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2024 DIGILAW 1836 (GUJ)

Integro Finserv Private Limited v. Dhirubhai Govabhai Sagthiya S/o. Govabhai Sagthiya

2024-10-01

PRANAV TRIVEDI, SUNITA AGARWAL

body2024
JUDGMENT : (Pranav Trivedi, J.) [1] The present writ petition has been preferred by the petitioner - original claimant under Article 227 of the Constitution of India, inter alia, praying to quash and set aside the order dated 23.02.2024 passed by the learned 3rd Additional District Judge & Commercial Court, Rajkot at Gondal (hereinafter referred to as "the learned court") in Commercial Execution No. 19 of 2023 (Old R/EXE No. 21 of 2022), whereby the Execution Petition, preferred by the petitioner under the provisions of Section 36 of the Arbitration & Conciliation Act, 1996 (hereinafter referred as to "the Act, 1996") came to be dismissed. [2] The factual aspect which lead to filing of the writ petition is that the petitioner is a Limited Company, incorporated under the provisions of Companies Act, 2013, inter alia, engaged in the business of providing financial service as well as secured and unsecured credit facilities to the entrepreneurs. The petitioner is also duly registered with the Reserve Bank of India as a Non-banking Finance Company. Respondent No.1 (hereinafter referred to as 'the respondent') had availed a loan cum hypothecation of Rs.4,42,000/- for the purpose of pick-up vehicle, namely, "DOST". The loan was availed from L & T Finance Limited (hereinafter referred as to "L & T") being the Original Creditor. The respondents were liable to repay in 48 equated installments of Rs.12,500/- each. The respondents were irregular in making payments of the loan installments and interest due thereon. L & T repeatedly demanded the payment of the arrears of loan installments along with interest due thereon and made all efforts to recover the dues from the respondents. On account of failure of respondents to pay the loan interest due thereon and other amount, the L & T took possession of the Asset on 13.01.2018 under the terms of the loan agreement. [2.1] It is the case of the petitioner that even after taking possession of the Asset, the respondents did not take any steps to clear the outstanding dues under the loan agreement. Hence, in order to minimize the losses, L & T sold the Asset on 28.03.2018 as it was empowered to do so under the terms of the loan agreement and realized a sum of Rs.1,50,000/- as sale proceeds. Hence, in order to minimize the losses, L & T sold the Asset on 28.03.2018 as it was empowered to do so under the terms of the loan agreement and realized a sum of Rs.1,50,000/- as sale proceeds. However, even after appropriating the amount realized from the sale of the Asset towards the dues under the agreement, a sum of Rs.1,50,000/- was still due and payable by the respondents on 28.03.2018 with further overdue compensation thereon at the rate of 36% per annum from 29.03.2018 till the date of payment and realization. It is the case of the petitioner that the account so maintained by the L & T, the loan agreement was assigned to an Asset reconstruction company, namely, Chartered Finance Management Private Limited (CFM ARC) on 26.06.2019 through an assignment deed. [2.2] Pursuant to the assignment, CFM ARC through their advocate sent a notice dated 17.12.2019 under the provisions of the Act and called upon the respondents to make payment of outstanding amount of Rs.3,96,118/- as per the Clause No.12.1 of the loan agreement. Subsequently, CFM ARC appointed sole Arbitrator, namely, Mr. Prashan S. Phophale (hereinafter referred as to "the learned Arbitrator") for adjudication of the dispute. CFM ARC had filed statement of claim. Pursuant to unilateral appointment of Arbitrator, respondent had not participated. Thereafter, the learned Arbitrator was pleased to pass an award dated 30.12.2020, wherein respondents were directed to pay a sum of Rs.3,96,118/- with interest of 18% per annum from 29.03.2018 till realization of payment. Subsequent to the award, CFM ARC had further assigned such account of respondent to the present petitioner through an assignment deed dated 16.02.2022. That is how the petitioner got involved in the issue for the first time. Pursuant to such assignment deed, present petitioner, who was not the original claimant, filed an application under Section 36 of the Act, 1996 for execution of the arbitral award dated 30.12.2020 before the learned court. The learned court observed that the award was unenforceable and biased, and therefore, quashed and set aside the arbitral award. Being aggrieved by the order passed by the learned court dated 23.02.2024, present writ petition is preferred. [3] We have heard Mr. Shrijit G. Pillai, learned learned advocate appearing for the petitioner. [3.1] Mr. The learned court observed that the