and consequently set aside all the interim orders.
Dispute and Appointment of Arbitral Tribunal
Disputes arose between Arth Micro Finance Private Ltd. and Shivalik Small Finance Bank Ltd. The agreement governing the parties contained an arbitration clause.
The respondent allegedly appointed an Arbitral Tribunal on the basis that the appointment was made with the consent of the parties. A notice concerning the appointment was issued on May 2, 2024.
After its appointment, the Tribunal issued a communication to the appellants. The appellants responded by expressly objecting to the constitution of the Tribunal. They specifically contended that the appointed Tribunal had close links with the respondent, thereby raising a serious question concerning its independence and impartiality.
The objections did not deter the Tribunal from proceeding with the matter and passing interim measures under Section 17 of the Arbitration and Conciliation Act, 1996.
Drastic Interim Orders Passed Despite Objection
The Arbitral Tribunal passed three interim orders having far-reaching financial and proprietary consequences for the appellants.
The first order directed the freezing of the appellants’ bank accounts maintained with IDBI Bank, Bank of Baroda, HDFC Bank and ICICI Bank and linked to their PAN.
The second order permitted the respondent bank to take over possession of the appellants’ movable and immovable properties.
The third order directed that amounts lying in the appellants’ various bank accounts be transferred and deposited into the respondent bank’s account.
Thus, even before the dispute was finally adjudicated, the respondent received the benefit of wide-ranging orders affecting the appellants’ bank accounts, funds and properties.
The Supreme Court noted that these orders were passed despite a clear objection to the very appointment of the Tribunal and a specific allegation of bias.
High Court Dismisses Section 37 Appeal on Limitation
The appellants challenged the interim orders before the High Court under Section 37 of the Arbitration and Conciliation Act.
The High Court, however, dismissed the appeal on the ground of limitation. It observed that no separate application had been filed under Section 5 of the Limitation Act, 1963, seeking condonation of delay.
The result was that the interim orders remained operative without the appellants’ substantive objections regarding the validity and impartiality of the Tribunal being examined.
The appellants therefore approached the Supreme Court.
No Evidence of Consent to Appointment
Before the Supreme Court, the respondent argued that the Arbitral Tribunal had been appointed by consent.
The Court found that there was nothing on record to establish that the appellants had actually consented to the appointment.
The existence of an arbitration clause did not, by itself, establish consent to the appointment of a particular arbitrator or Tribunal. Consent to arbitration and consent to the identity or constitution of the Tribunal are distinct requirements.
The appellants had objected to the appointment at the earliest available stage and had alleged close links between the Tribunal and the respondent. In these circumstances, the Tribunal could not disregard the objection and proceed as though its appointment was undisputed.
The Supreme Court described the interim orders themselves as arbitrary and declared the initiation of the arbitration legally invalid.
Interim Orders Set Aside and Property Restored
The Supreme Court set aside the High Court’s order as well as all three interim orders passed under Section 17.
The Court directed that if any amount had already been transferred from the appellants’ accounts to the respondent’s account, the respondent must remit it back within one week.
The question of interest payable on such amounts was left open for consideration by the newly appointed arbitrator.
However, the Court imposed a significant consequence for non-compliance. If the transferred amounts were not returned within one week, they would carry compound interest at 18% per annum, calculated with monthly rests from the date on which they were debited from the appellants’ accounts.
Such interest would be set off against any amount that might ultimately be awarded in favour of the respondent in the arbitration.
The Court also directed that every attachment or takeover of the appellants’ movable and immovable properties must be cancelled and possession restored to the appellants.
Supreme Court Appoints Independent Arbitrator
To ensure that the underlying commercial dispute was adjudicated without further procedural controversy, the Supreme Court appointed Ms. Mayuri Raghuwanshi, Advocate, as the sole arbitrator.
The Registry was directed to intimate the appointed arbitrator, who would issue notices to the parties and determine her fee in consultation with them.
The Supreme Court clarified that it had expressed no opinion on the merits of the commercial dispute. All substantive claims and defences were left open for determination in the fresh arbitration.
