The Supreme Court recently held that earlier arbitral proceedings do not become invalid merely because an arbitrator is substituted under the Arbitration and Conciliation Act, 1996 [Ankhim Holdings Vs Zaveri Constructions].
A Bench of Justices JB Pardiwala and KV Viswanathan set aside a Bombay High Court order which had appointed a substitute arbitrator in a dispute between two firms and declared the earlier arbitral proceedings as nullity.
"There is no doubt that the High Court assumed and exercised power which has clearly not been conferred by the Act, 1996, more particularly, wherein the statute itself envisages minimal judicial intervention," the Supreme Court said.
The dispute arose out of a partnership between Ankhim Holdings and Zaveri Constructions Pvt. Ltd. for a slum rehabilitation authority (SRA) project in Andheri (West) through a partnership firm named M/s Anmol Alliance.
Disputes between the parties led to the filing of a Section 9 petition (seeking interim protective reliefs from the court) before the Bombay High Court in 2019. On July 9, 2019, the High Court recorded consent terms between the parties and appointed a former Chief Justice of the Calcutta High Court as sole arbitrator.
The Section 9 petition was permitted to be treated as an application under Section 17 (interim measures by the arbitral tribunal).
On July 9, 2019, the Bombay High Court recorded consent terms between the parties and appointed a former Chief Justice of the Calcutta High Court as the sole arbitrator.
While the arbitration was ongoing, Zaveri Constructions was admitted to the corporate insolvency resolution process (CIRP) on September 26, 2019 by the National Company Law Tribunal's Mumbai Bench and a moratorium under Section 14 of the Insolvency and Bankruptcy Code (IBC) came into effect.
In March 2022, the Bombay High Court disposed of two interim applications filed by Ankhim Holdings after recording that the interim resolution professional (IRP) had become functus officio and that no liquidation order had yet been passed.
Liberty was granted to the parties to move applications under Section 17 of the Arbitration Act before the arbitral tribunal.
Pursuant to this order, the arbitral tribunal resumed proceedings and conducted hearings on seven dates between March 17, 2022 and August 25, 2022.
The proceedings also involved a Section 16 jurisdictional objection (tribunal’s power to rule on its own jurisdiction) raised by the IRP and a plea for interim relief under Section 17 (permission to sell certain flats).
Subsequently, on August 26, 2022, the NCLT ordered liquidation of Zaveri Constructions under Section 33 of the IBC, declared that the Section 14 moratorium had ceased and imposed a fresh moratorium under Section 33(5).
In October 2023, the sole arbitrator terminated the arbitral proceedings citing the parties’ inability to pay arbitral fees. This prompted Ankhim Holdings to move the Bombay High Court under Section 15(2) of the Arbitration Act seeking substitution of the arbitrator and extension of time.
Justice Bharati Dangre allowed substitution of the arbitrator and held that the Section 14 moratorium remained in force from September 2019 until the liquidation order dated August 26, 2022.
The High Court held that all arbitral proceedings conducted between September 26, 2019 and August 26, 2022 were affected by the IBC moratorium, and that the hearings held on seven dates between March 17, 2022 and August 25, 2022 could not be sustained in law. Thus, the court nullified the orders passed between these dates.
A retired judge of the Bombay High Court was appointed as substitute arbitrator with liberty to revive the arbitral proceedings.
This led to the appeal before the Supreme Court.
The apex court set aside the declaration of nullity and held that the High Court exceeded the limited jurisdiction available under Section 15(2) of the Arbitration and Conciliation Act, 1996 (power of court to appoint a substitute arbitrator when the mandate of an arbitrator terminates).
“Section 15(2) is not a standalone provision and should be read with Section 15(3) (continuity of arbitral proceedings after substitution) and Section 15(4) (protection of prior orders passed by the arbitral tribunal),” the Court held.
Referring to Section 15(4), which saves earlier orders of the tribunal from being invalidated merely because of substitution,, the Bench underscored that prior orders of an arbitral tribunal are protected from invalidation.
“The High Court could be said to have travelled beyond its vested jurisdiction, including by subsuming jurisdictions expressly made unavailable to it, including Section 37 of the Act, 1996 (limited statutory right of appeal against specific arbitral orders).”
The Supreme Court clarified that even assuming the existence of a Section 14 moratorium, the Arbitration Act does not permit a High Court to annul arbitral proceedings or interim orders while acting under Section 15.
“It would be impermissible for a court acting under Section 15(2) to adopt a procedure whereby it exercises jurisdiction barred to it by the Act, 1996,” the Court held.
It noted that the High Court had effectively set aside orders under Sections 16 and 17 of the Arbitration Act without recourse to the appellate mechanism under Section 37.
The Court made it clear held that substitution of an arbitrator is meant to preserve continuity of arbitration.
Hence, it set aside the Bombay High Court’s declaration that arbitral proceedings conducted between March and August 2022 were a nullity.
However, it did not tinker with the substitution of the arbitrator.
The appellants were represented by advocate Ashim Sood, Saahil Memon, Senu Nizar, Ekansh Gupta, Kartikeya Jaiswal, Prateek Kundu and Karan Kumar and Pallavi Pratap.
The respondent was represented by Solicitor General Tushar Mehta with advocates Sanjay Kapur, Surya Prakash, Shubhra Kapur, Santha Smruthi, Shakti Kanta Pattanaik and Santosh Kumar
[Read Judgment]