Any award passed by an Arbitrator unilaterally appointed is Invalid: Delhi HC Sets aside Arbitral Award passed on Liquidated Company [Read Order]

The Delhi High Court has held that any award passed by an arbitrator unilaterally appointed is invalid and set aside the Arbitral Award passed on the liquidated company.

Sandeep Mahajan, the petitioner was appointed as a director in Sandeep Axles Pvt. Ltd. on 20.09.1989, and later in SPM Auto Pvt. Ltd. on 10.08.2004. On 23.04.2015, a loan facility of Rs. 3,60,00,000/- was sanctioned to SPM Auto Pvt. Ltd. by the respondent vide Sanction Letter No. SME/VP/SPMPL-01/1516. Pursuant to the sanction, a Loan Agreement dated 24.04.2015 was executed between SPM Auto Pvt. Ltd. as the borrower and the petitioner, along with Mr. Vimal Mahajan and Mr. Vikrant Mahajan, as Personal and Corporate Guarantors for securing the said facility.

The petitioner resigned from the directorship of SPM Auto Pvt. Ltd. on 24.08.2015, and from Sandeep Axles Pvt. Ltd. on 18.02.2016. After his resignation, the petitioner had no further association with either company or its directors. Owing to personal differences with his brothers, who were also directors, he completely dissociated himself and remained unaware of any subsequent events or decisions related to the companies.

Vide order, the National Company Law Tribunal, (“NCLT”) Delhi, initiated the Corporate Insolvency Resolution Process (“CIRP”) against Sandeep Axles Pvt. Ltd., and subsequently, a liquidation order was passed on 13.09.2018. Similarly, vide order dated 18.11.2020, the Hon'ble NCLT, Delhi, also initiated CIRP against SPM Automotive Components Private Limited.

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On 11.01.2021, the petitioner received an email from the respondent showing copies of arbitral awards dated 13.12.2019, passed against the petitioner and two other respondents. Subsequently, summons issued by the Delhi High Court in the execution petitions were emailed to the petitioner on 12.03.2021. He appeared before the Court on 16.03.2021 and received copies of the petitions and consequently filed the present petition.

Counsel for the petitioner has submitted that the petitioner was not served with any notice of the arbitral proceedings nor was informed of the appointment of the learned Sole Arbitrator. Consequently, the petitioner was proceeded exparte and did not have the opportunity to participate or present his case. It is further submitted that the signed copy of the Arbitral Award has not been received by the petitioner.

The Counsel for the respondent stated that due to payment defaults, arbitration was initiated, excluding the borrower company as it was under insolvency. The petitioner appeared through counsel in 2019, filed a vakalatnama, and sought documents but later failed to participate, resulting in an ex-parte award dated 13.12.2019. A Board Resolution dated 30.09.2012 authorized the petitioner to execute the loan documents. Despite allegedly exiting the company, the petitioner neither notified the respondent nor revoked his guarantee.

A perusal of the above arbitration clause clearly reveals that the authority to appoint the sole arbitrator was vested exclusively with the respondent, i.e. the lender. The clause empowers the lender to unilaterally nominate a sole arbitrator to adjudicate disputes arising out of or in connection with the Loan Agreement.

In exercise of the contractual right, the respondent appointed a sole arbitrator, who thereafter conducted the arbitral proceedings ex parte. Pursuant to the said proceedings, the arbitrator passed the impugned arbitral award which is now under challenge in the present petition.

It was observed that even though specific objection has not been laid, it is an objection which goes to the root of the matter and can be taken even at the stage of arguments. The objection pertains to the fundamental requirement of a fair and impartial adjudicatory mechanism, which is non-derogable.

The Supreme Court in Perkins Eastman has categorically held that any award passed by an arbitrator unilaterally appointed by an interested party is vitiated. Therefore, in view of the settled legal position and to uphold the sanctity of the arbitral process, the single bench of Justice Jasmeet Singh set aside the arbitral award.

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