Delhi District Court
Rcc Infraventures Pvt Ltd vs Hdb Financial Services Ltd on 19 January, 2024
IN THE COURT OF GORAKH NATH PANDEY
DISTRICT JUDGE (COMMERCIAL COURT),
NORTH DISTRICT, ROHINI COURTS: DELHI.
OMP (COMM.) 05/23
CNR NO.DLNT1010013492023
1. RCC INFRAVENTURES LTD
Registered office at:
Unit No.14, Ground Floor Vipul Agora,
MG Road, Gurugram (HR) - 122002.
2. Ravi Kumar Jain,
R/o GV - 02, The Palms Spring
Golf Course Road, Opp. Ibis Hotel
Sector - 54, Gurugram (HR) - 122009.
3. Luv Jain
R/o GV - 02, The Palms Spring
Golf Course Road, Opp. Ibis Hotel
Sector - 54, Gurugram (HR) - 122009.
...... Petitioners.
VERSUS
HDB Financial Services Ltd.
2/12, 2nd Floor, Mall Road,
Near Keys Show Room, Tilak Nagar,
New Delhi - 110018.
...... Respondent.
Date of Institution : 09.02.2023
Date of final arguments : 09.01.2024
Date of decision : 19.01.2024
Decision : Allowed.
J U D G E M E N T:-
1. Vide this petition u/s 34 of Arbitration and Conciliation Act, 1996, the Petitioners has assailed the arbitral OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.1/11 award dated 30.09.2022 passed by Sole Arbitrator in Arbitration Case No.HDB/RB-7031/LOT-24/133 (hereinafter called the impugned Award) and prayed to set aside the same being void ab- initio.
2. As contended, the petitioner no.1 is a company whereas the petitioners no.2 and 3 are its Directors. The respondent company is engaged in the business of financial services. Petitioner no.1 and respondent entered into a business relationship and consequently several loan agreements were entered into including loan agreement no.5671091 dated 31.10.18 (hereinafter referred as the loan agreement) whereby the loan facility of Rs.55,92,000/- was extended to the petitioner no.1 alongwith interest. The aforesaid loan agreement vide Article 31 and Article 32 contains the arbitration clause. The respondent has recalled the loan vide notice dated 06.11.19. Vide letter dated 23.06.2022, the respondent proposed to shift the venue of arbitration proceedings from Chennai to Delhi/New Delhi and the petitioners gave their no objection vide letter dated 30.06.2022. Vide letter dated 30.06.2022, the dispute was referred to the Sole Arbitrator by the respondent. The petitioners withheld their consent for the appointment of Sole Arbitrator vide letter dated 10.07.22 but the Ld. Arbitrator proceeded with the reference and lastly passed the impugned award.
3. It is submitted by the Ld. Counsel for the Petitioners that the impugned award suffers from several infirmities as under:
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(i) the instant claim was non-arbitrable in view of the loan amount of more than Rs.20 lacs;
(ii) the sole arbitrator was appointed without waiting for 30 days of statutory period in view of Section 11(5) of Arbitration Act;
(iii) the Arbitrator was unilaterally appointed by the respondent without consent of the petitioners;
(iv) the award has passed mechanically without appreciating the evidence on record; &
(v) the interest awarded by the Ld. Arbitrator is against the public policy.
In view of these circumstances, it is claimed that the appointment of Sole Arbitrator to adjudicate upon the disputes between the parties was illegal and void ab-initio and the arbitration proceedings were vitiated right since their commencement.
4. The petition is not replied by the respondent despite opportunities.
5. Ld. Counsel for the Respondent argued that the Petitioners had been duly intimated about the appointment of the Sole Arbitrator as well as about the change of the venue of the arbitration proceedings and therefore, no fault can be found in the OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.3/11 appointment of Sole Arbitrator in this case as well as in the change of venue of the arbitration proceedings.
6. I have considered the rival contentions by the parties. I have also gone through the written submissions filed on behalf of the petitioners alongwith following judgments relied in support of contentions as below:
(i) TRF Ltd. v. Energo Engg. Projects Ltd. reported as (2017) 8 SCC 377.
(ii) HRD Corpn v. GAIL (India) Ltd., reported as (2018) 12 SCC 471.
(iii) Bharat Broadband Network Ltd. v. United Telecoms Ltd., reported as (2019) 5 SCC 755.
(iv) Perkins Eastman Architects DPC v. HSCC (India) Ltd., reported as (2020) 20 SCC 760.
(v) Kotak Mahindra Bank Ltd. v. Narendra Kumar Prajapat, reported as 2023: DHC:3705-DB.
(vi) RCC Infraventures Ltd. & Ors. v. Kotak Mahindra Bank Ltd., order dated 11.12.2023 in FAO (Comm) 141/2023 by Hon'ble High Court of Delhi.
