Allahabad High Court Mandates compliance with Section 21 Arbitration & Conciliation Act for Initiation of Arbitration Proceedings

Allahabad High Court Mandates compliance with Section 21 Arbitration & Conciliation Act for Initiation of Arbitration Proceedings

The Allahabad High Court has ruled that compliance with Section 21 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") is mandatory, and the initiation of arbitral proceedings is contingent upon the receipt of the arbitration invocation notice by the respondent. The court emphasized that the formal commencement of arbitral proceedings occurs only when the respondent receives the notice invoking arbitration issued by the claimant.

Justice Manju Rani Chauhan was adjudicating a writ petition filed under Article 226 of the Constitution. The petition was brought forth by borrowers who contested the arbitration proceedings initiated by Shivalik Small Finance Bank Ltd. The central contention was the absence of a Notice Invoking Arbitration being served. The Bench has quashed the arbitration proceedings for not complying with the requirements of Section 21 of the Arbitration Act.

The petitioner, M/s Samyam Industries, had utilized a financial facility from the respondent, Shivalik Small Finance Bank Ltd. Upon the failure to repay the loan, the bank initiated arbitration proceedings. Allegedly, a Notice Invoking Arbitration was issued to the Borrowers on 26.06.2023, and the Bank unilaterally appointed a sole arbitrator. However, the Borrowers contend that they never received the said notice, and the Bank has been unable to furnish any evidence of delivery.

During the initial hearing of the arbitration proceedings on 03.07.2023, the arbitrator issued an order noting that the Notice Invoking Arbitration had been sent to the Borrowers on 26.06.2023, and no objection had been received from them. However, it is notable that the arbitrator did not record any findings regarding whether the notice dated 26.06.2023 had actually been received by the borrowers or not.

Upon becoming aware of the ongoing arbitral proceedings, the Borrowers took action by filing a writ petition under Article 226 of the Constitution of India before the High Court. In their petition, they sought the quashing of the entire arbitral proceedings that were pending before the sole arbitrator.

The issue presented before the Bench revolved around the failure to meet the necessary criteria for serving notice to the petitioners, as stipulated by Section 21 of the Arbitration Act, prior to the commencement of arbitration proceedings.

The bench emphasized the mandatory nature of complying with Section 21 of the Arbitration Act. In their observation, they highlighted that the order sheet dated 03.07.2023 lacked evidence of the petitioners receiving the necessary notice before proceeding. The order from the arbitral tribunal on the same date stated that a notice under Section 21 of the Act was issued to the petitioner on 26.06.2023. However, as no objections or suggestions were received from the respondent, indicating non-receipt of the notice, it became apparent that the mandatory requirement of serving notice to the petitioners under Section 21 of the Act for the initiation of arbitration proceedings had not been fulfilled.

As a result of the observed non-compliance with Section 21 of the Arbitration Act, the Bench proceeded to quash the entire arbitral proceedings that were pending before the Sole Arbitrator.

The court observed that while the current arbitral proceedings were quashed due to non-compliance with Section 21 of the Arbitration Act, it is still within the authorities' discretion to rectify the situation. They can do so by issuing a fresh notice to the petitioners, adhering to the requirements of Section 21 of the Act. Upon proper service of the notice, the authorities may proceed with the arbitration proceedings in accordance with the law.