Introduction

The present case arises from a civil appeal against the order of the Hon’ble Bombay High Court (“High Court”) in a petition filed by the Appellants herein under Section 15(2) of the Arbitration and Conciliation Act, 1996 (the “Act”). The High Court while substituting the arbitrator as prayed for, also held that the proceedings conducted by the previous arbitrator between 17.03.2022 to 25.08.2022 were a nullity due to the Respondent Company being under moratorium according to the provision of the Insolvency and Bankruptcy Code, 2016 (“IBC”).

Brief Facts about the dispute

The Appellant and the Respondent constituted a partnership firm named “M/s Anmol Alliance” for the specific purpose of developing and constructing a Slum Rehabilitation Authority (SRA) project by the name of Andheri Shiv Shakti CHS located in Andheri (West), Mumbai.

Initially, some disputes cropped up between the parties in 2019 which led to the Appellants filing a Section 9 petition before the High Court. Pursuant to the filing of the Section 9 petition, an interim arrangement was worked out between the parties and the project continued. The High Court recorded the settlement between the parties vide order dated 09.07.2019 and also appointed HMJ JN Patel as the sole arbitrator between the parties.

Just a few months later the Respondent Company was sent into CIRP by NCLT Mumbai Bench vide order dated 26.09.2019 and moratorium was imposed in terms of Section 14 of the IBC.

The Appellants moved the High Court first in 2020 with an IA under Section 9 of the Act seeking to restraining the RP of the Respondent from obstructing the sale of flats and further sought permission for sale of flats in terms of the previous interim arrangement. The Appellants also filed an IA under Section 9 of the Act seeking to execute Agreements for Sale for some specific flats.  The High Court vide order dated 15.03.2022 disposed of both IAs and observed that the Interim Resolution Professional (“IRP”) had become functus officio as 180 days of the CIRP had elapsed and, as no liquidation order had been passed. The High Court granted the Appellants liberty to move Section 17 applications for interim relief before the Ld. Arbitrator.

The Appellants moved Section 17 applications before the Ld. Arbitrator seeking the same reliefs on 17.03.2022. The Respondent moved an application under Section 16 of the Arbitration Act challenging the jurisdiction of the Ld. Tribunal. The Ld. Tribunal dismissed the Section 16 application of the Respondent vide order dated 29.03.2022 and allowed the Appellant to sell some of the flats as prayed for in their Section 17 applications vide orders dated 29.03.2022 and 20.04.2022.

In pursuance of the aforementioned orders, the Appellants executed agreements for sale for 5 flats between July 2022 and February 2023. Pertinently the sale deeds for the same had not been executed.

NCLT Mumbai passed an order of liquidation against the Respondent Company vide order dated 26.08.2022.

The Respondent through the liquidator filed their Statement of Defence dated 24.04.2023, the Ld. Tribunal passed an order directing the liquidator to seek clarification from the High Court in respect of continuation of arbitral proceedings.

Accordingly the Liquidator filed an IA before the High Court seeking a declaration that the disputes between the parties were non-arbitrable. The High Court dismissed the said application vide order dated 25.08.2023.

The Arbitrator eventually terminated the Arbitral Proceedings on 11.10.2023. The Appellants moved a petition before the High Court under Section 15 seeking appointment of a substitute arbitrator as well extension of time for passing an arbitral award.

The High Court vide impugned judgment allowed substitution of arbitrator but held that proceedings conducted on 7 dates between 26.09.2019 to 26.08.2022 would be a nullity in law in light of Section 14 of the IBC. High Court reasoned that the moratorium remained in effect throughout that period, and its previous bench had been “misled” into believing the IRP was functus officio.

