Introduction
In Ballarpur Industries Ltd. v. SG Enterprises & Ors., O.M.P. (T) (COMM.) 40/2024, decided on 16 May 2025, the Delhi High Court terminated the mandate of a Sole Arbitrator appointed unilaterally by the Respondents during the pendency of a moratorium under the Insolvency and Bankruptcy Code, 2016 (“IBC”). The judgment reiterates the invalidity of unilateral arbitrator appointments and underscores the statutory embargo on arbitral proceedings during moratorium under Section 14 of the IBC.
1. Factual Background and Procedural History
Ballarpur Industries Ltd. (“Petitioner”) and SG Enterprises (“Respondent No. 1”) entered into a Distribution Agreement on 01.07.2009, containing an arbitration clause (Clause 20) providing for mutual appointment of an arbitrator, or in default, appointment by the Managing Director of the Petitioner.
Disputes arose between the parties concerning payments, leading Respondent No. 1 to file a civil suit in Alipore. The then management of the Petitioner filed an application under Sections 5 and 8 of the Arbitration and Conciliation Act, 1996 (“the Act”), seeking reference to arbitration.
However, the situation changed drastically on 17.01.2020, when the NCLT, Mumbai initiated Corporate Insolvency Resolution Process (CIRP) against the Petitioner and imposed a moratorium under Section 14 of the IBC.
Despite the moratorium, the civil court allowed the reference to arbitration on 02.05.2022. Thereafter, without waiting for mutual consent or court referral under Section 11(6) of the Act, the Respondents unilaterally appointed a Sole Arbitrator on 15.07.2022.
The Arbitrator, in turn, entered reference and forfeited the Petitioner’s right to file a Statement of Defence on 24.09.2022. After gaining control post-approval of the resolution plan, the new management challenged the proceedings and filed this petition under Section 14(1)(a) of the Act.
2. Identification of Legal Issues
The following legal issues were identified and adjudicated:
- Whether the unilateral appointment of a Sole Arbitrator by the Respondents is valid under the Arbitration and Conciliation Act, 1996.
- Whether arbitration proceedings initiated during a moratorium imposed under Section 14 of the IBC are void ab initio.
- Whether the Respondents’ claims are extinguished under the IBC due to their absence from the approved Resolution Plan.
3. Arguments of the Parties
Petitioner’s Arguments:
- The Arbitrator was appointed unilaterally by the Respondents in violation of Clause 20 of the Agreement and the law laid down in Perkins Eastman Architects DPC v. HSCC (India) Ltd., (2020) 20 SCC 760.
- The appointment by the Managing Director of one of the parties (Respondents) violates the principles of neutrality, independence, and party autonomy.
- Arbitration was initiated during the subsistence of a moratorium under Section 14 of the IBC, making it void. Reliance was placed on Alchemist Asset Reconstruction Co. Ltd. v. Hotel Gaudavan Pvt. Ltd., (2018) 16 SCC 94.
- The Respondents’ claims were not submitted during CIRP and were thus extinguished by the approved Resolution Plan under Sections 30 and 31 of the IBC.
Respondents’ Arguments:
- The unilateral appointment of the Arbitrator was conceded as untenable in view of settled law.
- It was requested that the issue of extinguishment of claims under IBC be left open for future arbitration, without prejudice to either party.
4. Court’s Analysis and Reasoning
On Unilateral Appointment of Arbitrator:
- The Court held that Clause 20 allowed mutual appointment of the Arbitrator and failing agreement, empowered the Managing Director of Respondent No. 1 to appoint one. Such provision, the Court held, was directly in conflict with judicial precedents on impartiality and independence.
- Relying on Perkins Eastman, Central Organisation for Railway Electrification, Proddatur Cable TV, Smaaash Leisure Ltd., and Power Grid Corporation of India Ltd., the Court held that the appointment was impermissible and hit by Section 14(1)(a) of the Act as the Arbitrator became de jure ineligible.
On Proceedings During IBC Moratorium:
- The Arbitrator entered reference on 15.07.2022, and forfeited Petitioner’s right to defend on 24.09.2022—both during the subsistence of the IBC moratorium, rendering the proceedings invalid.
- The continuation of such proceedings was contrary to Section 14 of the IBC, which prohibits initiation or continuation of all legal proceedings, including arbitration.
On Extinguishment of Claims:
- The Court noted that the Respondents’ claims related to a period prior to 17.01.2020 and had not been submitted during CIRP.
- However, the Court refrained from deciding this issue on merits and left it open to be raised in future arbitration proceedings, if initiated lawfully.
5. Final Conclusion and Holding
The Delhi High Court held:
- The Arbitrator’s appointment was unilaterally made by an interested party and was hence unsustainable.
- The mandate of the Arbitrator stands terminated under Section 14(1)(a) of the Arbitration Act.
- The issue of extinguishment of claims under IBC is left open to be adjudicated in future if arbitration is lawfully invoked.
- No substitute Arbitrator was appointed, leaving parties to initiate fresh proceedings in accordance with law.
FAQs:
1. Can a party unilaterally appoint an arbitrator under Indian arbitration law?
No. As per Supreme Court rulings, unilateral appointment by a party interested in the outcome is impermissible and invalid under Section 14 of the Arbitration Act.
2. What happens to arbitration proceedings initiated during an IBC moratorium?
They are considered non-est in law. Section 14 of the IBC bars all legal proceedings, including arbitration, during moratorium.
3. When does Section 14(1)(a) of the Arbitration Act apply?
It applies when the arbitrator becomes de jure or de facto incapable of performing their functions, including due to invalid appointment.
4. Are claims not included in a Resolution Plan under IBC extinguished?
Yes. Claims not submitted or included in a Resolution Plan approved under Section 31 of the IBC are deemed extinguished and cannot be revived.
5. Can parties approach court to terminate the mandate of an arbitrator?
Yes. Under Section 14 of the Arbitration Act, parties can approach court to terminate an arbitrator’s mandate if there is legal disqualification or de jure incapacity.
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