Unilateral Arbitrator Appointment by NBFC is Void

Bombay HC noted manipulative trend where NBFCs initiate arbitration via unilateral appointments, obtain section 17 orders for attachment, bank accounts, etc and withdraw proceedings when challenged in the High Court, circumventing the law laid down by the Supreme Court.

There are only two known methods in law to appoint an arbitrator (i) the consent of the parties; and (ii) appointment by a Section 11 Court having jurisdiction in the matter. Any third appointment cannot be whitewashed as being a compliant appointment.

An increasing trend is being seen in a number of matters, in particular by non-banking financial companies and even scheduled commercial banks that are themselves listed companies, requiring them to be mindful of having greater intensity of promise to be compliant with the law, where a unilateral arbitrator is appointed but purporting to appoint the arbitrator through an “institution” or an algorithm-based selection of arbitrator, it is hoped that the inherent illegality in unilateral-appointment is magically cleansed.

Therefore, the attempt by finance companies and banks to pretend to have cleansed the arbitrator-appointment process by getting an “institution” of their choice to make a purportedly “independent” appointment is wholly untenable and completely illegal, and indeed a colourable and manipulative device to circumvent the law declared by the Supreme Court.

it is directed that this judgement be placed before the Audit Committee of the Respondent’s Board of Directors by the Chief Compliance Officer, to ensure that those in the governance of the Respondent are aware of the practice adopted by them being contrary to law and to ensure that they frame appropriate policies compliant with the law declared by the Supreme Court, in their resort to arbitration.

Invocation of Arbitration is not consent for appointment of Arbitrator.   Section 21 Notice acts as a communication that the sender is aggrieved and seeks to invoke the arbitration agreement.   It does not by itself operate as consent to any appointment of arbitrator to be made in the future.

Judgment dated 30.4.2026 of the High Court of Bombay in Arbitration Petition (L) No.12097 of 2026 of D S Textiles Vs. IIFL Finance Limited and connected petitions