award was unenforceable and biased, and therefore, quashed and set aside the arbitral award. Being aggrieved by the order passed by the learned court dated 23.02.2024, present writ petition is preferred. [3] We have heard Mr. Shrijit G. Pillai, learned learned advocate appearing for the petitioner. [3.1] Mr. Pillai, learned advocate has submitted that the learned court has erred by not exercising the powers vested within Executing Courts and has exercised the powers beyond its jurisdiction. Mr. Pillai also submitted that the learned court has a limited role while enforcing the arbitral award under Section 36 of the Act, 1996. The important question of law to be considered herein is that whether the learned court can suo motu set aside the arbitral award in capacity of Section 34 of Act, 1996 when originally the application under Section 36 of the Act, 1996 was filed for enforcement of the arbitral award. [3.2] Mr. Pillai, learned advocate further submitted that the appointment of the learned Arbitrator was made as per the loan cum hypothecation agreement dated 28.11.2013 between L & T and respondent Nos.1 and 2 as per the Clause 12.1. Thus, the clause of appointment of learned Arbitrator was accepted by the respondents to be made by L & T and the same was not disputed by the respondents during the whole arbitration proceeding and it has remained silent and voluntarily chosen to not participate in the proceedings, the rights so vested with L & T under the said agreement were further assigned to CFM ARC and subsequently assigned to present petitioner. Therefore, when the respondents have neither taken an objection nor challenged appointment of Arbitrator throughout the arbitration proceedings and when the award has attained finality as per Section 35 of Act, 1996, the learned court ought not to have interfered with the award and rule upon the correctness of the appointment of the Arbitrator itself. [3.3] Mr. Pillai, learned advocate has further submitted that the learned court could not have held the arbitral award as unenforceable and dismiss the execution petition under Section 36 of Act, 1996 since it is arbitrary and beyond the jurisdiction conferred upon it. The learned court cannot itself get into the merits of the arbitral award and test its accuracy, genuineness and sanctity unless the same is challenged under Section 34 of Act, 1996. The learned court cannot itself get into the merits of the arbitral award and test its accuracy, genuineness and sanctity unless the same is challenged under Section 34 of Act, 1996. [3.4] It was further submitted by Mr. Pillai, learned advocate that even if it is observed that unilateral appointment would render the Arbitrator ineligible then such eventuality could not be stretched to the extent that ineligibility goes to the very root of the matter and renders the arbitral proceedings and consequential award void ab initio. If the issue of the ineligibility was not taken at any stage of the arbitral proceeding or was never considered during the arbitral proceeding, then it would not vitiate the entire proceedings. Such an inherent lack of jurisdiction or absolute bar could not be made post factor rectifiable. Relying on the decision of the learned Single Judge of Calcutta High Court in the case of Kotak Mahindra Bank Limited versus Shalibhadra Cottrade Pvt. Ltd. and Ors. passed in Execution Case No.193 of 2019, it was submitted by Mr. Pillai, learned advocate that even the inherent lacks of jurisdiction of the learned Arbitrator would not vitiate the proceedings void ab initio and such issue should have been discussed during the abritral proceedings. [4] Upon hearing the submission made by Mr. Pillai, learned advocate appearing for the petitioner and perusal of the material on record, two issues came up for our consideration:- (i) Whether the appointment of the Arbitrator was unilateral and in breach of Section 12(5) of the Act which would render arbitral proceedings void ab initio; (ii) Whether the arbitral award can be set-aside in proceedings under Section 36 of the Act. [5] Before going on the first point, a factual assertion would be necessary. Petitioner is not the original claimant. Subsequent to the unilateral appointment of the learned Arbitrator by the claimant and there is assignment deed by the claimant to the present petitioner, and thereafter, present petitioner has preferred the Execution Petition under Section 36 of the Act, 1996. Since the issue is with regard to validity of whole proceedings, potentially being void ab initio, the Court has not gone into the issue of the legitimate rights of the petitioner who was not the original claimant. Since the issue is with regard to validity of whole proceedings, potentially being void ab initio, the Court has not gone into the issue of the legitimate rights of the petitioner