Contentions at the Bar

Contentions of the Appellants

• Limited Scope:  Appellants submitted that the High Court under Section 15(2) of the Act was empowered only to substitute the Arbitrator and does not grant the Court power to conduct a review on merits or nullify prior orders.
• Powers under Section 15 (2) of the Act akin to Section 11: The jurisdiction of the High Court under Section 15(2)  of the Act, 1996, is akin to the jurisdiction that may be exercised under  Section 11 of the Act, 1996.  Section 15(2) states that a “substitute arbitrator shall be appointed according to the rules that were applicable to the appointment of the arbitrator being replaced”. Therefore, the powers of the Court under Section 15(2) must be defined with reference to the power of the Courts under Section 11 of the Act.
• Statutory Mandate: Under Section 15(4), a ruling made before replacement is not invalid solely due to a change in the tribunal’s composition. S. 15(4) of the Act clearly states that the earlier orders would be a nullity only if the parties agree to the same.
• Jurisdictional Overreach: The High Court effectively set aside Section 16 and Section 17 orders, actions that are either barred or only permitted under specific sections like Section 37 of the Arbitration Act, while dealing with an application for substitution under Section 15 of the Act.
• Third-Party Rights: Nullifying the proceedings would unfairly penalize homebuyers who had already purchased flats based on the Arbitrator’s orders.

Contentions of the Official Liquidator

The Liquidator argued that the High Court was correct because the moratorium under Section 14 is absolute. Any transaction or legal proceeding conducted while the moratorium is active is inherently void and a nullity.

Contentions of the State Bank of India (SBI)

The Solicitor General, Mr. Tushar Mehta, appeared for SBI, claiming the flats were mortgaged with the Bank and seeking to protect the Bank’s security interest. The appellants countered that these flats were never mortgaged and carried no charge.

1. Analysis and Conclusions of the Supreme Court
2. Interpretation of Section 15 of the Act

The Supreme Court held that Section 15(2) is not a standalone provision, it must be read in harmony with sub-sections (3) and (4).Section 15(3) was held to have the following ingredients:

1. Any hearing previously held may be repeated;
2. The repetition of the hearing is at the discretion of the arbitral tribunal;

However, such repetition of the hearing is subject to the agreement between the parties;

The Court held that if the parties agree for repetition of hearing, the term “may” transforms into “shall”.  Whereas, if the parties agree for non-repetition of hearing, the term “may” transforms into  “shall not”. The court relied heavily on the judgment of YashwithContructions Pvt Ltd vs Simplex Concrete Piles India Ltd. &AnrAIR 2006 SC 2798 wherein it was held that a substitute arbitrator must be appointed according to the original rules of appointment.

Section 15(4) explicitly states that prior rulings are not invalidated merely by the arbitrator’s replacement, they become a nullity by the consent of parties. Relying on Hindustan Construction Co. Ltd. v. Bihar Rajya Pul Nirman Nigam Ltd., 2005 SCC OnLine SC 2578, the Supreme Court held that “substitution preserves continuity, and prior proceedings remain valid unless either party objects.”

Having regard to the plain language of sub-section (2) andsub-section (4) of Section  15 respectively referred to above, the Apex Court found that the High Court exceeded its  jurisdiction while taking the view that the proceedings held by the Arbitral Tribunal between  17.03.2022 and 25.08.2022 are a nullity because of the operation of moratorium.

Minimal Judicial Intervention and the “Self-Contained Code”

The Apex Court reiterated that the Arbitration Act is a self-contained and exhaustive code. Following the precedent in the Interplay Between Arbitration Agreements under Arbitration and Conciliation Act,  1996 & Stamp Act, 1899, In re, (2024) 6 SCC 1,the Supreme Court noted that when a statute specifies a procedure, general legal procedures are excluded.

In this case, theHigh Court had, while exercising jurisdiction under Section15(2) of the Act impermissibly:(i) set aside an order rejecting an application under Section 16, even though the Act does not provide for it; (ii) set aside orders under Section 17, but not through the appropriate process under Section 37 (i.e., the statutory appellate remedy); and (iii) set aside other procedural orders, even though no court is vested with the power to exercise such jurisdiction under the Act. The Supreme Court relied on the ratio in Official Trustee v. Sachindra Nath Chatterjee, 1968, SCC OnLine SC 103,which held that“the High Court is not empowered to nullify orders which it had no jurisdiction to consider.”

Final Order

The Supreme Court set aside the High Court’s declaration of nullity. Invoking Article 142 of the Constitution, the Court declared the flat transactions lawfully valid to protect homebuyers’ rights and directed the substitute arbitrator to continue from the existing stage of the proceedings.

Written By: Aaryaan Sadanand