Rinkesh Khanna vs M/S Cholamandalam, Investment And ...
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Chattisgarh High Court

Rinkesh Khanna vs M/S Cholamandalam, Investment And ... on 4 March, 2025

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                                                                2025:CGHC:10647
        Digitally
 REKHA signed by
 SINGH REKHA
        SINGH
                                                                      NAFR

                    HIGH COURT OF CHHATTISGARH AT BILASPUR

                                   WP227 No. 1162 of 2024

1 - Rinkesh Khanna S/o Jagdish Chandra Khanna Aged About 38 Years
R/o Ward No. 21, Ambikapur Road, Near Jaiswal Petrol Pump, Chainpur,
Manendragarh, District Korea Chhattisgarh. Now District M.C.B
Chhattisgarh.

2 - Rashmi Khanna W/o Rinkesh Khanna Aged About 35 Years R/o Ward
No. 21, Near Surbhi Park, Manendragarh, Korea, District Korea
Chhattisgarh. Now District M.C.B Chhattisgarh.
                                                       ... Petitioner(s)

                                           versus

1 - M/s Cholamandalam, Investment And Finance Company Limited
Registered Office At Der House No. 2, Nsc Bose Road, Chennai 600001,
Branch Office, Cholamandalam Investment And Finance Company Ltd.
Ward No. 21, Near Bhaiyyalal Petrol Pump, Ambikapur Road, Chainpur,
Manendragarh, Tehsil Manendragarh, District Korea Chhattisgarh Now
District M.C.B. Chhattisgarh.
                                                   ---- Respondents

For Petitioners : Mr. Sushobhit Singh, Advocate For respondent : Mr. Mukesh Sharma, Advocate

Hon'ble Shri Justice Rakesh Mohan Pandey Order on Board 04.03.2025

1. The petitioners have filed this petition seeking the following

relief(s):-

"10.1 That, this Honble may kindly be pleased to issue appropriate writ, order, direction in the nature of certiorari and quash the impugned execution proceedings bearing MJC Civil Case No.49/24

between the parties Cholamandalam Investment and Finance Co.Ltd., Vs. Rinkesh Khanna pending before the Court of 1st District Judge, Manendragarh District Korea Now MCB-C.G. (Annexure P-1) 10.2 That, this Hon'ble Court may kindly be pleased to grant any other relief as it may deems fit and appropriate."

2. The facts of the present case are as under:-

(i) The petitioners purchased a Mahindra Blazo bearing

registration No. C.G.-16CH-2489 through a higher purchase

agreement and obtained a loan of Rs.39,20,800/-. The loan

amount was to be paid in monthly installments. The monthly

installment was fixed @ Rs.67,600/- per month. The agreement

was executed between the parties on 27.06.2017. The

petitioners could not continue payment of installments.

(ii) The respondent Company initiated an arbitration

proceedings and an arbitrator was appointed by the respondent

itself.

(iii) The arbitrator passed a final award to the tune of

Rs.13,06,079/- with interest @ 18% per annum on 26.08.2022.

(iv) An application for execution under Section 36 of the

Arbitration and Conciliation Act, 1996 was filed by the

respondent.

(v) The petitioners in this petition have sought relief to quash

the execution proceeding bearing MJC Civil Case No.49/2024

pending before the Court of First District Judge Manendragarh,

District Korea now Manendragarh-Chirmiri-Bharatpur (MCB)

C.G.

3. Mr. Singh, the learned counsel appearing for the petitioners

would submit that a copy of the arbitral award dated 26.08.2022

was never served on the petitioners. He would further submit

that when the petitioners received a summons issued by the

Executing Court, they came to know about the award. He would

contend that part payment of the loan amount was made by the

petitioners, the vehicle was surrendered and there was no

occasion for the respondent company to initiate the arbitration

proceeding. He would further contend that substantial

amendments were incorporated in the Arbitration and

Conciliation Act through the Amendment Act, 2015 to render

more credibility and impartiality to the arbitrator so as to enable

him to perform his functions in a just, fair and judicial manner.

He would state that according to the provisions of Section 12(5)

of the Amendment Act, 2015 read with Schedule 7, interested

persons cannot be appointed as the sole arbitrator. He would

further state that as the arbitrator was appointed by the

respondent contrary to the provisions of Section 12(5) of the

Act, 2015 read with Schedule 7, the award passed by the

Arbitrator is null and void and not binding. In support of his

contentions, he placed reliance on the judgment passed by the

Hon'ble Supreme Court in the matter of Bharat Broadman

Limited Vs. United Telecom, 2019 (5) SCC 75 5 and the

matter of Shreepat Mishra and another Vs. M/s. Equitas

Small Finance Bank Limited and others, WP227 No.726 of

2023 decided on 09.09.2024.