who was not the original claimant. In view of the such factual assertion, on the first point of discussion, it can be observed that breach as per Section 12(5) of the Act, 1996, the law is settled to the effect that no person whose relationship with the parties or counsel of the subject matter of the dispute falls under any of the categories specified in the VIIth Schedule, shall be eligible to be appointed as an Arbitrator. It is the case of the petitioner that concerned arbitrator would not fall within the meaning of the VIIth Schedule. However, it needs to be observed that a person having interest in the dispute or in the outcome of the decision thereof, must not only be ineligible to act as an arbitrator, but must also not be eligible to appoint any person and should not have any role in charting out any course to the dispute resolution by having the power to appoint an Arbitrator. Therefore, once such person becomes ineligible by law to be an Arbitrator, he / she cannot nominate another person to be the Arbitrator. Therefore, a person appointed in violation to the procedure mentioned above, the Arbitrator is de jure incapacitated and his mandate stands terminated. This issue came for categorical consideration of the Hon’ble Apex Court in the case of firstly, in the case of HRD Corporation - vs- GAIL reported in (2018) 12 SCC 471 , the Hon'ble Apex Court ruled that when a person directly falls under Schedule VII, ineligibility goes to the root of the appointment as per prohibition under Section 12(5) read with Schedule VII. Such person lacks inherent jurisdiction. [6] Subsequently, in TRF Limited -vs- Energo Engineering Projects Limited reported in [2017] 7 S.C.R. 409, the Apex Court expanded the approach in HRD Corporation (supra) and held that an individual who himself is ineligible under the provisions of the Act to be appointed as an Arbitrator, cannot nominate a sole Arbitrator. The ineligibility goes to the root of the matter and arises out of lack of inherent jurisdiction. The ineligibility goes to the root of the matter and arises out of lack of inherent jurisdiction. Therefore, any prior agreement to do away with the ineligibility would be wiped out by the non-obstante clause contained in Section 12(5) and the same can be cured only through an express waiver. This has been expressly considered by the Hon’ble Apex Court in the case of Bharat Broadband Network Limited V. United Telecoms Limited reported in [2019] 6 S.C.R. 97. [7] Therefore, we are in complete agreement with the observations made by the Court and the submission made by Mr. Pillai, learned advocate that validity should be challenged during arbitral proceeding is found misconceived. In the wake of such finding, and observations being made that the appointment of the Arbitrator goes to the very root of the matter and the Arbitrator would lack inherent jurisdiction, suffice is to note that the contentions raised by Mr. Pillai, learned advocate that such issue should have been raised before the learned Arbitrator is not a valid contention when the whole proceeding lacks inherent jurisdiction. Therefore, such contention is a fallacious contention and it is not required to be considered. [8] Another aspect is that it was incumbent upon the petitioner or the claimant that while venturing out for appointment of Arbitrator unilaterally that he should have obtained express agreement in writing from the other party for appointment of the suggested Arbitrator. In absence of any consent in writing from the respondent, the appointment of the Arbitrator by the claimant unilaterally itself is non-est in the eye of law and the Arbitrator was disqualified to commence the arbitral proceedings. This could have been done by issuing notice under Section 21 of the Act. In view of Section 12(5) vis- a-vis Section 11(5) of the Act, claimant could have waited for 30 days for consent in writing from the other parties after issuance of Section 21 notice. In the event of absence of consent in writing provided by other side within a stipulated period of 30 days for any unilateral appointment of arbitrator, the action of the claimant to make such unilateral appointment is de-hors the provisions of the Act. In the event of absence of consent in writing provided by other side within a stipulated period of 30 days for any unilateral appointment of arbitrator, the action of the claimant to make such unilateral appointment is de-hors the provisions of the Act. Arbitration is an Alternative Disputes Resolution Process which provides that parties to the dispute evolve their own dispute resolution mechanism by consenting to refer their dispute to an independent person on whom both the parties have faith and repose trust. The entire purpose is to have autonomy, wisdom and spirit of the parties to resolve their dispute by their own