The Delhi High Court (“DHC”) has in its judgement dated July 15, 2021 in the matter of Komal Narula v. DMI Finance Private Limited and Another [O.M.P. (COMM.) 166/2019 and IA Nos. 6024/2019 & 11657/2020], (“Judgement”) laid down that an arbitral award is liable to be set aside when there is no proper notice of the tribunal’s appointment or of the institution of arbitral proceedings.

Facts

The instant case is an appeal under Section 34 (Application for setting aside arbitral award) of the Arbitration and Conciliation Act, 1996 (“1996 Act”) against an award passed by the arbitral tribunal comprising of a sole arbitrator (“Award”). The impugned Award was rendered in the context of disputes that had arisen between the parties in relation to a common loan agreement dated January 14, 2015 (“Agreement”). DMI Finance Private Limited (“Respondent No. 1”) is registered as a non-banking finance company with the Reserve Bank of India and DMI Housing Finance Private Limited (“Respondent No. 2”) is registered as a housing finance company with the National Housing Bank. Respondent No. 1 and Respondent No. 2 are collectively referred to as “Respondents”. The Respondents are companies of the same group with a common management.

According to the Respondents, Ms. Komal Narula (“Petitioner”), Mr. Nitin Chawla, Mr. Harsh Chawla, Mr. Jitin Chawla and Chawla Iron Traders Private Limited (“Borrower Company”) collectively referred to as “Borrowers”) jointly approached them and requested for financial assistance of INR 1,65,00,000. The Respondents jointly agreed to grant two loans of a sum of INR 1,15,00,000 and INR 50,00,000 respectively (collectively referred to as “Loan Facilities”). The Loan Facilities were sanctioned by the Respondents by letters dated January 14, 2015, which were duly signed by the Borrowers in acceptance of the terms and conditions therein. Subsequently, the parties executed the Agreement, demand promissory note and an affidavit cum undertaking dated January 14, 2015,. In terms of the Agreement and the sanction letter dated January 14, 2015, the Borrowers were liable to pay a sum of INR 2,28,414 per month in 84 (eighty-four) equal monthly instalments (EMI) commencing from March 5, 2015 to Respondent No. 1, towards the repayment of loan, and INR 99,310 per month in 84 (eighty-four) EMI commencing from March 5, 2015 to Respondent No. 2, towards the repayment of loan. The Borrowers, however, failed to make the payments for the aforesaid EMIs regularly. The Respondents, by a letter dated July 16, 2015, recalled the Loan Facilities granted to the Borrowers, alleging that the sale deed documents submitted by the Borrowers were not genuine and, therefore, the Borrowers had “knowingly and wilfully committed fraud and misrepresentation against the lenders”. Accordingly, Respondent No. 1 recalled the amount of INR 1,14,04,541 and Respondent No. 2 recalled the amount of INR 49,58,818 and demanded that the amounts be paid on or before July 23, 2015. However, the Borrowers did not respond to the said letter. Since disputes had arisen between the parties, the Respondents sent a letter dated January 15, 2016, invoking the arbitration clause in the Agreement.

Thereafter, notices dated February 1, 2016 were issued to the Borrowers and Respondents to be present before the arbitrator, but the Borrowers were not represented. The postal report indicated that the Borrowers had refused to accept the notice and the office of the Borrower Company was reported closed, because of which the arbitral tribunal once again issued a notice to the Borrowers, informing the Borrowers that on the further failure to be represented on the fixed date and time, the arbitrator would pass the appropriate order. Such notice was sent to the new address of the Borrowers as well as the old one, and was sent by e-mail too. On March 11, 2016, the Borrowers were represented before the arbitral tribunal by Mr. Gaurav Soni. The arbitral proceedings were thereafter adjourned to March 17, 2016, for which the Borrowers did not appear. By an order dated March 17, 2016, the arbitral tribunal issued a formal notice to the Borrowers and restrained them from creating any third-party interest or alienating, transferring, selling or handing over the possession of the mortgaged property to any third party. The arbitral record indicated that the Borrowers had refused to accept the notices on earlier occasions and that they were served through affixation of the notices at the premises. Thereafter, on March 30, 2016, the learned arbitrator recorded a formal order, to proceed ex parte against the Borrowers. The arbitral tribunal, by the Award, directed that a total amount of INR 1,43,92,456/- was payable to Respondent No. 1 and an amount of INR 62,57,590/- was payable to Respondent No. 2 in respect of their claims. The arbitral tribunal further awarded pendente lite and future interest till realisation of the awarded amounts at the rate of 12% per annum. The arbitral tribunal also awarded costs, which it quantified at INR 80,000/-. Aggrieved by the Award, the Petitioner filed a petition before the DHC, on the ground as set out in Section 34(2)(a)(iii) of the 1996 Act, that the Petitioner was not given a proper notice of appointment of the arbitral tribunal or of the arbitral proceedings and, was unable to defend the case.

