Arth Micro Finance Private Ltd. And Ors. v. Shivalik Small Finance Bank Ltd., 2026 INSC 1014 (17 September 2026)
What the case was about
This case began as a routine commercial dispute between a microfinance company and a small finance bank. The parties had agreed to settle any differences through arbitration, but the arrangement soon unravelled over a basic question of fairness: was the arbitral tribunal ever properly appointed? The bank claimed the tribunal was chosen by consent, yet the finance company insisted it had never agreed and accused the proposed arbitrator of bias. While that objection was still pending, the tribunal froze the company’s bank accounts, authorised the takeover of its properties, and ordered the transfer of its funds to the bank. When the company challenged these sweeping interim measures in the High Court, its appeal was dismissed on the technical ground that it was barred by limitation. The Supreme Court was then called upon to decide whether an arbitration stripped of consent—and shadowed by allegations of bias—could lawfully produce such drastic consequences.
The key facts
The appellants, Arth Micro Finance Private Ltd. and others, had entered into an agreement with the respondent, Shivalik Small Finance Bank Ltd., which included an arbitration clause. When disputes arose, the respondent issued a notice on 2 May 2024 stating that an arbitral tribunal had been appointed on the basis of the appellants’ consent (para 4). The appellants replied with a firm objection, specifically alleging that the proposed arbitrator enjoyed close links with the respondent and was therefore likely to be biased (para 3).
Undeterred by this challenge, the tribunal proceeded to pass three wide-ranging interim orders under Section 17 of the Arbitration and Conciliation Act, 1996. By Annexure P5, it directed the freezing of the appellants’ bank accounts at IDBI, Bank of Baroda, HDFC and ICICI that were linked to the appellants’ PAN number. By Annexure P6, it permitted the respondent to take over possession of the appellants’ movable and immovable properties. By Annexure P7, it ordered that the amounts deposited by the appellants in those banks be transferred directly to the respondent’s account (para 4).
The appellants challenged these emergency orders by filing an appeal under Section 37 of the 1996 Act before the High Court. The High Court dismissed the appeal, holding that it was barred by limitation and noting that the appellants had not filed any application seeking condonation of delay under Section 5 of the Limitation Act, 1963 (para 3).
The questions before the Court
When the matter reached the Supreme Court, three broad questions framed the hearing.
First, was the arbitral tribunal validly appointed on the basis of the appellants’ consent, or did the appointment suffer from a fundamental procedural defect? Second, could the interim orders passed by the tribunal—freezing accounts, seizing properties and transferring funds—survive in law when they were issued after the appellants had raised a specific objection alleging bias and lack of consent? Third, was the High Court justified in dismissing the Section 37 appeal solely on the ground of limitation, without any application for condonation of delay?
What the Court decided and why
A bench of Justices J.B. Pardiwala and K. Vinod Chandran allowed the appeal in part, delivering a crisp but forceful ruling that restored the appellants to their position before the arbitration began.
The Court opened with a pointed reminder: “Arbitration, though rhymes with it, cannot result in an arbitrary measure, even in the appointment of an Arbitral Tribunal” (para 2). It then examined the respondent’s claim that the tribunal was appointed by consent. After hearing senior counsel for both sides, the Court found that there was “nothing to show the consent having been obtained from the appellants herein” (para 4). Without that foundational agreement to the tribunal’s composition, the entire arbitral edifice collapsed.
The Court stressed that the three interim orders were passed “in the wake of the clear objection to the appointment of the Arbitral Tribunal and the allegation of bias raised against the said Arbitral Tribunal” (para 5). Describing these orders as “arbitrary in nature,” it held that they could not survive scrutiny (para 5).
Consequently, the Court declared the very initiation of the arbitration to be non est in law—legally non-existent—and set aside the impugned order of the High Court (para 6). The interim orders at Annexures P5, P6 and P7 were quashed. Any amounts already transferred from the appellants’ accounts to the respondent were directed to be remitted back within one week (para 6). The Court added a sharp financial deterrent: if the money was not returned within that window, it would carry compound interest at 18 per cent per annum, calculated from the date of debit on monthly rests, and this sum would be set off against any claim ultimately found in favour of the respondent in future arbitration proceedings (para 6). Any attachment or takeover of the appellants’ movable or immovable properties was also “set at naught,” and possession was ordered to be restored to the appellants (para 6).
Recognizing that the underlying commercial dispute still required resolution, the Court did not leave the parties without a forum. It appointed Ms. Mayuri Raghuwanshi, Advocate, as the sole arbitrator to adjudicate the disputes de novo (para 7). The Registry was directed to intimate her, and she was left free to determine her fee in consultation with the parties. The bench expressly clarified that it had pronounced no opinion on the merits of the case, leaving those substantive issues open for the parties to argue before the freshly appointed arbitrator (para 7).
Why it matters
This judgment is a significant reaffirmation that arbitration, for all its speed and informality, cannot dispense with basic fairness at the threshold. The Court’s insistence on valid consent to the tribunal’s appointment reinforces the principle that no party can be compelled to submit to a proceeding before a decision-maker it never accepted, particularly one shadowed by bias. By treating the arbitral initiation as non est, the Supreme Court made clear that interim orders flowing from an invalid appointment are themselves void, no matter how severe their real-world impact.
For businesses, the ruling underscores the importance of objecting promptly to procedural irregularities. The appellants’ immediate challenge—documented in their reply to the initial notice—proved decisive in establishing that the tribunal lacked authority. The decision also illustrates that where a foundational appointment is unlawful, appellate courts will not allow technical objections such as limitation under Section 37 to perpetuate a nullity. Instead, they will intervene to restore the status quo ante, remit seized funds and property, and steer the parties toward a genuinely independent forum.
Finally, by appointing a new arbitrator and expressly keeping the merits open, the Court balanced corrective justice with the need for finality. It prevented an unfair process from compounding into an unfair outcome, while ensuring that the parties’ underlying commercial disagreement would still be resolved through arbitration—just not before a tribunal whose authority was never properly established.