mutually agreed mechanism. It is, therefore, imperative that when the Arbitral Tribunal is constituted, the same must be with the consent of both the parties or failing such consent, it has to be as per the provisions of Section 11 of the Act. In our humble opinion, unilateral appointment of Arbitrator by the claimant was non-est in law. [9] The second issue is with regard to setting aside the arbitral award in proceedings under Section 36 of the Act, 1996. The object of the Court is to safeguard their rights and uphold the principles of natural justice, irrespective of procedural hurdles. Even if an award is not set aside under the procedure established under Section 34 of the Act, the Courts can nullify the award, which was non-est in law. While Section 47 of the Code of Civil Procedure is not directly applicable, guidance can be sought from the jurisprudence of the Hon'ble Apex Court visa- 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. [10] It is settled law that a decree passed by a Court without jurisdiction on the subject matter or on the grounds on which the decree made which goes to the root of its jurisdiction or lacks inherent jurisdiction is coram non judice. A decree passed by such Court is a nullity and is non est. Its invalidity can be set up whenever it is sought to be enforced or is acted upon as a foundation for a right, even at the stage of execution or in collateral proceedings. A decree passed by such Court is a nullity and is non est. Its invalidity can be set up whenever it is sought to be enforced or is acted upon as a foundation for a right, even at the stage of execution or in collateral proceedings. The defect of the jurisdiction strikes at the very authority of the Court to pass decree which cannot be cured by consent or waiver of the party. [11] This issue was considered by the Hon’ble Apex Court in the case of Chiranjilal Shrilal Goenka v. Jasjit Singh and others, reported in (1993) 2 SCC 507 . Even in case of Sushil Kumar Mehta v. Gobind Ram Bohra (dead) through his Lrs., reported in (1990) 1 SCC 193 , it was held that the decree was without jurisdiction and its nullity can be raised in execution. [12] In the instant case, it is palpably clear that an arbitral award passed by a unilaterally appointed Arbitrator will not survive the Section 34 challenge. Section 36 provides no scope of adverse interference with an arbitral award except executing it as a decree of the court. However, there is no denying the fact that the Act is a complete code in itself. Therefore, the question would be when the award sought to be executed is a nullity for lack of inherent jurisdiction can be set aside in an executing proceeding. Analogy can be drawn for the same from the Code of Civil Procedure. Section 47 of the Code of Civil Procedure governs the challenge to a court decree at an execution stage. Such similar provision is not provided in the Arbitration Act. The award so enforced under Section 36 of the Act is a nullity for lack of inherent jurisdiction. Therefore, it goes to the root of the competence of the court to try the case and an award. Therefore, the executing court can, therefore, entertain an objection that the decree is a nullity and can refuse to execute the decree. The executing court under Section 36 cannot shut its eyes to the grave irregularity that will occur if it does not interfere. This issue was categorically considered in the case of Cholamandalam Investment and Finance Company Ltd. v. Amrapali Enterprises and Anr., by Division Bench of High Court At Calcutta in EC No. 122 of 2022. The executing court under Section 36 cannot shut its eyes to the grave irregularity that will occur if it does not interfere. This issue was categorically considered in the case of Cholamandalam Investment and Finance Company Ltd. v. Amrapali Enterprises and Anr., by Division Bench of High Court At Calcutta in EC No. 122 of 2022. Therefore, we do not find any reason to interfere with the observations made by the executing court. An arbitral award passed by a unilaterally appointed arbitrator cannot be considered to be a void award under the provisions of the Act and that being regarded as nonest in the eyes of law, the executing court while deciding application under Section 36 will have power to declare such award as illegal and with manifest lack of jurisdiction. [13] As observed hereinabove, we have found that the unilateral award of the Arbitrator was non-est in law. Therefore, there cannot be any prayer to stay the execution to set-aside the arbitral award if it was a nullity. In the wake of such observations, we find no merits in the submissions advanced by Mr. Shrijit G. Pillai, learned advocate for the petitioner and thereby reject the petition as being misconceived. [14] In view of the same, the petition is hereby rejected. No order as to costs.