The Bombay High Court has clarified that an arbitral award is liable to be set aside under Section 34 of the Arbitration Act where the arbitral tribunal continues proceedings and grants relief in respect of a debt that is subject to interim moratorium under Section 96 of the Insolvency and Bankruptcy Code, since such continuation disregards binding law that the moratorium attaches to the debt in its entirety.
The Court also laid down that refusal of a party’s request to cross-examine the opposing witness, in a case where evidence has been led and material facts such as execution of documents are in dispute, violates the principles of natural justice and Sections 18 and 24 of the Arbitration and Conciliation Act, and may also render the resulting findings patently illegal. Further, arbitral directions amounting to enforcement of mortgage by sale are non-arbitrable because they concern rights in rem.
At the same time, the Court reaffirmed that in a Section 34 proceeding, it will not undertake factual reappreciation on issues such as interpretation of guarantee terms or sufficiency of stamp duty where those matters require merits review. Accordingly, the Court set aside the arbitral awards.
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A Single Judge Bench of Justice Sharmila U. Deshmukh observed that the challenge under Section 34 of the Arbitration and Conciliation Act, 1996 had to be tested within the limited statutory grounds, including conflict with the fundamental policy of Indian law, violation of natural justice, and patent illegality. It found that the arbitral tribunal had continued the proceedings against some guarantors even though interim moratorium under Section 96 of the Insolvency and Bankruptcy Code had commenced on personal insolvency applications filed by other guarantors.
Relying on the settled position that the moratorium under Section 96 operates in respect of the debt and not merely the debtor, the Bench held that the arbitral tribunal could not bifurcate the debt and continue proceedings against only some co-obligants. The Bench also found that refusal to permit cross-examination of the Bank’s witness violated Sections 18 and 24 of the Arbitration Act, especially when the Bank had led affidavit evidence and the execution of guarantee and related documents was specifically disputed. It further observed that the tribunal’s findings that the Bank’s claim stood proved were rendered without affording a fair opportunity to test that evidence and therefore suffered from patent illegality.
On the issue of guarantor discharge owing to restructuring and on the stamp duty objection, however, the Bench held that those issues would require factual appraisal or merits review, which is impermissible in a Section 34 challenge. The Bench also held that the arbitral directions permitting enforcement by sale of mortgaged property were non-arbitrable because enforcement of mortgage is a right in rem, to be decided by courts and not arbitral tribunals.
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Briefly, the dispute concerns a group of petitions filed by Ajeet Madhukar Mulay and Monica Ajeet Mulay, who were guarantors for financial assistance availed by M/s Nirmangold Alloys Private Limited and M/s Nirmangold Plasttech Private Limited from Abhyudaya Co-operative Bank Limited. The arbitral proceedings had been initiated by the Bank under Section 84 of the Multi-State Co-operative Societies Act, 2002 for recovery of outstanding dues. In one case, the principal borrower, Nirmangold Alloys Private Limited, was undergoing corporate insolvency resolution process and therefore was not impleaded because of the moratorium; the guarantors and directors were proceeded against instead.
The guarantors contended, among other things, that the guarantee and mortgage documents were insufficiently stamped, that fraud had surfaced through forensic audit, that there was no legally enforceable debt against them, that some of them were not signatories to the restructured facility, and that restructuring had discharged the surety. They also objected to the arbitrator’s jurisdiction, challenged the arbitrator’s disclosure, and sought cross-examination of the Bank’s witness, which request was rejected. The arbitral awards dated 12 February 2024 substantially accepted the Bank’s case and held the guarantors liable, while also granting reliefs concerning the mortgaged properties.
