High Courts Cannot Nullify Prior Arbitral Proceedings While Substituting Arbitrator: Supreme Court

The Supreme Court of India has recently observed hat while appointing a substitute arbitrator under Section 15(2) of the Arbitration and Conciliation Act, 1996, High Courts cannot invalidate prior arbitral proceedings or orders.

A Bench of Justices J.B. Pardiwala and K.V. Viswanathan set aside a portion of an order passed by the Bombay High Court, which, while appointing a substitute arbitrator, had declared arbitral proceedings conducted on seven dates between March 17, 2022 and August 25, 2022, to be void on the ground that they were undertaken during the insolvency moratorium.

“The proper and legal course for the High Court acting under Section 15(2) of the Act, 1996, should have been to appoint a substitute arbitrator to continue from the existing stage of the proceedings,” the Court observed.

The case arose from a partnership between the parties for the execution of a Slum Rehabilitation Authority project in Mumbai. Disputes led the appellants to move the Bombay High Court under Section 9 of the Arbitration Act in 2019.

By an order dated July 9, 2019, the High Court recorded consent terms between the parties and appointed former Chief Justice J.N. Patel as the sole arbitrator. On September 26, 2019, the respondent company was admitted into corporate insolvency resolution proceedings under the Insolvency and Bankruptcy Code, 2016, and a moratorium under Section 14 was imposed.

In March 2022, while dealing with interim applications, the High Court recorded that the Interim Resolution Professional had become functus officio and disposed of the Section 9 petitions, granting liberty to the parties to move the arbitral tribunal under Section 17 of the Act. Pursuant to this order, applications were moved before the arbitral tribunal.

The arbitral tribunal rejected a jurisdictional objection raised under Section 16 of the Act on the ground of the insolvency moratorium and passed interim orders permitting execution of agreements for sale of certain flats.

On August 26, 2022, the National Company Law Tribunal ordered liquidation of the respondent company, resulting in a fresh moratorium under Section 33(5) of the IBC. The arbitral proceedings were terminated on October 11, 2023.

The appellants thereafter approached the Bombay High Court seeking appointment of a substitute arbitrator under Section 15(2) of the Arbitration Act. While appointing a substitute arbitrator, the High Court also held that the arbitral proceedings conducted on seven dates between March 17, 2022 and August 25, 2022 were a nullity as they were undertaken during the moratorium period.

Allowing the appeal in part, the Supreme Court held that the High Court exceeded its jurisdiction under Section 15(2) of the Arbitration Act. The Court noted that Section 15(2) is not a standalone provision and must be read with Sections 15(3) and 15(4), which make it clear that prior hearings and orders are not rendered invalid merely because of substitution of the arbitrator.

Relying on its decision in Interplay Between Arbitration Agreements under the Arbitration and Conciliation Act, 1996 & Stamp Act, 1899, In re, the Court reiterated that the Arbitration Act is a self-contained code and that courts cannot assume powers not expressly conferred by the statute.

The Court held that the High Court, while acting under Section 15(2), could not set aside an order rejecting a jurisdictional objection under Section 16, nor could it nullify interim orders passed under Section 17, except through the appellate mechanism prescribed under Section 37 of the Act.

It also relied on Official Trustee v. Sachindra Nath Chatterjee to hold that a court cannot nullify orders over which it has no jurisdiction to adjudicate.

“The High Court assumed and exercised power which has clearly not been conferred by the Act, 1996,” the Bench held.

The Supreme Court upheld the appointment of the substitute arbitrator but set aside the High Court's declaration that the arbitral proceedings conducted between March 17, 2022 and August 25, 2022 were a nullity.

In exercise of its powers under Article 142 of the Constitution, the Court also declared the transactions carried out pursuant to the interim arbitral orders to be lawfully valid, and modified the impugned judgment to that extent.

For Petitioner : Advocates Ashim Sood, Saahil Memon, Sidharth Srivastava, Pallavi Pratap, AOR

For Respondent: Advocates Shakti Kanta Pattanaik, AOR Santosh Kumar, Rajeev Nayan, Rupesh Sashi