2025 (9) TMI 977 - HC - IBC

Arbitrator declared de jure ineligible for failing disclosures under Section 12(1) A&C Act, 1996; award quashed

JSW Ispat Special Products Limited Versus Bharat Petroresources Limited (vice versa).

HC held the presiding arbitrator was de jure ineligible for appointment for failing to make disclosures required under Section 12(1) A&C Act, 1996, and ... Appointment of presiding officer - failure to make the necessary disclosure as required under Section 12(1) of A&C Act, 1996 - de jure ineligibility for appointment as an Arbitrator - whether Tribunal was right in dismissing the application filed by the Petitioner under Section 12 of 1996 Act, laying a challenge to the appointment of the Presiding Arbitrator? - HELD THAT:- A somewhat similar issue arose before the Supreme Court in HRD Corporation [2017 (9) TMI 56 - SUPREME COURT], wherein challenge was laid to the appointment of two Arbitrators, who were Members of the Tribunal. Against one, it was alleged that he had been an advisor to one of the parties in an unconnected matter, whereas the other had previously rendered an award between the same parties in an earlier arbitration concerning the same dispute albeit for an earlier period. Entries 15 and 16 of Seventh Schedule were invoked to contend that both the Arbitrators were ineligible. The Supreme Court observed that the grounds in Fifth and Seventh Schedules have been taken from IBA Guidelines, particularly from the Red and Orange Lists thereof. The Red List consists of non-waivable and waivable guidelines, which cover situations, which are ‘more serious’ and ‘serious’, the ‘more serious’ objections being non-waivable. The Orange List, on the other hand, is a list of situations that may give rise to doubts as to Arbitrator’s impartiality or independence, as a consequence of which, Arbitrator has a duty to disclose such situations. A plain reading of Entry 16 shows that to be ineligible, proposed Arbitrator must have previous involvement in the case and the entry refers to ‘involvement’ in an advisory or other capacity in the very dispute but not in the avatar of and Arbitrator. In Supreme Court Advocates-on-Record Association and Another v. Union of India (Recusal Matter) [2015 (10) TMI 2687 - SUPREME COURT] notice was taken of the observation of Grant Hammond, a former Judge of the Court of Appeal of New Zealand in his Book Judicial Recusal that a Judge could only be disqualified for a direct pecuniary interest or consanguinity, affinity, friendship or enmity with a party or because he was or had been a party’s advocate. In the present case, the Presiding Arbitrator had dismissed an appeal filed by the Respondent against the order of NCLT on the ground that the RP was not legally empowered to include and admit future claims of the Respondent, by virtue of Section 18(1)(b) of IBC. In Committee of Creditors of Essar Steel India Limited through Authorised Signatory v. Satish Kumar Gupta and Others [2019 (11) TMI 731 - SUPREME COURT], the Supreme Court observed that the impugned judgment of the NCLT, wherein it was held that claims that may exist apart from those decided on merits by the RP and the adjudicating authority/Appellate Tribunal can be decided by an appropriate forum under Section 60(6) of IBC, militates against the rationale of Section 31 IBC. The impugned arbitral award dated 21.08.2024 is quashed and set aside and this petition is allowed and disposed of. ISSUES PRESENTED AND CONSIDERED 1. Whether the appointment of the Presiding Arbitrator was vitiated by failure to make mandatory disclosures under Section 12(1) of the Arbitration and Conciliation Act, 1996 (the 1996 Act), on the ground of 'previous involvement in the case' as contemplated by Entry 16 of the Seventh Schedule, rendering the arbitral award liable to be set aside. 2. Whether claims not included in an approved resolution plan under the Insolvency and Bankruptcy Code, 2016 (IBC) - in particular, claims arising post the insolvency commencement date (ICD) - stand extinguished by operation of the approved resolution plan and, if so, whether such extinguished claims are non-arbitrable and the arbitral tribunal lacked jurisdiction to adjudicate them. 3. Whether the impugned arbitral award is vitiated by any patent illegality or other grounds under Section 34 of the 1996 Act warranting interference. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Disclosure and previous involvement of the Presiding Arbitrator (Section 12(1) / Entry 16 Seventh Schedule) Legal framework: Section 12(1) of the 1996 Act mandates that a person approached for appointment as arbitrator must disclose in writing circumstances likely to give rise to justifiable doubts as to independence or impartiality, in the format prescribed by the Sixth Schedule; Fifth and Seventh Schedules list illustrative disqualifying/guide circumstances (including Entry 16: 'The arbitrator has previous involvement in the case'). An arbitrator who is de jure ineligible cannot validly act and an award rendered by such an ineligible arbitrator may be unenforceable. Precedent treatment: The Court analysed Supreme Court authority holding that Entry 16 refers to previous involvement in the very dispute in a non-adjudicatory avatar (e.g., advisor, consultant), and that merely having adjudicated earlier between the parties does not, without more, render a proposed arbitrator ineligible (HRD Corporation; related decisions distinguishing advisory/representative involvement from prior judicial/adjudicatory roles were followed). Authorities were also cited recognising that disclosure obligations are mandatory and that the onus of disclosure lies on the person approached. Interpretation and reasoning: The Court compared the NCLAT order earlier authored by the Presiding Arbitrator (as Chairperson of NCLAT) and the arbitral award, and considered whether that prior adjudication amounted to 'previous involvement in the case' under Entry 16. It found that the NCLAT decision addressed a discrete legal question under