Substitution Is Not Substitution Of Justice: Why Courts Cannot Nullify Prior Arbitral Proceedings

I. Introduction

1) The Hon'ble Supreme Court has recently set aside a decision of the Bombay High Court. The Supreme Court held that while exercising its authority under Section 15(2) of the Arbitration and Conciliation Act, 1996, the Court lacks the jurisdiction to declare prior arbitral proceedings null and void, even if such proceedings were conducted during the continuation of a moratorium under the Insolvency and Bankruptcy Code, 2016 ("IBC").

2) The present issue stems from an appeal challenging a Bombay High Court order which, while appointing a substitute arbitrator, declared that the arbitral proceedings conducted between 17.03.2022 and 25.08.2022 were held to be void on the grounds that they had been conducted during the moratorium imposed under Section 14 of the Insolvency and Bankruptcy Code, 2016.

3) It is well settled that upon substitution of an arbitrator, the newly appointed arbitrator is required to continue the proceedings from the stage at which they were left by the previous arbitrator, unless otherwise directed. However, the Bombay High Court departed from this well‑established position by nullifying the prior arbitral proceedings in their entirety. This departure gives rise to several critical questions: What justified such a deviation from the settled principles governing the substitution of arbitrators? Does Section 15(2) of the Arbitration and Conciliation Act, 1996 confer any authority on the court to invalidate earlier proceedings? And what broader implications does the Supreme Court's ruling have for the interface between arbitration law and the insolvency framework under IBC?

4) This article analyses the Supreme Court's ruling and examines the limits of judicial intervention under Section 15(2) of the Arbitration and Conciliation Act, 1996.

II. Previous Decisions of the Court with respect to Substitution of Arbitrator

5) Section 15 of the Arbitration and Conciliation Act, 1996 states about Termination of mandate and substitution of arbitrator. Section 15 (2) & (3) states as follows:

6) Accordingly, it is evident that upon substitution of an arbitrator during the pendency of arbitral proceedings, the arbitration does not commence afresh normally. Rather, the proceedings continue from the stage at which they were left by the previous arbitrator, unless the parties mutually agree otherwise.

7) The Hon'ble Courts across various forums have consistently taken the view that substitution of an arbitrator during ongoing proceedings does not necessitate a de novo commencement of arbitration.

8) In M/s Chemical Sales Corporation & Ors. v. M/s A&A Laxmi Sales and Service Private Limited, 2011 SCC OnLine Del 3847, the Hon'ble High Court of Delhi, while adjudicating an application under Sections 14(2) and 15(2) of the Arbitration and Conciliation Act, 1996, observed that where the parties have stipulated a fixed period (for instance, six months) for completion of arbitral proceedings and issuance of the award, failure of the arbitrator to adhere to such timeline results in termination of the arbitrator's mandate and not the arbitration itself. In such circumstances, upon appointment of a substitute arbitrator, the proceedings are to continue from the stage at which they were left by the earlier arbitrator.

9) In the case of Religare Finvest Limited Vs. Widescreen Holdings Private Limited 2024 SCC OnLine Del 2769 while deciding an application under Section 14 and 15 of the Arbitration and Conciliation Act, 1996, the Hon'ble Delhi High Court observed that in both the circumstances, under Section 14 and 15, only the mandate of the Arbitrator comes to an end, therefore, provisions is made for the appointment of substitute Arbitrator who can continue from the stage where the earlier Tribunal left the proceedings. The Hon'ble High Court of Delhi took a reference to the Supreme Court Judgement titled as SREI Infrastructure Finance Limited Vs. Tuff Drilling Private Limited, 2017 SCC OnLine SC 1210, wherein it was held that in case of Termination of arbitral proceedings, the proceedings itself do not survive and there is no scope of appointment of substitute arbitrator, however, in case of termination of the mandate of Arbitrator, the proceedings survive thereby leaving the scope of appointment of the arbitrator.

10) It is now well settled through a consistent line of judicial precedents that termination of an arbitrator's mandate does not bring the arbitral proceedings themselves to an end. In such circumstances, the mandate may either be extended, or a substitute arbitrator may be appointed. Where a substitute arbitrator is appointed, the proceedings ordinarily continue from the stage left by the previous arbitrator, unless the parties agree otherwise, a position consistently upheld under Sections 15(2) and 15(3) of the Arbitration and Conciliation Act, 1996.

11) However, the question that arises for consideration now is why the Hon'ble Bombay High Court deviated from the established principles governing substitution of arbitrators. It is thus important to analyze the decision of the Bombay High Court.

III. Hon'ble Bombay High Court Decision1

12) The appellants, Ankhim Holdings Pvt. Ltd., and the respondent, Zaveri Construction Pvt. Ltd., entered into a partnership firm named "M/s Anmol Alliance" to develop and construct an SRA project of Andheri Shiv Shakti CHS Limited in Mumbai. Disputes arose between the parties, leading the appellants to file an application under Section 9 of the Act, 1996 (Commercial Arbitration Petition No. 347/2019). On 09.07.2019, the Bombay High Court passed an order accepting the minutes of order recording consent terms between the parties and appointed Hon'ble Mr. Justice J.N. Patel, former Chief Justice of the Calcutta High Court, as the sole arbitrator to adjudicate the disputes.

13) During the pendency of arbitration proceedings, on 26.09.2019, the National Company Law Tribunal ("NCLT"), Mumbai Bench, admitted the respondent into the Corporate Insolvency Resolution Process ("CIRP") pursuant to proceedings initiated by Reliance Home Finance Private Limited under Section 7 of the IBC. The NCLT imposed a moratorium under Section 14 of the IBC, which prohibited, inter alia, the institution or continuation of any suit or proceeding against the corporate debtor.

