TaxTMI 
TaxTMI 
2022 (8) TMI 1515
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....tion (hereinafter collectively referred to as the "petitioner"). b) The Respondent is a Non-Banking Financial Company (hereinafter referred to as "NBFC") incorporated under the provisions of the Companies Act, 1956 and is in the business of providing financial facilities, personal loans, commercial loans, etc. c) The disputes between the parties arise out of a loan agreement dated August 29, 2016, wherein the respondent company disbursed a sum of INR 5,50,00,000/- to the petitioners. d) On September 27, 2021, the respondent issued a legal notice to the petitioners for seeking repayment of the principal amount along with the interest accrued. The petitioners issued their reply dated October 19, 2021 to the aforementioned legal notice. e) Be that as it may, on December 08, 2021, the respondent company issue a notice under Section 21 of the Act invoking arbitration contained in clause 19 of the said agreement and appointed Justice Aloke Chakraborty (Retd.), a former Judge of this Court as the Sole Arbitrator to adjudicate upon the disputes and differences that have arisen between the parties. f) On February 25, 2022, the learned arbitrator ....
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.... to exercise its powers under Section 14(1) of the Act by appointing a substitute arbitrator in the absence of a valid arbitration agreement between the parties. d) The counsel for the petitioners points out that the respondent has failed to produce a copy of the alleged loan agreement despite multiple requests made by them before and during the pendency of the arbitration; and that it is only upon the specific directions of this Court that the respondent placed on record a copy of the said loan agreement. The counsel further argues that in the absence of the original loan agreement and consequent absence of an arbitration agreement, a substitute arbitrator cannot be appointed by this Court in the present application. e) Continuing this line of submission, the counsel argues that there is no express or automatic substitution of an arbitrator upon termination of the ineligible arbitrator. Following the termination of the arbitrator under Section 14(2) of the Act, the Court is required to refer to Section 15(2) of the Act for appointment of a substitute arbitrator. The clause is extracted below- "15(2). Where the mandate of an arbitrator terminates, a subst....
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.... Section 14(1) of the Act to submit that a substitute arbitrator must be appointed by the Court, if the mandate of the present arbitrator gets terminated under Section 14(1)(a) of the Act. Further, the counsel opposed the reliance placed by the petitioners on Section 15 of the Act for appointment of substitute arbitrator by the Court and argued that Section 15 has no manner of application in the facts of the present case which is clearly evident from the bare reading of the provision. c) The counsel places reliance on Perkins Eastman Architects DPC & Anr -v- HSCC (India) Limited (supra) to refute the argument of the petitioners that no substitute arbitrator can be appointed by this Court as the arbitration clause itself from the agreement gets erased on account of holding the clause illegal and invalid. The counsel adds that had that been the case, the Apex Court in the aforementioned case would not have appointed a sole arbitrator to decide all the disputes arising out of the agreement being the subject matter of the proceeding. d) Lastly, the counsel for the respondent argues that any question with regards to the existence and validity of the arbitration agreeme....
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....Lender and the arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996. The Borrower and/or the Guarantor shall not be entitled to have any objection regarding the personnel of the Sole Arbitrator for the reasons that he may be an associate or advisor of Lender or connected or related to Lender and/or its directors or executives on personal, business or professional basis......" At the first instance, one may state that the position of law on unilateral appointment of sole arbitrator is well settled after the decisions of the Supreme Court in TRF Limited -v- Energo Engineering Projects Ltd. (supra) and Perkins Eastman Architects DPC & Anr. -v- HSCC (India) Ltd. (supra). In TRF Limited, the Apex Court held that an individual who himself is ineligible under the provisions of the Act to be appointed as an arbitrator, cannot himself/herself nominate a sole arbitrator. The relevant portion has been extracted below- "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 nei....
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....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 Court in TRF Ltd., 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 own and it would always be available to argue that a party or an official or an authority having interest in the dispute would be disentitled to make appointment of an arbitrator. 21. But, in our view that has to be the logical deduction from TRF Ltd. Para 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 anyo....
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.... 12(1) to 12(4) read with Section 13. However, where such person becomes "ineligible" to be appointed as an arbitrator, there is no question of challenge to such arbitrator, before such arbitrator. In such a case i.e., a case which falls under Section 12(5), Section 14(1)(a) of the Act gets attracted inasmuch as the arbitrator becomes, as a matter of law (i.e., de jure), unable to perform his functions under Section 12(5), being ineligible to be appointed as an arbitrator. This being so, his mandate automatically terminates, and he shall then be substituted by another arbitrator under Section 14(1) itself. It is only if a controversy occurs concerning whether he has become de jure unable to perform his functions as such, that a party has to apply to the Court to decide on the termination of the mandate, unless otherwise agreed by the parties. Thus, in all Section 12(5) cases, there is no challenge procedure to be availed of. If an arbitrator continues as such, being de jure unable to perform his functions, as he falls within any of the categories mentioned in Section 12(5), read with the Seventh Schedule, a party may apply to the Court, which will then decide on whether his mandate....
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....stituted by another arbitrator, if- (a) he becomes de jure or de facto unable to perform his functions or for other reasons fails to act without undue delay; and (b) he withdraws from his office or the parties agree to the termination of his mandate. (2) If a controversy remains concerning any of the grounds referred to in clause (a) of sub-section (1), a party may, unless otherwise agreed by the parties, apply to the Court to decide on the termination of the mandate. .........." However, the petitioners plead that on account of the arbitration clause in the said loan agreement being declared as prima facie illegal, null and void, the same is erased and extinguished from the loan agreement. As a corollary, this Court ought not to exercise its powers under Section 14(1) of the Act to appoint a substitute arbitrator in the absence of a valid arbitration agreement between the parties. 12. In my view, this contention put forward by the petitioners is untenable in law for the simple reason that this Court has the power to severe portion(s) of the arbitration agreement and invalidate only those specific portion(s) that are hit by illegality, viz.....
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....trator in the present case), unless a party has established a prima facie (summary findings) case of non-existence of valid arbitration agreement, by summarily portraying a strong case that he is entitled to such a finding. Further, reliance can also be placed on the decision of A. Ayyasamy -v- A Paramasivam & Ors. reported in (2016) 10 SCC 386, wherein the Apex Court stated that mere allegation of fraud is not sufficient to detract parties from the obligation to submit their disputes to arbitration. The relevant paragraph has been reproduced below- Para 45.1 ".... Hence, it is necessary to emphasise that as a matter of first principle, this Court has not held that a mere allegation of fraud will exclude arbitrability. The burden must lie heavily on a party which avoids compliance with the obligation assumed by it to submit disputes to arbitration to establish the dispute is not arbitrable under the law for the time being in force. In each such case where an objection on the ground of fraud and criminal wrongdoing is raised, it is for the judicial authority to carefully sift through the materials for the purpose of determining whether the defence is merely a pretext to avo....