Bombay HC Sounds Alarm: NBFCs' 'Fig-Leaf' Arbitrator Appointments Exposed as Illegal Ploy

In a scathing oral judgment delivered on April 30, 2026, Justice Somashekar Sundaresan of the Bombay High Court pulled back the curtain on a troubling trend among non-banking financial companies (NBFCs). The court deprecated the practice of unilaterally appointing arbitrators—often masked as "independent" via institutions or algorithms—declaring it a foundational violation of arbitration law. The ruling came in three consolidated petitions filed by D S Textiles, Madhuram Fabrics Pvt Ltd, and P R Packing Service against IIFL Finance Limited, which had swiftly withdrawn its arbitration after challenges arose.

The Hidden Playbook of Finance Firms in Arbitration

These petitions stemmed from a familiar script: IIFL Finance, like other NBFCs and banks, invoked arbitration unilaterally, appointing an arbitrator who promptly issued Section 17 orders attaching the petitioners' bank accounts. No details were provided on the tribunal's constitution, and invocation notices lacked compliant particulars. The petitioners approached the High Court under Section 11-equivalent challenges, spotlighting the arbitrator's lack of independence.

The backdrop reveals a broader pattern. Justice Sundaresan took judicial notice of rising cases where finance companies, including listed ones bound by stricter compliance, appoint sole arbitrators without party consent. The goal? Rush urgent orders for recoveries, banking on weaker counterparties settling quietly. When challenged, proceedings are withdrawn to dodge rulings—leaving the illegality unchecked.

Withdrawal Tactic Fails to Shield Respondent

Petitioners' counsel, Pratik Barot along with Angel Pandey and Kruti Bhavsar, highlighted the procedural flaws. IIFL's representative, Mitali More, offered no defense beyond stating the arbitration was being dropped, seeking disposal as infructuous.

The court refused to let the matter slide. "An increasing trend is being seen... where a unilateral arbitrator is appointed but purporting to appoint the arbitrator through an 'institution' or an algorithm-based selection... it is hoped that the inherent illegality ... is magically cleansed," Justice Sundaresan noted, framing it as a deliberate circumvention of Supreme Court mandates.

Supreme Court Precedents Build an Ironclad Wall

Drawing on landmark rulings, the judge dismantled the "veneer of independence." Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020) established that unilateral appointments by one party—even of a seemingly neutral third party—breach impartiality. This was reaffirmed in Central Organisation for Railway Electrification v. ECI SPIC-SMO-MCML (JV) (2025) and expansively traced in the recent Bhadra International (India) Pvt. Ltd. v. Airports Authority of India (2026 INSC 6).

Key distinctions emerged: Party autonomy yields to equal treatment under the Arbitration and Conciliation Act, 1996. Section 12(5)'s proviso demands express written consent for waivers—mere participation or notices don't suffice. Even pre-2015 amendments, unilateralism was void, as per Dharma Prathishthanam v. Madhok Construction . Institutional fig-leaves don't cure the defect unless mutually agreed upfront.

Justice Sundaresan echoed Lite Bite Foods Pvt. Ltd. v. AAI (Bombay HC, 2019): "The guiding principle is neutrality, independence, fairness and transparency even in the arbitral-forum selection process."

Key Observations That Sting

The judgment brimmed with pointed critiques:

"What is evident is that the modus operandi is to conduct arbitration in this process and hope that in most cases the affected party may not challenge the arbitration and may instead come up with settlement terms, with the strategy resulting in recoveries." (Para 4)

"There are only two known methods in law to appoint an arbitrator – (i) the consent of the parties; and (ii) appointment by a Section 11 Court having jurisdiction in the matter." (Para 6)

"The attempt by finance companies and banks to pretend to have cleansed the arbitrator-appointment process by getting an 'institution' of their choice to make a purportedly 'independent' appointment is wholly untenable and completely illegal." (Para 12)

"The market practice... is that the manipulative device being resorted to is to simply surrender to the Court in those cases where the counterparty has the strength to approach the Court." (Para 17)

These quotes underscore the court's frustration with a practice eroding arbitration's credibility.

A Disposal with Teeth: Boardroom Wake-Up Call

While noting the withdrawal, the court quashed the impugned Section 17 orders and disposed of the petitions. But it went further, directing IIFL's Chief Compliance Officer to place the judgment before the Audit Committee and Board of Directors. This ensures governance bodies address the "approach that is directly contrary to the law declared by the Supreme Court ."

The implications ripple wide: Finance firms must abandon unilateral tactics or risk futile proceedings, even post-award challenges under Section 34 . As media reports echo—like headlines flagging the "rising trend of NBFCs unilaterally appointing arbitrators" —this ruling fortifies arbitration's integrity, compelling compliant policies and potentially deterring abusive recoveries.