Bank Attached Borrower’s Flat for Brother’s Cash-Credit Loan; Bombay High Court Finds Ex Parte Award Patently Illegal, Sets Aside ₹18-Lakh Arbitral Liability
No Finding That Flat Secured Brother’s Cash-Credit Loan: Bombay High Court Sets Aside ₹18.16 Lakh Award Against Alleged Co-Borrower
Facts
Mohammed Sharif Hanif Khan had obtained a housing loan of ₹7.70 lakh from Apna Sahakari Bank Limited on 4 September 2006, under Loan Account No. SCHLN/44. The loan was secured by mortgage of his Flat No. 102, B-Wing, Sunrise Tower Co-operative Housing Society, Village Shil, District Thane. According to the petitioner, the housing loan was fully repaid in March 2023, but the Bank did not return his original title deeds.
The controversy arose from an entirely different cash-credit facility, Loan Account No. CC/111, availed by Respondent No. 2, the petitioner’s brother and proprietor of M/s Paper Box. The petitioner maintained that he had never become a co-borrower or surety for that facility and had never offered his flat as collateral for it.
On 12 April 2024, the petitioner claimed that he first received communication enclosing an arbitral award dated 6 March 2024. He then discovered that he had been shown as a co-borrower/surety for his brother’s cash-credit account and that his flat had been treated as security for that liability.
The ex parte award directed the petitioner and the other opponents to jointly and severally pay ₹18,16,562.64 as on 31 December 2023, with further contractual interest at 14% per annum from 1 January 2024, besides arbitration and administrative costs. It also restrained dealings with the securities and mortgaged properties until recovery.
After obtaining the arbitration papers, the petitioner alleged that his signatures on the surety documentation had been forged, along with the seal of his proprietary concern, M/s Shan Packaging. He lodged a police complaint at Kurla Police Station on 28 June 2024.
He thereafter challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.
Issues
The principal questions before the High Court were whether:
- an ex parte arbitral award passed without effectively hearing the petitioner violated principles of natural justice;
- the petitioner was actually a member of Apna Sahakari Bank so as to attract arbitration under Section 84 of the Multi-State Co-operative Societies Act, 2002;
- the petitioner had ever become a co-borrower/surety for his brother’s CC/111 cash-credit facility;
- his separately mortgaged flat, originally securing his own 2006 housing loan, could legitimately be treated as collateral for the brother’s subsequent business facility;
- the documents relied upon by the Bank actually contained the petitioner’s genuine signatures;
- the arbitrator’s failure to decide these fundamental questions rendered the award perverse and patently illegal under Section 34(2A).
Petitioner’s Arguments
The petitioner argued that the award was fundamentally defective because it had been passed ex parte, without giving him a meaningful opportunity to place his case before the tribunal. The arbitration proceedings had allegedly commenced and concluded within only 28 days, demonstrating the hurried manner in which the matter was dealt with.
A central factual argument concerned the two distinct loan transactions. His own housing loan under SCHLN/44 commenced in 2006 and had been repaid, whereas his brother’s CC/111 facility commenced only in 2011. He denied ever offering his flat as security for CC/111 and argued that there was no document establishing how his property became collateral for his brother’s liability.
The petitioner further alleged that the surety forms contained forged signatures and a fabricated seal of his proprietary concern.
He also disputed his membership of the Bank. Although paragraph 3 of the Section 34 petition had described him as a member, an additional affidavit dated 19 August 2026 stated that this was an inadvertent drafting error by his former advocate. He asserted that the Bank had produced no signed membership application or other instrument demonstrating that he had applied for or accepted membership.
Accordingly, he contended that if he was not a member, the very applicability of Section 84 of the MCS Act required determination before liability could be imposed.
Respondent Bank’s Arguments
Apna Sahakari Bank defended the award and relied heavily upon the petitioner’s original pleading describing himself as a member of the Bank.
The Bank contended that only a member could have availed the housing loan, and since the petitioner admittedly obtained such a loan and created a mortgage, his subsequent denial of membership was inconsistent with his own case.
It further argued that the mortgage documentation extended the security to other accounts and that the petitioner had subsequently joined his brother’s facility as a co-obligant/co-borrower in 2014.
On natural justice, the Bank contended that the petitioner had received sufficient opportunity because notices had been issued on at least four occasions. According to the Bank, his non-appearance could not subsequently be converted into a ground for setting aside the award.
The Bank therefore maintained that there was no patent illegality warranting interference under Section 34.
Analysis of the Law
The High Court began by acknowledging the restricted scope of judicial interference under Section 34. A court does not sit in appeal over an arbitral award and ordinarily cannot reappreciate the evidence merely because another interpretation is possible.
However, the Court distinguished an impermissible reappreciation of evidence from a case where the arbitrator has failed altogether to consider vital evidence or render findings on fundamental contentious issues.
The Court found the latter defect present here.
