Tis Hazari Court: In a petition filed by Gurukul Sanskar School (‘School’) against Educomp Solutions Ltd. (‘Educomp’) and Edu Smart Services Pvt. Ltd. (‘Edu Smart’) to challenge the award dated 03-02-2018 passed by the Arbitrator, a Single Judge Bench of Rajesh Kumar Goel, J. said that the present case was hit by Section 12(5) read with Schedule VII of the Arbitration and Conciliation Act, 1996 (‘Act’) and set aside the impugned award.
Background
In the present matter, the School entered into an agreement on 31-12-2010 with Educomp and Edu Smart to set up Educlass Pro Designated Classroom comprising of sale of “Pro Module Hardware” and making available the “Digital Content” at the School premises situated in Alwar.
After the Pro Module Hardware was set up, the School started facing problems and informed the person concerned many times about the same but did not receive any response. As a result, the School cancelled the agreement and sent a letter of cancellation to Educomp and Edu Smart on 24-08-2011.
The School received a letter dated 26-08-2011 from Educomp and Edu Smart stating that they had considered all of the reasons for default and were ready to cancel the agreement only if the School paid a premature termination amount of Rs. 2,80,210.52/-. Vide letter dated 07-09-2011 the School refused to pay stating that they never used the product and complained about the same since installation. The School further demanded compensation of Rs. 4,50,000/- for the loss suffered due to faulty product.
On 04-01-2012, the agreement was categorically cancelled without any payment and the School returned all hardware that was received and the School did not hear anything from Educomp and Edu Smart for the next five years.
Surprisingly, Educomp and Edu Smart appointed a sole arbitrator and initiated arbitration proceedings without notifying the School. The School came to know about the arbitration proceedings only after they received the notice of ex-parte proceedings on 25-07-2017. Educomp and Edu Smart received an ex parte award on 03-02-2018.
The School had assailed the impugned award mainly on the grounds that the claim of Educomp and Edu Smart was based on the terms of agreement which, the parties had mutually agreed to terminate on 04-01-2012 itself and therefore, the arbitration proceedings were void ab initio. The School also contended that the proceedings were barred by limitation because the time limit for initiating the proceedings was three years.
Analysis and Decision
The Court found that the notice of the present petition was directed to be issued several times to Educomp and Edu Smart but they remained unserved for almost four years. The Court said that the School leisurely took its time and could not get Educomp and Edu Smart served.
The Court considered it important to mention that Educomp and Edu Smart had not filed any reply to the present petition and only one objection was raised by them that the present petition was not maintainable as per Section 14 of the Insolvency and Bankruptcy Code, 2016 (‘IBC’).
The Court noted that vide order dated 28-05-2024, Educomp and Edu Smart were proceeded to be ex parte as they failed to appear before the Court but, it was said that they were appearing in another similar and identical case that was pending before this Court and was listed on the same day.
Another peculiar fact which was noted by the Court was that despite several notices and efforts made by this Court, the Arbitrator who had passed the impugned award could not be traced and therefore, the Court could not peruse the original arbitration records.
The Court said that a cursory look at Section 14(1) of IBC made it clear that subject to the exceptions contained in sub-sections (2) and (3), on the insolvency commencement date, the adjudicating authority shall mandatorily, by order, declare a moratorium to prohibit what follows in clauses (a) to (d).
Further, the Court said that under sub-section (4), this order of moratorium does not continue indefinitely but has effect only from the date of the order till the completion of the corporate insolvency resolution process which is time-bound, either culminating in the order of the adjudicating authority approving a resolution plan or in liquidation.
The Court said that the petition of Educomp filed under Section 10 of the IBC was admitted by the National Company Law Tribunal (‘NCLT’) on 30-05-2017 and an Insolvency Resolution Professional (‘IRP’) was appointed. The Court also found it evident that vide order dated 30-05-2017, NCLT declared the moratorium and other powers to be vested in the IRP. It was noted that a similar petition was also filed by Edu Smart wherein NCLT appointed an IRP and declared moratorium. Thus, the Court said that all the financial powers of Educomp and Edu Smart were vested in the IRPs.
The Court said that in the background of the fact that moratorium had already been declared and the management had already been taken over by the respective IRPs, there was no occasion for Educomp and Edu Smart to institute the proceedings before the Arbitrator as IRPs had already stepped into the shoes of the respondents, which meant that the proceedings initiated by Educomp and Edu Smart were without any authority.
Considering the objections of Educomp and Edu Smart, the Court said that the present petition was hit by Section 14 of IBC but it does not preclude the corporate debtors to initiate or to institute the proceedings against the third parties.
The Court said that the Arbitration proceedings in the present matter were initiated by Educomp and Edu Smart, who were the corporate debtors after declaration of moratorium as their petition had already been admitted by NCLT. It was said that Educomp and Edu Smart could not be allowed to take shelter that the present petition is not maintainable.
The Court opined that filing a petition under Section 34 of the Act is a continuation of the arbitration proceedings that had been initiated by the corporate debtors and they could not be allowed to stop the said proceedings in midway as per their sweet will.
The Court said that in the present matter, the Arbitration proceedings were initiated by the corporate debtors which ultimately ended in their favour resulting in passing of the impugned award and the School would not be remedy less as it would have the statutory right to challenge the said impugned award.
Further, the Court opined that the bar of Section 14 of IBC would not come in the way of the School to file the present petition and therefore, the objection raised on behalf of Educomp and Edu Smart was rejected by the Court for being devoid of merits.
The Court said that even though the Act recognized the autonomy of the parties to choose their own Arbitrator in terms of their Agreement, the Act also countenances fairness, transparency and impartiality which are virtues that are equally important for consideration in the appointment of the arbitrator.
The Court said that to ensure the sanctity of an arbitral proceeding, Section 12 of the Act read with Schedule VI underlines the importance of disclosure to maintain the independence and impartiality of an arbitrator.
The Court referred to various cases and highlighted that the Supreme Court disapproved of a panel of arbitrators from which the other party may select an arbitrator as it “created room for suspicion”. The Court perused Clause 8.1 of the Agreement and said that it demonstrated the procedure of appointment was only a ‘one-way’ procedure and the power to single handedly decide who would be the arbitrator only vested with Educomp and Edu Smart.
Further, the Court said that the appointment of the arbitrator was unilateral with no participation by the petitioner and was hit by Section 12(5) read with VII Schedule of the Act. Therefore, the Court stated that the impugned award was liable to be set aside on this ground alone.
Lastly, the Court set aside the impugned award dated 03-02-2018 and disposed of the present petition filed under Section 34 of the Act.
[Gurukul Sanskar School v. Educomp Solutions, 2024 SCC OnLine Dis Crt (Del) 26, Decided on 18-09-2024]
Advocates who appeared in this case :
For Petitioner – Advocate Namit Saxena, Advocate Isha Nagpal
For Respondent – None
Buy Arbitration and Conciliation Act, 1996 HERE