4. On the other hand, Mr. Sharma, the learned counsel appearing

for the respondent would oppose the submissions made by

learned counsel for the petitioners. He would submit that the

award was passed by the arbitrator, who was appointed under

the provisions of Section 11(1) of the Arbitration and

Conciliation Act, 1996. He would further submit that the

petitioners participated in the arbitration proceeding without

raising any objection and therefore, after passing of the award,

such objections cannot be raised. He would contend that the

appointment of the arbitrator cannot be said to be without

jurisdiction.

5. Heard learned counsel appearing for the parties and perused

the documents placed on the record.

6. Section 12(5) of the Amendment Act, 2015 read with Schedule

7 is reproduced herein below:-

"S.12[(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub-section by an express agreement in writing.] THE SEVENTH SCHEDULE [See section 12(5)] Arbitrator's relationship with the parties or counsel

1. The arbitrator is an employee, consultant, advisor or has any other past or present business relationship with a party.

2. The arbitrator currently represents or advises one of the parties or an affiliate of one of the parties.

3. The arbitrator currently represents the lawyer or law firm acting as counsel for one of the parties.

4. The arbitrator is a lawyer in the same law firm which is representing one of the parties.

5. The arbitrator is a manager, director or part of the management, or has a similar controlling influence, in an affiliate of one of the parties if the affiliate is directly involved in the matters in dispute in the arbitration.

6. The arbitrator's law firm had a previous but terminated involvement in the case without the arbitrator being involved himself or herself.

7. The arbitrator's law firm currently has a significant commercial relationship with one of the parties or an affiliate of one of the parties.

8. The arbitrator regularly advises the appointing party or an affiliate of the appointing party even though neither the arbitrator nor his or her firm derives a significant financial income therefrom.

9. The arbitrator has a close family relationship with one of the parties and in the case of companies with the persons in the management and controlling the company.

10. A close family member of the arbitrator has a significant financial interest in one of the parties or an affiliate of one of the parties

11. The arbitrator is a legal representative of an entity that is a party in the arbitration.

12. The arbitrator is a manager, director or part of the management, or has a similar controlling influence in one of the parties.

13. The arbitrator has a significant financial interest in one of the parties or the outcome of the case.

14. The arbitrator regularly advises the appointing party or an affiliate of the appointing party, and the arbitrator or his or her firm derives a significant financial income therefrom. Relationship of the arbitrator to the dispute

15. The arbitrator has given legal advice or provided an expert opinion on the dispute to a party or an affiliate of one of the parties.

16. The arbitrator has previous involvement in the case.

Arbitrator's direct or indirect interest in the

dispute

17. The arbitrator holds shares, either directly or indirectly, in one of the parties or an affiliate of one of the parties that is privately held.

18. A close family member of the arbitrator has a significant financial interest in the outcome of the dispute.

19. The arbitrator or a close family member of the arbitrator has a close relationship with a third party who may be liable to recourse on the part of the unsuccessful party in the dispute."

7. A bare reading of this Section would make it clear that the

unilateral appointment of the sole arbitrator is not valid in the

eyes of the law.

8. In the present case, the respondent appointed the sole

arbitrator and this fact is not in dispute.

9. In the matter of TRF Limited Vs. Energo Engineering

Projects Limited, 2017(8) SCC 377, the Hon'ble Supreme

Court in para 54 held that the arbitrator who has become

ineligible by operation of law, cannot nominate another as an

arbitrator. It is further held that the arbitrator becomes ineligible

as per the prescription contained in Section 12(5) of the Act.

Relevant para 54 reads as under:-

"54.In such a context, the fulcrum of the controversy would be, can an ineligible arbitrator, like the Managing Director, nominate an arbitrator, who may be otherwise eligible and a respectable person. As stated earlier, we are neither concerned with the objectivity nor the individual respectability. We are only concerned with the authority or the power of the Managing Director. By our analysis, we are obligated to arrive at the conclusion that once the arbitrator has become ineligible by operation of law, he cannot nominate another as an arbitrator. The arbitrator becomes ineligible as per prescription contained in Section 12(5) of the Act. It is inconceivable in law that person who is statutorily ineligible can nominate a person. Needless

to say, once the infrastructure collapses, the superstructure is bound to collapse. One cannot have a building without the plinth. Or to put it differently, once the identity of the Managing Director as the sole arbitrator is lost, the power to nominate someone else as an arbitrator is obliterated. Therefore, the view expressed by the High Court is not sustainable and we say so.

