Case Name: Small Farmers Agri Business Consortium v. Vanilla India Producer Company Ltd. & Ors.
Case Number: FAO (COMM) 133/2024
Date: Friday, Ninth of October, Two Thousand and Twenty-Six
Court: High Court of Delhi
Quorum: Justice Anil Kshetarpal and Justice Bharat Parashar
FACTS
The dispute arose out of a sanction letter dated 08.08.2005 and a Loan Agreement dated 29.08.2005 between the Appellant and Respondent No. 1, Vanilla India Producer Company Ltd. The Appellant sanctioned Venture Capital Assistance (VCA) of ₹23,39,000 for Respondent No. 1’s agri-business project and disbursed it into the company’s account with Union Bank of India (UBI), Ernakulam, from which Respondent No. 1 had also availed a term loan. Under Clause 3 of the agreement, the VCA was to convert into a loan upon recovery of the term loan by UBI or upon the scheduled end date of the term loan, whichever was earlier. Under Clause 7, failing lump-sum repayment, the amount was repayable with interest at UBI’s term-loan rate in four quarterly instalments.
UBI informed the Appellant that it had initiated recovery proceedings before the Debt Recovery Tribunal (DRT), Ernakulam. According to the Respondents, the scheduled end date of the term loan was in 2008 and the account was classified as a Non-Performing Asset in 2009. The Appellant invoked Clause 16 of the Agreement and appointed Shri B.K. Srivastava, Advocate, as Learned Sole Arbitrator (LSA), and filed its Statement of Claim.
The LSA awarded ₹23,39,000 with interest at 12% per annum from 11.05.2012, the right to realise the amount from the hypothecated property, and costs of ₹1,00,000, against the Respondents jointly and severally. The Appellant initiated execution proceedings at Ernakulam, and Respondent No. 1 and UBI entered into a One-Time Settlement (OTS) on 26.09.2017, after the Award.
Upon challenge, the Learned District Judge (LDJ) set aside the Award on two grounds:
| Party/ Parties | Result before the LDJ |
| Respondent No. 1 (Company) | Award set aside under Section 34(2)(a)(iii) for want of proper notice of appointment of the LSA. |
| Respondent Nos. 2 to 5 (Directors) | Award set aside under Section 34(2)(a)(iii) and, for fastening liability on the Directors, under Section 34(2A) (patent illegality). |
Thus aggrieved, the Appellant approached the High Court u/s 37 of the Act.
LEGAL ISSUES
- Whether the Section 34 Petition was barred by limitation under Section 34(3) of the Act of 1996?
- Whether the Award was liable to be set aside under Section 34(2)(a)(iii) for want of proper notice or inability of the Respondents to present their case?
- Whether the Award, insofar as it fastens liability upon Respondent Nos. 2 to 5 (the Directors), is sustainable and, if not, whether it is severable?
- Whether the Award is otherwise liable to be set aside on the grounds urged by the Respondents before the High Court?
LEGAL PROVISIONS
- Section 31(5) of the Arbitration and Conciliation Act, 1996- Requires a signed copy of the award to be delivered to each party.
- Section 34 of the Arbitration and Conciliation Act, 1996- Permits an award to be set aside in certain enumerated circumstances.
- Section 37 of the Arbitration and Conciliation Act, 1996- Confers a right of appeal against an order setting aside or refusing to set aside an award under Section 34.
ARGUMENTS
APPELLANT- The Appellant argued that the Section 34 Petition was ex facie barred by limitation, as the Award was pronounced on 09.03.2017 but challenged only on 07.06.2019. They relied on Bengal Chemists & Druggists Association v. Kalyan Chowdhary (2018) 3 SCC 41 to contend that Section 34(3) permits extension only by thirty days on sufficient cause. They further argued that the Respondents were given adequate opportunity so the plea of violation of natural justice was contrary to the arbitral record. Lastly, they argued that the Chairman, Managing Director and Joint Managing Director of a company are jointly and severally liable with the company.
RESPONDENTS- The Respondents argued that the Award was vitiated by non-service of notice after November 2015 which resulted in an ex parte Award in breach of natural justice and Section 21 of the Act of 1996, and that their advocate was never informed of the final hearing nor was the Award delivered to them. They contended that the LSA was unilaterally appointed by the Appellant’s Managing Director. They argued that the Directors were not signatories to the Agreement hence, could not be held personally liable for the debt of a separate legal entity.
ANALYSIS
The Court first recalled the limited scope of appellate jurisdiction under Section 37. Relying on MMTC Ltd. v. Vedanta Ltd. (2019) 4 SCC 163, UHL Power Company Ltd. v. State of Himachal Pradesh (2022) 4 SCC 116, Konkan Railway Corporation Ltd. v. Chenab Bridge Project Undertaking 2023 SCC OnLine SC 1207 and Larsen Air Conditioning and Refrigeration Company v. Union of India 2023 SCC OnLine SC 982, it held that the appellate court does not step into the shoes of the Arbitral Tribunal and cannot independently assess the merits of the award hence, must only test whether court exceeded its scope u/s 34. The Court noted that patent illegality means an illegality going to the root of the matter and not a mere erroneous application of law.
On Issue (i), the Court reiterated that Section 34(3) bars delay beyond the thirty-day outer limit. Relying on several Supreme Court cases, it held that time runs from delivery of the signed copy of the award. Since the Appellant did not provide documents to evidence the delivery on 09.03.2017, the Petition filed on 07.06.2019 was within limitation.
On Issue (ii), the Court held that the burden u/s 34(2)(a)(iii) solely rests on the applicant, and that the provision is not meant to nullify an award for a procedural irregularity which caused no prejudice and which the party accepted by participating. The Court found that through the participation of Respondents along with the receival notice of the claim in December 2014, the proceedings were not ex parte. It was reiterated that since the Respondents participated without timely objection, they cannot subsequently assail award on such ground.
On Issue (iii) the Court held that the Agreement was entered into by Respondent No. 1 through its Chairman, and Respondent Nos. 2 to 5 neither executed it personally nor gave any personal guarantee or indemnity. The LSA’s holding that the Directors were not personally liable, yet jointly and severally liable as Directors, was self-contradictory. The Court also found that Respondent No. 1’s liability for ₹23,39,000 with interest, was determined independently, and that the Directors were brought in only through the direction of joint and several liability. It was held that the Award is severable and amenable to enforcement against the Respondent No.1.
On Issue (iv) the Court held that the pleas on interest, stamping and unilateral appointment of the LSA were found not to have been raised before the LSA or the LDJ therefore, it was held that they could not be raised for the first time in appeal.
JUDGEMENT
The Delhi High Court partly allowed the Appeal. It set aside the Award against Respondent No. 1; to that extent the Section 34 Petition stands dismissed and the Award is enforceable against Respondent No. 1. The judgment was upheld insofar as it set aside the Award against Respondent Nos. 2 to 5. The Executing Court at Ernakulam, Kerala shall proceed with the Execution Petition against Respondent No. 1.
CONCLUSION
The Court reaffirmed that limitation under Section 34(3) runs from receipt of the signed award and that a party who participates in arbitral proceedings without timely objection cannot later challenge the appointment or notice under Section 34(2)(a)(iii).
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