Calcutta High Court Voids Unilateral Arbitrator Appointment in Loan Dispute, Appoints Substitute and Imposes Bank Account Restrictions

Introduction

The Calcutta High Court, in a significant ruling on arbitration procedures under the Arbitration and Conciliation Act, 1996, has declared void the unilateral appointment of an arbitrator by lender L & T Finance Limited in a dispute over a defaulted SME business loan. Justice Arindam Mukherjee terminated the mandate of the original arbitrator, appointed a substitute, and directed the appellants—Beevee Enterprises and others—to maintain a minimum balance in their bank accounts as interim protection for the lender. This decision underscores the post-2015 amendments' impact on arbitrator eligibility and balances swift dispute resolution with fairness in commercial arbitration.

Case Background

Beevee Enterprises and associated parties (appellants) entered into an SME Business Loan Agreement on June 22, 2024, with L & T Finance Limited (respondent), a non-banking financial company regulated by the Reserve Bank of India. The agreement included an arbitration clause allowing the lender to unilaterally appoint a sole arbitrator for any disputes under the Arbitration and Conciliation Act, 1996.

The dispute arose when the appellants allegedly defaulted on loan installments, prompting the respondent to invoke arbitration. The respondent unilaterally appointed Mr. Shyam Bihari Sharma as arbitrator, who, on May 23, 2025, granted an attachment before judgment under Section 17 of the Act to secure over Rs. 10 lakh in claimed dues. The appellants challenged this via an appeal under Section 37 (2)(b) of the Act, arguing the arbitrator's invalid appointment due to the lender's unilateral control, citing ineligibility under Section 12 (5). The case reached the High Court at Calcutta, with proceedings decided on September 11, 2025, amid claims of loan default and requests for interim relief during the impending Puja vacation.

The main legal questions were: (1) Whether the unilateral appointment rendered the arbitrator ineligible and the proceedings a nullity; (2) If so, could the court terminate the mandate and appoint a substitute; and (3) Could the appellate court grant interim measures akin to Section 9 relief in the absence of a direct application?

Arguments Presented

The appellants, borrowers under the loan agreement, primarily contended that the arbitration clause's provision for unilateral appointment by the lender violated (5) of the 1996 Act, as amended in 2015. They argued the appointing principal officer's direct relation to the respondent made them ineligible, relying on Supreme Court precedents like * TRF Ltd. v. Energo Engg. Projects Ltd. * (2017) and Perkins Eastman Architects DPC v. HSCC (India) Ltd. (2020). This, they claimed, voided the arbitrator's mandate, rendering the attachment order without jurisdiction. They admitted receiving notices but alleged no hearing opportunity and opposed any interim security, asserting financial inability to pay and no liability for the claimed amounts. They sought a stay of the attachment without conditions, emphasizing the order's jurisdictional flaw over merits.

The respondent defended the proceedings, acknowledging the appellants' receipt of all documents but arguing waiver through non-participation. They highlighted the prima facie default on over Rs. 10,03,656 in installments, plus future dues and accrued interest under the agreement, supported by a detailed chart. While agreeing to terminate the current arbitrator's mandate and proceed before a court-appointed one, they sought interim protection under Section 9 principles to prevent asset dissipation. They urged the court to restrain bank operations without maintaining a substantial balance, noting their RBI-regulated status and accountability in case of defaults, and contended that appeals allow supportive measures even without a cross-appeal, akin to Order 41 Rule 22 CPC.

Legal Analysis

Justice Mukherjee analyzed the arbitration clause's unilateral nature, finding it conferred absolute authority on the lender without borrower input, rendering the appointment void under (5) read with the Fifth Schedule. He relied heavily on TRF Ltd. (holding ineligible persons cannot appoint arbitrators) and Perkins Eastman (extending ineligibility to unilateral appointments by party-affiliated entities), ratios consistently upheld post-2015 amendments. The court noted the appellants' failure to invoke Sections 14 , 15, or 16 earlier but held the jurisdictional challenge valid at the appellate stage under (2)(b).

On interim measures, the court equated powers with Section 9, affirming its jurisdiction as the principal civil court for such relief, despite no direct Section 9 application. Drawing from Pam Developments (P) Ltd. v. State of West Bengal (2019) and Central Organisation for Railway Electrification v. ECI SPIC SMO MCML (JV) (2025), it clarified CPC provisions (e.g., Order 41) apply as guidance without overriding the 1996 Act's self-contained code. The court distinguished jurisdictional nullity from merits, exercising inherent powers to grant balanced interim protection—restraining bank operations to secure a portion of the claim—considering the prima facie case, balance of convenience favoring the lender, and the agreement's security clause. It rejected stricter CPC rigors (e.g., Order 38 Rule 5) in favor of the Act's flexible interim measures. Precedents like * ONGC Ltd. v. Afcons Gunanusa JV. (2024) guided the new arbitrator's remuneration. The ruling preserves the arbitration agreement's subsistence, allowing court intervention under and 15 for substitution without a fresh Section 11 application, minimizing judicial interference.

Key Observations

• "The appointment of the Arbitrator is, therefore, void. Once it is held that the appointment of the Arbitrator is void, all subsequent proceedings before the Arbitrator is nullity. The order impugned also suffers from the same invalidity." (Para 7)
• "In view of the aforesaid, the mandate of the Arbitrator Mr. Shyam Bihari Sharma stands terminated under the provisions of Section 14 and 15 of the 1996 Act. Mr. Raj Ratna Sen... is appointed as the Sole Arbitrator invoking the provisions of Section 15 of the 1996 Act in his place and stead to enter into reference afresh..." (Para 14)
• "Applying the provisions of Section 9 of the 1996 Act when the order under appeal relates to money claim and substantial material are on record, I am inclined to direct the appellants not to operate the bank accounts... without leaving a balance sum of Rs.2,50,000/- until further orders being passed by the Arbitral Tribunal by holding that the respondent has been able to make out a prima facie case..." (Para 22)
• "The arbitration proceedings shall commence de novo and the Arbitrator shall have to comply with all other requirement under the 1996 Act." (Para 14, emphasizing fresh proceedings post-substitution)

Court's Decision

The Calcutta High Court allowed the appeal in part, setting aside the original arbitrator's attachment order as a nullity due to invalid unilateral appointment. It terminated Mr. Shyam Bihari Sharma's mandate under and 15, appointing Mr. Raj Ratna Sen as substitute sole arbitrator to conduct de novo proceedings in Kolkata, with Rs. 2 lakh lump-sum remuneration shared equally by parties. As interim relief under Section 9 principles, the court restrained the appellants from operating specified bank accounts without maintaining an aggregate balance of Rs. 2,50,000 until the new arbitrator's further orders.

This decision reinforces arbitrator neutrality, curbing unilateral appointments in commercial agreements and empowering courts to substitute promptly. Practically, it protects lenders in default cases by enabling interim safeguards during transitions, potentially influencing loan arbitration clauses to include balanced appointment mechanisms. Future cases may see increased invocations for substitutions, promoting efficient dispute resolution while safeguarding against bias.