(vii) Proddatur Cable TV Digi Services v. Siti Cable Network Ltd., reported as 2020 SCC Online Del 350.
(viii) Govind Singh v. Satya Group (P) Ltd. reported as 2023 SCC OnLine Del 37.
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(ix) National Seeds Corporation Ltd. v. Ram Avtar Gupta passed by Hon'ble High Court of Delhi in OMP (Comm) 79/2022 dated 25.08.2023.
(x) Vaibhav Bhatia & Anr. v. M/s. L&T Finance Ltd. & Anr. passed by Hon'ble High Court of Delhi in FAO No.88/2014 dated 24.03.2014.
7. Perusal of the loan agreement executed between the parties, a copy of which has been filed alongwith the petition and which is not disputed on behalf of the Respondent Company, shows that it contains Clause no. 31 as Arbitration Clause. Bare reading of the said Arbitration Clause in the loan agreement would reveal that the power to appoint Arbitrator to adjudicate upon the disputes arising under the loan agreement has been conferred upon the Respondent alone.
8. It has been held by the Hon'ble Supreme Court in TRF Ltd. Vs. Energo Engineering Projects Ltd. (2017) 8 SCC 377 that when the Managing Director of a Company has been specifically made ineligible to act as an Arbitrator in a dispute involving the Company by virtue of Section 12 (5) of the Arbitration and Conciliation Act, 1996 r/w 7 th Schedule, he cannot nominate any other person also as an Arbitrator. It would be apposite to reproduce the following paragraph of the said Judgment:-
"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 OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.5/11 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".
9. The said proposition of law enunciated in the above noted Judgement of the Hon'ble Supreme Court has been affirmed in the subsequent Judgements in Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Ltd. (2019) 17 SCR 275 and Bharat Broadband Network Ltd. Vs. United Telecoms Ltd. (2019) 6 SCR 97 also.
10. In the instant case also, the management of the Respondent Company which has been authorized to appoint Arbitrator vide Clause 31 noted hereinabove, was not competent to appoint the Arbitrator in view of the law enunciated by the Hon'ble Supreme court in the above judgements and therefore, the Arbitrator appointed by them was ineligible to conduct the arbitration proceedings. Thus, it is evident that arbitral reference itself in this case began with an illegal act and vitiate the entire arbitral proceedings from their inception. The logical inference which can be gathered from these circumstances would be that OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.6/11 the award passed by such an Arbitrator is void ab-initio. The same is non-est in the eyes of law.
11. It is also evident from the material on record and also not disputed from the side of the Respondent Company that the Arbitrator had been appointed by the Management of the Respondent Company unilaterally without seeking consent or approval from the Petitioners.
12. By now, it is very settled law in view of the various pronouncements of the Hon'ble Supreme and the Hon'ble High Courts that the awards passed by the unilaterally appointed Arbitrators are non-est in the eyes of law and would not survive the challenge u/s 34 of the Arbitration and Conciliation Act, 1996 for the reason that they lack inherent jurisdiction to conduct the proceedings.
13. In Perkins Eastman Architects DPC & Anr. Vs. HSCC (India) Ltd. (2019) 17 S.C.R. 275, it was held by the Apex Court that 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 determining or charting the course for dispute resolution. It was further held that 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 that has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 and recognized by the OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.7/11 decision of the Court in TRF Ltd. Vs. Energo Engineering Projects Limited (2017) 7 S.C.R. 409.
14. The Hon'ble Supreme Court, again in case Bharat Broadband Network Ltd. Vs. United Telecoms Ltd. (2019) 6 S.C.R. 97 held that a unilaterally appointed Arbitrator is de jure ineligible to perform his functions and his mandate is automatically terminated u/s 14 (1) (a) of the Act. Further, any prior agreement to do away with this ineligibility would be wiped out by the non-obstante clause contained in Section 12 (5) of the Act and the same can be cured only through an express waiver.
15. In Ram Kumar & Ors. Vs. Shriman Transport Finance Co. Limited reported as MANU/DE/4941/2022, the Hon'ble High Court has observed as under:-
"8. Clearly, an award rendered by a person who is ineligible to act as an arbitrator would be of little value; it cannot be considered as an arbitral award under the A&C Act. While it is permissible for the parties to agree to waive the ineligibility of an arbitrator, the proviso to Section 12(5) of the A&C Act makes it clear that such an agreement requires to be in writing. In Proddatur Cable TV Digi Services v. Siti Cable Network Limited: (2020) 267 DLT 51, the learned Single Judge of this Court, following the decision in TRF Ltd. v. Energo Engineering Projects Ltd. (supra) and Perkins Eastman Architects DPC & Anr. v. HSCC (India) Ltd. (supra), held that unilateral appointment of an arbitrator by a party is impermissible."
