Andhra Pradesh High Court Sets Aside Execution In IKF Finance Case Over Unilateral Arbitrator Appointment

The Andhra Pradesh High Court on 10 April reiterated that unilateral appointment of a sole arbitrator by a finance company violated the principle of equal treatment under Article 14 of the Constitution, and set aside execution proceedings arising from an arbitral award passed for recovery of loan dues.

A Division Bench of Justices Ravi Nath Tilhari and Balaji Medamalli allowed civil revision petitions filed by Katta Srinivasu and another petitioner against IKF Finance Limited, and held that the arbitral award was without jurisdiction and unenforceable.

The Court held:

“We reach to the conclusion that the appointment of the sole Arbitrator unilaterally appointed by the Finance Company is violative of Article 14 of the Constitution of India. It was invalid. The Arbitrator had no jurisdiction, it lacked inherent jurisdiction to pass the Award. The ineligibility under law under Section 12 read with Seventh Schedule, was attracted with respect to the person legal Manager of the 1st respondent Finance Company was attracted. So, he could also not appoint/nominate 2nd respondent as the sole arbitrator. There was no express waiver by any agreement in writing in terms of proviso to Sub-Section (5) of Section 12 of the Act 1996.”

IKF Finance invoked the arbitration clause after Srinivasu defaulted in loan repayment and obtained an ex parte arbitral award dated 20 January 2021 for recovery of the outstanding amount. Sri B. Chalapathi Suri, a retired judicial officer, was appointed as the sole arbitrator by the finance company through its Legal Manager.

Srinivasu and another party challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996 before the Principal District Judge, Krishna at Machilipatnam.

While the Section 34 challenge remained pending, IKF Finance Limited initiated execution proceedings in 2022. On 30 September 2022, the executing court ordered attachment of Srinivasu's bank account and restrained transactions.

Srinivasu then approached the High Court under Article 227 of the Constitution by filing civil revision petitions. He contended that the Legal Manager of the finance company was ineligible under Section 12(5) read with the Seventh Schedule to appoint or nominate an arbitrator.

He further argued that such unilateral appointment violated the principle of equal treatment under Section 18 and rendered the award void ab initio. He also submitted that no express written waiver existed as required under the proviso to Section 12(5).

IKF Finance argued that it had issued notices regarding appointment of the arbitrator and that the borrower did not raise objections during the arbitral proceedings. It submitted that this amounted to waiver under Section 4 of the Act. It also contended that the arbitrator was independent and the award was valid and executable.

Rejecting these submissions, the Court held that the Legal Manager of the finance company fell within the categories of ineligibility under the Seventh Schedule and was therefore disqualified from appointing an arbitrator. It reiterated that an ineligible person cannot nominate an arbitrator, and such nomination is invalid in law.

The Court also rejected reliance on Section 4. It held that silence during arbitration can amount to waiver only for non-mandatory procedural defects and cannot override the statutory bar under Section 12(5). It further held that waiver of an ineligible arbitrator is permitted only through an express written agreement executed after disputes arise, and found that no such waiver existed in the present case.

The Court further observed that jurisdictional objections can be raised even at the execution stage. It noted:

“The conditions under the proviso are not satisfied and consequently, the plea of waiver raised by the learned counsel for the respondents has no legs to stand. The mandate of the arbitrator in the present case automatically terminated as a matter of law.”

Accordingly, the High Court allowed the civil revision petitions, set aside the 30 September 2022 attachment order, and held the arbitral award to be unenforceable.

Appearances for petitioner (Katta Srinivasu): Advocate P. V. A. Padmanabham.

Appearances for respondent (M/s IKF Finance Limited): Advocate V. V. L. N. Purnesh.