Although the arbitral award recorded that notices had been served, the High Court found that the petitioner had not been heard before the award was made. The Court treated this as a breach of natural justice. More importantly, the award proceeded to impose liability without properly examining the very foundation upon which the petitioner could be made liable as a co-borrower or surety.
The Court observed that the award did not determine whether the petitioner’s housing loan had actually been repaid; whether the mortgage related exclusively to that housing loan; whether any demand had ever been made upon him in relation to CC/111; or whether his signatures on the alleged surety documents were genuine.
The award also failed to explain how a flat mortgaged for the petitioner’s 2006 housing loan became security for his brother’s 2011 cash-credit facility.
The High Court therefore held that this was not an exercise of substituting its own factual view for that of the arbitrator. Rather, the arbitral tribunal had never considered and decided the essential factual controversies in the first place.
The Court characterised the award as non-speaking, arbitrary, perverse and patently illegal, observing that non-consideration of facts and evidence going to the root of the dispute justified interference under Section 34.
Precedent Analysis
1. Ssangyong Engineering & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131
The Court relied upon Ssangyong for the proposition that although Section 34 does not permit reappreciation of evidence, an award can be interfered with where patent illegality goes to the root of the matter.
An award based on no evidence, or one that ignores vital evidence, can qualify as perverse and therefore patently illegal.
2. Associate Builders v. DDA, (2015) 3 SCC 49
Associate Builders was relied upon to explain perversity. A finding can be perverse where it:
- is based on no evidence;
- relies upon irrelevant material; or
- ignores vital evidence.
The judgment also recognises that failure to give reasons, contrary to Section 31(3), can constitute patent illegality.
3. DMRC Ltd. v. Delhi Airport Metro Express (P) Ltd., (2024) 6 SCC 357
The High Court placed significant reliance on the Supreme Court’s reiteration that an award which ignores vital evidence bearing upon an issue going to the root of the dispute may be set aside for patent illegality.
The Supreme Court had explained that an award may be perverse where findings are based on no evidence, irrelevant material, or where vital evidence has been ignored.
4. I-Pay Clearing Services (P) Ltd. v. ICICI Bank Ltd., (2022) 3 SCC 121
This authority was particularly important.
The Supreme Court held that where an arbitral award contains no findings at all on contentious issues, the defect cannot simply be cured by sending the matter back to the arbitrator to supply additional reasons.
There is a distinction between filling gaps in reasoning supporting an existing finding and a case where the necessary finding itself does not exist. In the latter situation, absence of findings on contentious issues can justify setting aside the award for patent illegality.
Court’s Reasoning
The High Court ultimately identified five fundamental questions on which the arbitrator had returned no finding whatsoever:
- Whether the petitioner was a member of Apna Sahakari Bank;
- Whether the dispute was arbitrable under the Multi-State Co-operative Societies Act;
- Whether the petitioner had ever applied to become a member of the Bank;
- Whether he had actually become a co-borrower in CC/111 and whether his flat was actually mortgaged for that facility; and
- Whether the documents relied upon for the cash-credit facility genuinely bore his signatures or whether those signatures were forged.
These were not peripheral issues. They went directly to the existence of the petitioner’s liability, the tribunal’s jurisdiction and the Bank’s right to proceed against his property.
The arbitrator had essentially proceeded from the absence of the opponents and the Bank’s unchallenged documents to impose joint and several liability. But absence of a defence did not dispense with the requirement to examine the legal and evidentiary foundation of the claim.
The Court therefore concluded that the award’s defects went to the root of the matter and crossed the threshold from a possible erroneous appreciation of evidence into patent illegality warranting Section 34 interference.
Conclusion
The Bombay High Court allowed the Section 34 petition and set aside the arbitral award dated 6 March 2024.
The Court held that the absence of findings on the petitioner’s membership, arbitrability under the MCS Act, alleged co-borrower status, mortgage of his flat for CC/111, and alleged forged signatures constituted patent illegality warranting interference.
Importantly, the Court did not itself determine that the petitioner was not liable, nor did it finally decide that the signatures were forged. Instead, it held that these crucial controversies had never been adjudicated by the arbitrator and therefore the existing award could not stand.
The Court directed that any amount deposited in Court be released after expiry of one month from the date the judgment was uploaded. It disposed of the interim applications, imposed no costs, and expressly left the parties at liberty to initiate fresh arbitration proceedings in accordance with law.
Case Details
Case: Mohammed Sharif Hanif Khan v. Apna Sahakari Bank Limited
Court: High Court of Judicature at Bombay, Ordinary Original Civil Jurisdiction
Case Number: Commercial Arbitration Petition (L) No. 21174 of 2025 with Interim Application (L) No. 21534 of 2024
Judge: Justice Aarti Sathe
Judgment Reserved: 19 August 2026
Judgment Pronounced: 16 September 2026
Neutral Citation: 2026:BHC-OS:20269
Result: Petition allowed; arbitral award dated 6 March 2024 set aside for patent illegality; deposited amount directed to be released; parties permitted to initiate fresh arbitration in accordance with law.