IBC (whether the RP could collate future claims under Section 18(1)(b)), did not decide the merits or enforceability of the post-ICD claims against the proposed arbitrator in an advisory or representative capacity, and therefore did not amount to the sort of prior 'involvement in the case' contemplated by Entry 16. The Court applied the HRD Corporation reasoning that prior adjudication does not automatically establish disqualifying involvement and that something more (e.g., advisory role, consultancy, or other non-adjudicatory engagement) is required to render the arbitrator de jure ineligible. Ratio vs. Obiter: Ratio - disclosure under Section 12(1) is mandatory; however, prior adjudication by a judge or member of an appellate forum on related legal issues does not per se amount to 'previous involvement' under Entry 16 that disqualifies appointment. Obiter - comparisons of factual congruence between earlier adjudicatory remarks and later arbitral reasoning may not necessarily establish bias unless objective grounds show the arbitrator could not act with an open mind. Conclusion: The Tribunal rightly dismissed the Section 12 challenge. The Presiding Arbitrator's prior role in deciding an appeal on a distinct legal point before NCLAT did not constitute disqualifying 'previous involvement in the case' under Entry 16, and there was no demonstrable real possibility of closed-mind adjudication or non-disclosure of an advisory relationship; therefore the appointment was not vitiated. Issue 2 - Arbitrability of claims not part of an approved resolution plan (IBC: Sections 31, 238; interplay with 1996 Act Section 2(3)) Legal framework: Section 31(1) IBC - adjudicating authority's approval of a resolution plan binds the corporate debtor and all stakeholders; Section 238 IBC - IBC overrides inconsistent laws; jurisprudence establishes that once a resolution plan is approved, claims not included in the approved plan as of the date of approval stand extinguished and cannot be prosecuted thereafter. Under the 1996 Act, jurisdiction of an arbitral tribunal is excluded where arbitrability is expressly barred by law (Section 2(3)). Precedent treatment: The Court relied on binding Supreme Court authority (Ghanashyam Mishra and subsequent reaffirmations including Essar Steel, Ruchi Soya, recent decisions and Electrosteel) that an approved resolution plan freezes and extinguishes claims not included in it, including statutory dues and other claims crystallized before approval; consequentially, such extinguished claims are not arbitrable and a tribunal lacks jurisdiction to adjudicate them. Interpretation and reasoning: The Court examined the approved resolution plan's express terms (which extinguished 'any and all rights and entitlements' of operational creditors as to pre-acquisition or pre-approval liabilities), the RP's admitted pre-ICD claim and rejection of post-ICD claims, and subsequent NCLT/NCLAT approvals. The claims referred to arbitration were conceded to relate to periods post-ICD and were not incorporated in the approved plan. Reliance on the established principle that a successful resolution applicant must obtain a 'clean slate' (no hydra-head of revived or undecided claims) led the Court to conclude that claims outside the approved plan stood extinguished and were non-arbitrable; Ergo, the Tribunal lacked jurisdiction to entertain and decide those claims. Ratio vs. Obiter: Ratio - where an approved resolution plan extinguishes claims not included in it, such claims cannot be pursued in arbitration and an award on such claims is without jurisdiction and void; Obiter - factual discussions distinguishing the nature/timing of specific claims (e.g., whether certain claims truly arose post-ICD) are case-specific but do not dilute the general rule. Conclusion: The claims adjudicated by the Tribunal were not part of the approved resolution plan and therefore stood extinguished by operation of IBC; they were non-arbitrable and the arbitral tribunal lacked jurisdiction to decide them. The award on those claims was therefore void for want of jurisdiction. Issue 3 - Patent illegality and other grounds under Section 34 of the 1996 Act Legal framework: Section 34, 1996 Act permits challenge to an arbitral award on limited grounds including jurisdictional defects and public policy/patent illegality. Precedent treatment: The Court noted that absence of 'patent illegality' alone is insufficient where a tribunal has acted without jurisdiction; authorities confirm that awards rendered without jurisdiction (e.g., on claims extinguished by law) are susceptible to being set aside irrespective of absence of patent illegality on the merits. Interpretation and reasoning: Given the threshold findings on jurisdiction (Issue 2), the Court did not rest solely on conventional patent illegality analysis. It held that the Tribunal's adjudication of claims which were extinguished by the approved resolution plan constituted an exercise without jurisdiction; an award in such circumstances is void and unenforceable notwithstanding the absence of a specific patent illegality in reasoning on merits. Ratio vs. Obiter: Ratio - an arbitral award rendered on claims extinguished by an approved resolution plan is liable to be set aside under Section 34 for want of jurisdiction; Obiter - discussion on absence of patent illegality in the Tribunal's reasoning does not salvage jurisdictional defects. Conclusion: The impugned award was set aside on jurisdictional grounds because it adjudicated claims extinguished by the approved resolution plan under IBC; separate findings on patent illegality were unnecessary to dispose of the petition. Final Disposition The Court quashed and set aside the impugned arbitral award dated 21.08.2024 on the ground that the Tribunal exercised jurisdiction over claims which were extinguished upon approval of the resolution plan under IBC and were therefore non-arbitrable; the challenge to the Presiding Arbitrator's appointment under Section 12 was rejected as unsustainable.