10.In the matter of Perkins Eastman Architects DPC and

another vs. HSCC (India) Ltd., AIR 2020 SC 59, the law has

been reiterated that a person who has an interest in the

outcome or decision of the dispute must not have the power to

appoint a sole arbitrator. The Hon'ble Supreme Court in paras

15 & 16 made the following observations which read as under:-

"15. It was thus held that as the Managing Director became ineligible by operation of law to act as an arbitrator, he could not nominate another person to act as an arbitrator and that once the identity of the Managing Director as the sole arbitrator was lost, the power to nominate someone else as an arbitrator was also obliterated. The relevant Clause in said case had nominated the Managing Director himself to be the sole arbitrator and also empowered said Managing Director to nominate another person to act as an arbitrator. The Managing Director thus had two capacities under said Clause, the first as an arbitrator and the second as an appointing authority. In the present case we are concerned with only one capacity of the Chairman and Managing Director and that is as an appointing authority.

We thus have two categories of cases. The first, similar to the one dealt with in TRF Limited(supra) where the Managing Director himself is named as an arbitrator with an additional power to appoint any other person as an arbitrator. In the second category, the Managing Director is not to act as an arbitrator himself but is empowered or authorised to appoint any other person of his choice or discretion as an arbitrator. If, in the first category of cases, the Managing Director was found incompetent, it was because of the interest that he would be said to be having in the outcome or result of the dispute. The element of invalidity would thus be directly relatable to and arise from the interest that he would be having in such outcome or decision. If that be

the test, similar invalidity would always arise and spring even in the second category of cases. If the interest that he has in the outcome of the dispute, is taken to be the basis for the possibility of bias, it will always be present irrespective of whether the matter stands under the first or second category of cases. We are conscious that if such deduction is drawn from the decision of this own and it would always be available to argue that a party or an disentitled to make appointment of an Arbitrator. Court in TRF Limited(supra), all cases having clauses similar to that with which we are presently concerned, a party to the agreement would be disentitled to make any appointment of an Arbitrator on its official or an authority having interest in the dispute would be disentittled to make appointment of an Arbitrator.

16. But, in our view that has to be the logical deduction from TRF Limited(supra). Paragraph 50 of the decision shows that this Court was concerned with the issue, "whether the Managing Director, after becoming ineligible by operation of law, is he still eligible to nominate an Arbitrator" The ineligibility referred to therein, was as a result of operation of law, in that a person having an interest in the dispute or in the outcome or decision thereof, must not only be ineligible to act as an arbitrator but must also not be eligible to appoint anyone else as an arbitrator and that such person cannot and should not have any role in charting out any course to the dispute resolution by having the power to appoint an arbitrator. The next sentences in the paragraph, further show that cases where both the parties could nominate respective arbitrators of their choice were found to be completely a different situation. The reason is clear that whatever advantage a party may derive by nominating an arbitrator of its choice would get counter balanced by equal power with the other party. But, in a case where only one party has a right to appoint a sole arbitrator, its choice will always have an element of exclusivity in determining or charting the course for dispute resolution. Naturally, the person who has an interest in the outcome or decision of the dispute must not have the power to appoint a sole arbitrator. That has to be taken as the essence of the amendments brought in by the Arbitration and Conciliation (Amendment) Act, 2015 (Act 3 of 2016) and recognised by the decision of this Court in TRF Limited(spura)."

11.Further, a similar issue came up for consideration before the

High Court of Gujarat at Ahmedabad in Special Civil

Application No.728/2023 along with other connected matters

wherein an ex-parte award was passed in Chennai and the

same was challenged in the writ petition at Gujarat High Court

raising a similar nature of objection which was allowed and the

ex-parte award was set-aside. At Para 19 and 20, the following

was materially observed:-

"19.Therefore the Sample under Seed Not the petitioners are required to challenge the petitioners have been able circumstances and bad faith on the part of to show respondent NBFC to invoke the remedy under Article 226 and 227 of the Constitution of India whose ambit is broad and pervasive as held by the Hon'ble Supreme Court in case of Bhaven Construction (Supra) after considering the position of law with regard to the challenge to the arbitration proceedings under Article 226 and 227 of the Constitution of India. Therefore, in the exceptional circumstances as emerging from the facts of these petitions, these petitions are entertained instead of relegating the petitioners to avail appropriate remedy under Section 34 of the Act.