Issue

Whether the Petitioner was served due notice of the arbitral proceedings and had full opportunity to defend the case instituted by the Respondents.

Arguments

Contentions raised by the Petitioner:

The Petitioner averred that she had divorced Mr. Nitin Chawla on March 5, 2016 and had been residing separately since January 15, 2014. It was further averred that neither did the Petitioner have anything to do with the Borrower Company nor was she a working director in the Borrower Company and, all debts and liabilities borne by the Borrower Company were required to be discharged by Mr. Nitin Chawla. The Petitioner assailed the Award on the sole ground that the Petitioner did not have any notice of the arbitral proceedings. It was further submitted that the Petitioner did not participate in any business activities of the Borrower Company and was made a director therein merely for registration purposes. Further, due to temperamental differences, she had divorced Mr. Nitin Chawla in the year 2016 and had been assured that she would be removed as a director of the Borrower Company.

The Petitioner argued that the Award was liable to be set aside as no communication was received by the Petitioner from the Respondents. Further, the Respondents were well aware that the Petitioner had divorced Mr. Nitin Chawla and had moved her residence to property bearing no. B-5/12, Paschim Vihar, Delhi- 110063 (“Paschim Vihar Address”). The substitute address of the Petitioner was mentioned in the Agreement and despite knowing the same, the Respondents did not affect service at the said address. It was submitted that neither had the Petitioner received any notice for initiation of arbitral proceedings nor a notice from the arbitral tribunal nor a copy of the ex parte award prior to September 29, 2018 and, therefore, was unable to place her defense. It was also argued that the Petitioner had not authorized Mr. Gaurav Soni to appear on her behalf.

Contentions raised by the Respondents:

It was contended that the Petitioner had signed the power of attorney nominating the Respondents to act, take possession, create mortgage, to register property in the land registry or municipal records along with a letter of continuity, undertaking cum indemnity, along with letter of declaration, letter evidencing deposit of title deeds among other documents. Further, the Petitioner, being a director of the Borrower Company was liable for its acts and omissions. The Award duly recorded deemed service of notice of the arbitration proceedings on the Petitioner. It was further submitted that the notice was sent through e-mail. In addition, dasti (by hand) service was also affected. It was argued that Mr. Gaurav Soni had appeared on behalf of the Petitioner and, on subsequent non-appearance on March 17, 2016, the sole arbitrator proceeded ex parte against the Petitioner. Arguing that the factum of divorce between the Petitioner and Mr. Nitin Chawla was not relevant for the present petition, and referring to master data of the Borrower Company managed by the Ministry of Corporate Affairs, it was submitted that the Petitioner, being the director of the Borrower Company, was actively involved in its affairs.

