The Supreme Court has set aside the initiation of arbitration between Arth Micro Finance Private Ltd. and Ors. and Shivalik Small Finance Bank Ltd., finding no material to establish Arbitral Tribunal Appointment Consent from the appellants. The Court held that arbitration is a consensual dispute-resolution mechanism. Therefore, the process cannot become arbitrary, including at the stage of appointing the tribunal.
A Bench comprising Justice J.B. Pardiwala and Justice K. Vinod Chandran passed the order on September 17, 2026, in Civil Appeal No. 13015 of 2026, arising out of SLP (C) No. 26596 of 2026. The decision is reported as 2026 INSC 1014.
The Court observed:
“Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal.”
Dispute Over Appointment of Arbitral Tribunal
The dispute arose from an agreement between the parties containing an arbitration clause. Shivalik Small Finance Bank Ltd., the respondent, allegedly appointed an Arbitral Tribunal with the parties’ consent.
A notice concerning the appointment was issued as Annexure P2 on May 2, 2024. The tribunal later communicated with the appellants through Annexure P3.
Arth Micro Finance responded through Annexure P4 and objected to the appointment. It specifically alleged that the appointed tribunal had close links with the respondent bank.
Despite the objection, the tribunal proceeded to pass three interim orders under Section 17 of the Arbitration and Conciliation Act, 1996, through Annexures P5, P6 and P7.
The appellants challenged these orders before the Allahabad High Court under Section 37 of the Arbitration and Conciliation Act, 1996.
The High Court dismissed the appeal on limitation grounds. It noted that the appellants had not filed an application seeking condonation of delay under Section 5 of the Limitation Act, 1963.
Tribunal Froze Bank Accounts
The interim orders imposed several restrictions on the appellants.
The tribunal directed the freezing of bank accounts linked to the appellants’ specific PAN number at IDBI, Bank of Baroda, HDFC and ICICI.
It also permitted the respondent bank to take possession of the appellants’ movable and immovable properties. Further, it ordered the transfer of amounts held in the appellants’ specified bank accounts to the respondent bank.
Before the Supreme Court, Senior Advocate K. Parameshwar appeared for the appellants. Senior Advocate Bishwajit Bhattacharyya represented the respondent.
The appellants questioned the arbitral proceedings and challenged the tribunal’s competence under Section 16 of the Act. They also raised allegations of bias against the arbitrator.
The respondent maintained that the parties had consented to the tribunal’s appointment. However, the Supreme Court found nothing on record to establish that the appellants had actually provided such consent.
Supreme Court Finds Arbitration Arbitrary
The Supreme Court found merit in the appellants’ submissions. It emphasised that arbitration operates through the consent of the parties.
Accordingly, one party cannot arbitrarily initiate the process without securing the consent required from the other party.
The Bench also considered the appellants’ specific objection to the tribunal’s appointment. It took note of their allegation that the tribunal had close links with the respondent.
In these circumstances, the Court found that the record did not establish Arbitral Tribunal Appointment Consent from the appellants. It also described the interim orders passed at the initial stage as arbitrary.
The Court consequently set aside the impugned order of the Allahabad High Court. It held that the very initiation of arbitration was non est in law.
The Supreme Court also set aside all three interim orders passed by the Arbitral Tribunal.
Transferred Amounts Must Be Returned Within One Week
The Court issued consequential directions concerning any action already taken under the interim orders.
If authorities had transferred amounts from the appellants’ accounts to the respondent’s account, the respondent must return those amounts within one week.
The Supreme Court left the question of interest on the transferred amounts open. The Arbitrator appointed by the Court will consider that issue.
However, the Bench prescribed a specific consequence if the respondent fails to return the money within the stipulated period.
In such a situation, the amounts would carry compound interest at 18% per annum with monthly rests. The interest would run from the date on which the amounts were debited from the appellants’ accounts.
The amount would then be liable to set-off against any claim ultimately found in favour of the respondent in arbitration.
Attachment and Takeover of Properties Set Aside
The Supreme Court also set aside any attachment or takeover of the appellants’ movable or immovable properties carried out under the tribunal’s interim orders.
The Court directed restoration of those properties to the appellants.
Mayuri Raghuwanshi Appointed Arbitrator
To facilitate resolution of the dispute, the Supreme Court appointed Ms. Mayuri Raghuwanshi, Advocate, as the Arbitrator.
The Court directed its Registry to inform the appointed Arbitrator. She will issue notices to the parties regarding the arbitral proceedings and may determine her fee in consultation with them.
The Bench clarified that it had not expressed any opinion on the merits of the dispute. The parties remain free to raise their respective contentions before the newly appointed Arbitrator.
The Supreme Court disposed of the appeal in these terms and rejected any pending applications.