16. The Calcutta High Court in Cholamandalam Investment and finance Company Ltd. Vs. Amarpali Enterprises and Anr., EC No. 122/2022 decided on 14.03.2023, has analyzed OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.8/11 all the above Judgements as well as some other relevant pronouncements on the said issue and has laid down following principles:-
"(a) As held in HRD Corp (supra), arbitrators falling under Schedule VII of the Act are ineligible as they lack inherent jurisdiction. Such ineligibility was extended to persons appointed by persons falling under Schedule VII of the Act in TRF Limited (supra). This ineligibility was ultimately extended to persons who are unilaterally appointed by one of the parties to the arbitration in Perkins (supra).
(b) The Apex court has judicially expanded the Schedule VII of the Act to include persons unilaterally appointed by one of the parties vide its judgement in Perkins (supra) and/or persons appointed by persons falling under Schedule VII of the Act vide its judgement in TRF Limited (supra).
(c) It is a settled principle of law that compliance with Section 12(5) read with Schedule VII is sine qua non for any arbitral reference to gain recognition and validity before the Courts. An arbitral reference which begins with an illegal act vitiates the entire arbitral proceedings from its inception and the same cannot be validated at any later stage. Thus, it would be a logical inference to consider such arbitral proceedings as void ab initio.
(d) Awards passed by a unilaterally appointed arbitrator are non- est in the eyes of law. While Section 47 of the CPC is not directly applicable, guidance has to be sought from the jurisprudence of the Apex Court vis-à-vis decrees passed while lacking inherent jurisdiction. Such decrees do not exist in the eyes of law and similarly awards passed while lacking inherent jurisdiction can be said to have never existed. Therefore, the parties would be free to re-agitate the matter.
e) This judgement is applicable to awards wherein the arbitral proceeding commenced post the 2015 amendment to the Act. It does not deal with proceedings having been initiated pre the 2015 amendment and concluding post the 2015 amendment".
(Emphasis supplied).
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17. It would also be profitable to reproduce following observations of the Calcutta High Court in the same Judgment:-
"23. The law of arbitration is an alternative dispute resolution mechanism that was brought into the statute books in order to facilitate a quick and efficient method of dispute resolution. The raison d'être of arbitration is to provide liberty to parties wherein they can decide upon various facets of dispute resolution. Ergo, party autonomy is sine qua non of the law of arbitration. However, a virus had emerged wherein finance companies and banks were facilitating appointment of a small cabal of arbitrators in hundreds of cases for themselves. The awards passed were soiled and tainted with bias. It was clear that the borrower was the underdog as he had no choice in the matter of appointment of arbitrator and the very concept of impartiality was given a go bye. In order to overcome this issue, the legislative amendments of 2015 and the judicial pronouncements on such amendments by the Apex Court have brought in a level playing field so that no party could have a higher bargaining power in the decision making process for appointment of an arbitrator. Such interpretation, as discussed above, has ensured complete impartiality in such appointments and served the intended purpose of saving the 'small guy' while counter-balancing party autonomy. In conclusion, one may say that the apparent impartiality that existed providing power to one of the parties to choose the arbitrator unilaterally has been taken away as the same was fraught with inequalities at the very threshold of the initiation of the arbitration proceedings. However, the proviso to Section 12(5) of the Act allows for waiver but clarifies that the same has to be explicit and in writing".
(Emphasis supplied)
18. Thus, it palpably clear that the awards passed by the unilaterally appointed Arbitrators are non-est in the eyes of law and cannot be considered as an Arbitral Award under the Arbitration and Conciliation Act, 1996 for the reason that the unilateral appointment of the Arbitrators is illegal and defeats very purpose of unbiased and impartial adjudication of the OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.10/11 disputes between the parties. Awards passed by such unilaterally appointed Arbitrators will not survive the challenge u/s 34 of the Act.
19. In the instant case, as already noted hereinabove, the Sole Arbitrator had been appointed by the Respondent unilaterally. At no point of time was the concurrence or the consent of the Petitioners sought for his appointment. On this score also, the impugned arbitral award passed by the Sole Arbitrator becomes non-est in eyes of law and cannot survive the challenge u/s 34 of Arbitration and Conciliation Act, 1996.
20. Hence, the petition is allowed and the impugned arbitral award dated 30.09.2022 is hereby set-aside.
21. File be consigned to Record Room after necessary compliance.
Announced in the open court (GORAKH NATH PANDEY) th on 19 January, 2024. District Judge (Commercial Court) North:Rohini:Delhi/19.01.2024 OMP (COMM.) 05/23 RCC Infraventures Ltd. & Ors.
Vs. HDB Financial Services Ltd. Page no.11/11