Karnataka High Court Quashes 'Staged Arbitration' Proceedings, Holds "Arbitrator Acted as a Stooge and Rubber Stamp" and Declares Entire Process as "Complete Abuse of Law"
Isabella Mariam
The High Court of Karnataka Single Bench of Justice Suraj Govindaraj has quashed arbitration proceedings initiated by a private finance company, declaring the appointment of the arbitrator as unilateral and legally impermissible. The Court found that the arbitrator had acted without valid authority, entering reference and issuing orders even before formal appointment. Concluding that the entire arbitration process, including vehicle repossession and sale, had been conducted in violation of statutory procedures, the Court invalidated the proceedings in their entirety.
The Court ordered an inquiry into the matter by directing the Director General of Police to appoint an officer of the rank of Superintendent of Police to investigate the legality and propriety of the arbitration process followed. The Court noted with concern the abuse of arbitral mechanisms and the misuse of police assistance for repossession of hypothecated vehicles based on unauthorized arbitral orders. The Court allowed the writ petition and held the proceedings and orders issued in Arbitration Case Nos. 1032/2019 and 1033/2019 as void.
The petitioners, a widow and son of a deceased borrower, approached the High Court seeking to quash the proceedings in Arbitration Case Nos. 1032/2019 and 1033/2019 pending before the second respondent, who was designated as an arbitrator. The deceased borrower, Manjunath, had taken two vehicle loans from a private finance company. Following his death on 25 August 2018, legal notices dated 27 July 2019 were issued to the petitioners, demanding repayment of Rs. 28,33,882 and Rs. 28,61,998 respectively for the two loan accounts.
According to the petitioners, the notices stated that failure to pay would lead to appointment of an arbitrator. The petitioners alleged that the arbitrator passed an order under Section 17 of the Arbitration and Conciliation Act, 1996 on 12 July 2019—prior to the issuance of the notices themselves—authorizing repossession of the vehicles.
Counsel for the petitioners submitted that the entire arbitration process was initiated and concluded without following mandatory legal procedures. It was argued that the arbitrator entered reference and passed repossession orders even before being appointed, and that no arbitration agreement or clause permitting unilateral appointment of arbitrator was ever disclosed or produced.
Further, it was contended that the petitioners were not signatories to any agreement with the finance company, and as legal heirs, they could not be subjected to arbitration without a valid agreement. The counsel also stated that the documents produced, including the application and arbitral orders, appeared to be generated from the same computer, suggesting the arbitration was staged to facilitate repossession.
The respondents, represented by counsel for the finance company, contended that the arbitrator was appointed in accordance with the arbitration clause in the loan agreement. It was submitted that the finance company had the right to unilaterally appoint an arbitrator and the procedure followed was in accordance with law.
Reliance was placed on Supreme Court decisions interpreting Article 226 of the Constitution, asserting that a writ against a private entity was not maintainable. It was argued that the finance company, being a private organization, was not amenable to writ jurisdiction.
The petitioners countered that even assuming an arbitration agreement existed, it did not name the arbitrator. As such, the finance company could not unilaterally appoint an arbitrator and initiate proceedings. The petitioners asserted that absence of consent and failure to follow procedures under Sections 11 and 21 of the Arbitration and Conciliation Act rendered the proceedings illegal.
The Court considered the submissions and examined the records. It noted that despite being granted opportunities, the finance company failed to produce the arbitration agreement or establish the authority to appoint the arbitrator unilaterally.
The Court found that the arbitrator had passed orders on 12 July 2019, while the notices appointing him were issued only on 27 July 2019. This chronology indicated that the arbitrator was neither appointed nor authorized when he issued the repossession orders. The Court further noted that the petitioners were not parties to any arbitration agreement, as they were only legal heirs and had not signed any loan documents.
"As on 12-7-2019, there is no nomination of 2nd Respondent as an Arbitrator, there was no appointment of the 2nd Respondent as an Arbitrator, then the question of 2nd Respondent passing such an order on 12-7-2019 would not arise."
"Shriram has abused the process prescribed under the Act, nominated its own person as an Arbitrator, who has passed an order as an Arbitrator even before being appointed, which has also been executed prior to his appointment."
"Since the arbitration agreement has not been placed on record, it would have to be presumed that there is no such arbitration agreement let alone entitling Shriram to invoke arbitration proceedings and appoint 2nd Respondent as an Arbitrator."
"The Arbitrator is not a stooge for any party, nor is he a rubber stamp for any party. In the present case, from perusal of the record, it is clearly and categorically seen, that the 2nd Respondent has acted as a stooge and rubber stamp of Shriram and has been more loyal than the king."
"By acting for and on behalf of Shriram, by misusing his position as an Arbitrator, he has directed seizure of a vehicle, with police help."
"These kind of orders are required to be passed by an appropriate authority vested with appropriate powers and not by an Arbitrator like that in the present case, who has entered reference even before being nominated."
"If a Constitutional Court does not come to the rescue of the Petitioners, that would amount to denial of justice to the Petitioners, which cannot be countenanced under any law."
"What is more crucial is that the Arbitrator has entered reference and passed an order on 12-7-2019 when the notice itself was issued on 27-7-2019."
"The actions on part of Shriram in doing all the above by involving the jurisdictional police, abusing the process of law, misusing the arbitral mechanism, in my considered opinion, would entitle this Court to exercise its powers under Article 226 and 227 of the Constitution of India."
The Court, in its final order, allowed the writ petition and quashed the order passed by the second respondent in A.C. No. 1032/2019 and A.C. No. 1033/2019, along with the entire proceedings in both cases. It further directed the Registrar (Judicial) to forward a copy of the order to the Director General of Police for necessary action. Although the petition was disposed of, the matter was directed to be relisted on 30.07.2025 to enable the nominee of the Director General of Police to submit a report.
Advocates Representing the Parties:
For the Petitioners: Ms. Neeraja Karanth, Advocate
For the Respondents: Sri M.J. Alva, Advocate for Respondent No.1
Case Title: Smt. Manjula and Another v. Shriram Transport Finance Co. Ltd. and Others
Neutral Citation: 2025: KHC:18406
Case Number: WP No. 10493 of 2020
Bench: Justice Suraj Govindaraj
[Read/Download order]
