Compliance Of Section 21 Of Arbitration & Conciliation Act, 1996 Is Mandatory: Allahabad High Court

The Allahabad High Court has held that the compliance of Section 21 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) is mandatory. Thus, arbitral proceedings would only commence once the notice invoking arbitration issued by the claimant is received by the respondent.

The Bench comprising Justice Manju Rani Chauhan was adjudicating a writ petition filed under Article 226 of the Constitution by borrowers, challenging the arbitration proceedings initiated against them by Shivalik Small Finance Bank Ltd. without serving a Notice Invoking Arbitration. The Bench has quashed the arbitration proceedings for not complying with the requirements of Section 21 of Arbitration Act.

BACKGROUND FACTS

M/s Samyam Industries (“Petitioner/Borrower”) availed financial facility from the Shivalik Small Finance Bank Ltd. (“Bank/Respondent”). When the loan was not repaid, the Bank invoked arbitration proceedings and allegedly issued a Notice Invoking Arbitration to the Borrowers on 26.06.2023 and unilaterally appointed a sole arbitrator. However, the Borrowers never received the said notice and the Bank failed to produce any proof of delivery.

The first hearing of arbitration proceedings was conducted on 03.07.2023, wherein the Arbitrator passed an order recording that Notice Invoking Arbitration was sent to the Borrowers on 26.06.2023 but no objection has been received from the Borrowers. However, the Arbitrator did not record any finding as to whether the Notice dated 26.06.2023 has been received by the Borrowers or not.

When the Borrowers became aware of the ongoing arbitral proceedings, they filed a writ petition under Article 226 of the Constitution of India before the High Court, seeking quashing of the entire arbitral proceedings pending before the Sole Arbitrator.

RELEVANT LAW

Section 21 of the Arbitration and Conciliation Act, 1996

“21. Commencement of arbitral proceedings

Unless otherwise agreed by the parties, the arbitral proceeding in respect to a particular dispute commences on the date of which a request for that dispute to be referred to arbitration is received by the respondent.”

HIGH COURT VERDICT

The issue before the Bench was regarding non fulfilment of the requirements of service of notice to the Petitioners (Borrowers), as required under Section 21 of Arbitration Act before commencement of arbitration proceedings.

The Bench held that compliance of Section 21 of the Arbitration Act is mandatory while observing as under:

“Placing the order laying emphasis on page no. 50 of the writ petition, wherein the order sheet dated 03.07.2023 has been placed, there is nothing to show that any such notice as required, before proceeding, has been received by the petitioners. In the order dated 03.07.2023, passed by the arbitral tribunal, it is also mentioned that notice under section 21 of the Act was issued to respondent i.e. petitioner on 26.06.2023 but no objection and suggestion has been received from the respondent that goes to show that requirement of notice by the respondent that is the petitioner as required under section 21 of the Act for initiation of arbitration proceedings which is mandatory has not been served upon the petitioners.”

Accordingly, the Bench quashed the entire arbitral proceedings pending before the Sole arbitrator over non-compliance of Section 21 of Arbitration Act.

“In view of above, the entire arbitration proceedings pending before Ld. Sole Arbitrator Ms. Zesshana Khan in the matter of Shivalik Small Finance Bank Ltd. V. Samyam Industries & Ors. bearing Case No. Arb-26/2023, is hereby quashed.”

Further, liberty has been given to the Bank to issue fresh notice to the Borrowers as required under Section 21 of Arbitration Act and after serving the notice the Bank may proceed in accordance with law.

Case Title: M/S Samyam Industries and Others vs. Shivalik Small Finance Bank Ltd. 2024 LiveLaw (AB) 107

Case citation: 2024 LiveLaw (AB) 107

Case No.: WRIT - C No. - 41115 of 2023

Counsel for Petitioners: Adv. Pallavi Mishra

Click Here To Read/Download Order