20. In light of above discussion and considering the facts of the case, it becomes evident that from the very inception i.e. from the stage of appointment of the sole arbitrator, the proceedings were vitiated and the impugned ex parte arbitral awards are therefore rendered unsustainable. The impugned awards are therefore liable to be quashed and set aside with a liberty to the respondent NBFC to initiate fresh proceedings in accordance with the settled legal position as held by the Hon'ble Division Bench of this Court in case of Pahal Engineers vs. The Gujarat Water Supply and Sewerage Board(Special Civil Application No.8727 of 2019) dated 30.01.2023 by appointing the arbitrator either with the consent of the petitioners or by approaching this Court under Section 11 of the Act."

12.In the matter of Bharat Broadman Limited (supra), the

Hon'ble Supreme Court held that the practice of unilateral

appointment of an Arbitrator by one of the parties who is

himself interested in the subject matter is a total nullity and bad

in the eyes of law. The Hon'ble Supreme Court in para 15 held

as under:-

"15.Section 12(5), on the other hand, is a new provision which relates to the de jure inability of an arbitrator to act as such. Under this provision, any prior agreement to the contrary is wiped out by the non- obstante clause in Section 12(5) the moment any person whose relationship with the parties or the counsel or the subject matter of the dispute falls under the Seventh Schedule. The sub-section then declares that such person shall be "ineligible" to be appointed as arbitrator. The only way in which this ineligibility can be removed is by the proviso, which again is a special provision which states that parties may, subsequent to disputes having arisen between them, waive the applicability of Section 12(5) by an express agreement in writing. What is clear, therefore, is that where, under any agreement between the parties, a person falls within any of the categories set out in the Seventh Schedule, he is, as a matter of law, ineligible to be appointed as an arbitrator. The only way in which this ineligibility can be removed, again, in law, is that parties may after disputes have arisen between them, waive the applicability of this sub-section by an "express agreement in writing". Obviously, the "express agreement in writing" has reference to a person who is interdicted by the Seventh Schedule, but who is stated by parties (after the disputes have arisen between them) to be a person in whom they have faith notwithstanding the fact that such person is interdicted by the Seventh Schedule."

13.In the matter of Bhaven Construction v. Executive Engineer,

Sardar Sarovar Narmada Nigam Limited and Another

{(2022) 1 SCC 75}, it has been categorically observed that the

ambit of Article 227 is broad and pervasive and it is well settled

that the High Court should be circumspect in interfering in any

arbitration proceedings and the interference is restricted to

orders which are patently lacking inherent jurisdiction.

14.In the case at hand, in the loan agreement itself, a clause exists

with regard to the appointment of an arbitrator unilaterally and

the said clause is in the teeth of the amendment in the

Arbitration Act in the year 2015 in terms of Section 12(5) of the

Act, 1996 read with Schedule 7. Now, the law is well settled

that a person having any interest in the dispute or in the

outcome thereof is ineligible not only to act as an arbitrator but

is also rendered ineligible to appoint anyone else as an

arbitrator.

15.Admittedly, in the instant case, a unilateral appointment of an

arbitrator was made contrary to the law. Therefore, there was a

patent lack of inherent jurisdiction of the arbitrator and the

settled law discussed in the matter of TRF Limited (supra) and

Perkins Eastman Architects DPC (supra) clarifies the legal

issue that the award itself is a nullity in the eyes of the law and

void ab initio and is liable to be set aside.

16.Now coming to the facts of the present case in the light of the

judgments laid down by the Hon'ble Supreme Court, it is quite

vivid that in the present case, a sole arbitrator was appointed

by the respondent and it can safely be concluded that the

arbitrator was appointed contrary to the provisions of Section

12(5) of the Act of 2015 read with Schedule 7.

17.In view of the aforesaid discussion, the impugned award is

hereby set aside, however, the respondent is at liberty to initiate

fresh proceedings in accordance with the settled legal

proposition.

18.With the aforesaid observation(s), this petition is disposed of.

19.No order as to costs.

Sd/-

(Rakesh Mohan Pandey) Judge Rekha