14) While, the above mentioned developments were ongoing, on 15.03.2022, the Bombay High Court passed an order in an interlocutory applications noting that the Interim Resolution Professional had become functus officio and no liquidation order had been passed, thereby granting liberty to the appellants to move applications under Section 17 of the Arbitration and Conciliation Act, 1996 before the arbitrator. In pursuance thereof, the appellants filed Section 17 applications before the Arbitral Tribunal on 17.03.2022. The Arbitral Tribunal proceeded to conduct hearings and passed orders on several dates between 17.03.2022 and 25.08.2022, including rejecting the respondent's Section 16 application of Arbitration and Conciliation Act, 1996 challenging jurisdiction and granting interim measures under Section 17 of the Arbitration and Conciliation Act, 1996.

15) The NCLT on 26.08.2022, initiated liquidation proceedings against the respondent and declared that the moratorium under Section 14 had ceased to have effect, with a fresh moratorium under Section 33(5) commencing. Subsequently, on 11.10.2023, the Arbitral Tribunal terminated the arbitration proceedings as the parties expressed inability to pay the arbitrator's fees. Consequently, the appellants filed Commercial Arbitration Petition No. 30650/2023 before the Bombay High Court seeking appointment of a substitute arbitrator.

IV. Rationale of the Bombay High Court Judgement

16) The Bombay High Court, while appointing the Substitute Arbitrator, nullified the previous rounds of Arbitration as were held between the parties. The High Court's reasoning was founded on the interpretation of Section 14(4) of the IBC and its proviso. The Court held that the moratorium imposed under Section 14 by the order dated 26.09.2019 continued to be in operation until 26.08.2020, when the NCLT declared that it ceased to have effect upon passing the liquidation order and imposing a fresh moratorium under Section 33(5) of IBC. The proviso to Section 14(4) of IBC makes clear that the moratorium shall have effect until the completion of CIRP, and if during the CIRP period the adjudicating authority either approves a resolution plan under Section 31(1) of IBC or passes a liquidation order under Section 33, the moratorium shall cease from the date of such approval or liquidation order.

17) The High Court treated the arbitral hearings held between 17.03.2022 and 25.08.2022 as invalid because they took place while the Section 14 moratorium under the IBC was still in force, which had begun when the respondent entered CIRP on 26.09.2019. According to the Court, Section 14(1) clearly stops any new or ongoing legal proceedings against the corporate debtor until the CIRP is completed. Under Section 14 (4), the moratorium stays in force until a resolution plan is approved under Section 31 (1) or a liquidation order is passed under Section 33 of IBC, whichever happens first. In the present case, liquidation was ordered only on 26.08.2022, and that order specifically stated that under Section 14 moratorium ended on that date. A new moratorium under Section 33 (5) began, which stops only new proceedings from being filed, not the continuation of ongoing ones, due to the same, the Court held any arbitral steps taken before 26.08.2022 were carried out while the Section 14 moratorium was still active and there was invalid; conversely, after 26.08.2022, pending arbitration could revive because Section 33(5) does not prohibit continuation of already‑pending proceedings. On that footing, while appointing a substitute arbitrator, the Court nullified the seven pre‑26.08.2022 hearings/orders (including the Section 17 reliefs and the Section 16 rejection) as conducted in the teeth of Section 14, but permitted the arbitration to continue prospectively post‑liquidation under the Section 33(5) regime

V. Supreme Court's Interpretation of the Law2

18) The Hon'ble Supreme Court set aside the Bombay High Court's decision. The Hon'ble Supreme Court's decision relied upon on several interconnected legal principles. First being, the principle of limited judicial intervention in arbitral proceedings, as per Arbitration and Conciliation Act, 1996 which mandates that courts exercise only those powers expressly conferred upon them. The High Court, acting under Section 15(2), was confined to appointing a substitute arbitrator and could not adjudicate on the validity of prior arbitral proceedings.

19) Secondly, the authority to determine whether prior hearings should be repeated rests with the substituted arbitral tribunal, subject to party agreement under Section 15(3), and not with the appointing court.

20) Third, the Arbitration Act being a self-contained code; its procedures cannot be bypassed by invoking general principles or provisions from other statutes such as the IBC. The challenge to arbitral orders must follow the statutory mechanism of Section 37 for appeals against Section 17 orders, and Section 34 for setting aside awards not through collateral proceedings under Section 15.

21) Fourth, the Supreme Court considered the interests of third parties. Home buyers had acquired rights under the Section 17 order, nullifying the proceedings would have unfairly harmed them. To prevent this, the Court invoked Article 142 and upheld the validity of these transactions.

22) The Supreme Court observed that Section 15(2) is not a standalone provision and must be read in harmony with Section 15(3) and Section 15(4) of the Act, 1996. Crucially, Section 15(4) stipulates that an order or ruling of the arbitral tribunal made prior to the replacement of an arbitrator shall not be invalid solely because of a change in composition.

VI. Conclusion

23) The Supreme Court's decision holds good that substituting an arbitrator does not invalidate the earlier arbitral proceedings. The Supreme Court has in its judgement clarified that Section 15(2) only concerns with appointing of a substitute arbitrator and does not empower the court with the jurisdiction to examine the validity of the prior arbitration proceedings.

24) It is pertinent to focus on the Hon'ble Court's decision that the Arbitration Act itself is a self‑contained code, and its procedure cannot be bypassed by invoking other statutes like the IBC. The court has thus upheld the principle of limited judicial intervention, ensuring that courts act only within the jurisdiction which has been expressly granted by the Arbitration Act.

25) The Supreme Court's ruling signals on the effect of such a moratorium on arbitral proceedings must be raised and adjudicated through the proper channels rather than through an incidental application for substitution of an arbitrator.