Author’s Comments
The judgment highlights that an arbitration agreement does not confer a unilateral right upon one party to appoint a person of its choice and subsequently label the appointment as consensual. Consent must be real, demonstrable and supported by the record.
The ruling is particularly significant because the Tribunal proceeded to grant coercive interim measures despite an objection to its own constitution and an allegation of close links with the appointing party. Section 17 gives an arbitral tribunal substantial power, but such power presupposes a legally constituted and impartial tribunal.
The direction requiring restoration of funds and properties ensures that a party does not continue to benefit from orders passed by a tribunal whose appointment was legally invalid.
The 18% compound interest with monthly rests is also a strong deterrent against retaining amounts transferred under invalid interim orders after the Supreme Court directed their return.
The broader principle is clear: speed and finality in arbitration cannot come at the cost of consent, neutrality and procedural fairness. Arbitration is intended to provide an efficient alternative to court proceedings, not an arbitrary mechanism controlled by one contracting party.
FULL TEXT OF THE ORDER OF SUPREME COURT
Leave granted.
2. Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal.
3. In the present case, disputes arose between the appellants and the respondent, and definitely, the agreement between them, had an arbitration clause. The respondent allegedly appointed an Arbitral Tribunal, on consent. The notice is seen issued at Annexure P2 on 02.05.2024. The Arbitral Tribunal appointed, issued a communication to the appellants by Annexure P3, which was replied to by Annexure P4 objecting to the appointment, especially pointing out that the appointed Arbitral Tribunal had close links with the respondent. Undeterred, the Arbitral Tribunal passed three interim orders under Section 17 of the Arbitration and Conciliation Act, 1996, by Annexures P5, P6 and P7, which were appealed before the High Court under Section 37 of the said Act. The appeal was dismissed on the ground of limitation, especially pointing out that there is no application filed to condone the delay, invoking Section 5 of the Limitation Act, 1963.
4. We heard Sri K. Parameshwar, learned Senior Counsel for the appellants and Sri Bishwajit Bhattacharyya, learned Senior Counsel for the respondent. Though it was argued that, it is on consent that the Arbitral Tribunal was appointed, there is nothing to show the consent having been obtained from the appellants herein. The orders at Annexures P5, P6 and P7 respectively directed the freezing of the bank accounts at IDBI, Bank of Baroda, HDFC and ICICI linked to the specific PAN number of the appellants; permitted the respondent’s bank to take over possession of the movable and immovable properties of the appellants; and directed transfer of the amounts deposited by the appellants herein, in the various banks as mentioned before, to be transferred and deposited in the respondent’s bank.
5. We have to remind ourselves that this was done in the wake of the clear objection to the appointment of the Arbitral Tribunal and the allegation of bias raised against the said Arbitral Tribunal. The orders passed at the first instance, are also arbitrary in nature.
6. We, hence, set aside the impugned order of the High Court finding the very initiation of arbitration to be non est in law. The interim orders passed by the Arbitral Tribunal at Annexures P5, P6 and P7 shall stand set aside. If the interim orders have been given effect to, then any amount deposited from the account of the appellants to the account of the respondent herein, shall be remitted back within a period of one week from today and the interest due on such amounts, the very appointment having been found to be non est in law, shall be one of the issues to be considered by the Arbitrator whom we intend to appoint. If the amounts are not remitted back as directed by us, then it would carry Compound Interest @18% from the date on which it was debited from the accounts of the appellants at monthly rests and the same shall be set off as against any claim found in favour of the respondent in Arbitration. Any attachment or takeovers of movable or immovable properties of the appellants shall also be set at naught and the same restored to the possession of the appellants.
7. To facilitate resolution of the disputes, we direct that Ms. Mayuri Raghuwanshi, Advocate (Mob. No.- 97173 44186), be appointed as an Arbitrator. The Registry of this Court shall intimate the learned Arbitrator appointed by us. The learned Arbitrator shall issue notices to the parties in connection with the arbitral proceedings. The learned Arbitrator is free to determine her fee in consultation with the parties. We make it clear that we have expressed no opinion on the merits of the case, which aspect is left open for the parties to urge before the learned Arbitrator.
8. The appeal is disposed of with the above directions.
9. Pending application(s), if any, shall stand rejected.