Observations of the Delhi High Court

The DHC observed that the arbitral tribunal had made a noting that the notice dated February 1, 2016 had been sent to the Petitioner at A-156, Second Floor, Meera Bagh, Delhi – 110087 (“Matrimonial Home”) and her Paschim Vihar Address. The envelope containing the notice sent to her Matrimonial Home bore the noting “refused”. On the basis of the aforesaid the DHC found merit in the Petitioner’s contention that there was no material to indicate that the Petitioner had refused service of the notices at her Paschim Vihar Address. Section 3 (Receipt of written communications) of the 1996 Act provides that notice is deemed to be served “if it is sent to the addressee’s last known place of business, habitual residence or mailing address by registered letter or by any other means which provides a record of the attempt to deliver it”. The DHC noted the postal receipt indicating that the notice was sent by speed post at the Petitioner’s Paschim Vihar Address and, thus, the Petitioner would be deemed to be served at the said address. That being said, the DHC pointed out that it was not established that, in fact, the Petitioner was served the notices or was aware of the proceedings. Considering that the arbitral tribunal had proceeded on the basis that the Petitioner had refused service of the notice, the DHC acknowledged that there was no evidence or any material to indicate that the Petitioner had refused service of the notice sent to her at her Paschim Vihar Address.

Although dasti notices were served on the Borrower Company, the Respondents had not requested for dasti notices to be served on the Petitioner and admittedly, there was no material on record to indicate that the Respondents had personally served any notice to the Petitioner. Considering that the notices served to the Petitioner at her Matrimonial Home had been returned with the noting “refused”, the DHC deemed the assumption made by the learned arbitral tribunal that the Petitioner was duly served as a rebuttable assumption. Noting the matrimonial dispute between the Petitioner and her husband, the DHC observed that the order dated August 18, 2015 passed by the Family Court indicated that the Petitioner had left her Matrimonial Home on January 15, 2014. She had thereafter, been residing at the Paschim Vihar Address. Concededly, the Respondents were aware of the said address.

Considering the circumstances, the DHC opined that it was difficult to accept that the notice dated February 1, 2016 issued by the arbitral tribunal was duly served on the Petitioner at her Matrimonial Home on account of the noting “refused”. The DHC stated that there was ample material on record to indicate that the Petitioner was not residing at the said address on February 1, 2016.

The DHC observed that the arbitral tribunal had proceeded on the basis that since Mr. Gaurav Soni had appeared on behalf of the Borrowers, including the Petitioner, the Petitioner had been duly served the notice regarding the arbitral proceedings and had willfully chosen not to appear before the tribunal. However, Mr. Gaurav Soni did not furnish any authority from the Petitioner to represent her before the arbitral tribunal. The DHC thus affirmed the Petitioner’s claims that she had not authorized Mr. Gaurav Soni or any other person to appear in the arbitral proceedings as she was not aware of the same, and accepted that Mr. Gaurav Soni had not appeared on the instructions of the Petitioner but of her ex-husband.

Decision of the Delhi High Court

The DHC thus held that the Respondents had failed to establish that the Petitioner was duly served the notices regarding constitution of the arbitral tribunal or had due notice of the arbitral proceedings at the material time. The DHC agreed that there was merit in the Petitioner’s contention that she did not have notice of appointment of the arbitral tribunal or of the arbitral proceedings. Hence, the DHC set aside the Award insofar as the Petitioner was concerned, clarifying that the Award is not interfered with in so far as the other Borrowers are concerned. The DHC further clarified that the Respondents were at liberty to institute fresh proceedings against the Petitioner.

VA View:

The DHC has through this Judgement clarified that an arbitral award can be set aside, if notice of initiation of arbitral proceedings is not duly served to any of the parties to the dispute, with regards to that party. The DHC has upheld the rationale behind sending notice of institution of arbitral tribunal and initiation of arbitral proceedings, that is, the parties to the dispute against whom a claim is made should know what the claims are. In response to such notice, the recipient of the notice may accept the claims either wholly or partially.

Service of notice is crucial for the parties to understand the claims against them and to analyze whether the claims are tenable in light of the factual matrix of the dispute, thereby allowing them to defend themselves. Thus, not serving a notice to any of the parties to the dispute takes away a full opportunity to defend the case instituted. Hence, the DHC has rightly established that improper service of notice can consequently result in the arbitral award being set aside qua such party.

For more information please write to Mr. Bomi Daruwala at [email protected]

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