Why the Bombay High Court Quashed Arbitration Awards: A Definitive Ruling on IBC Moratoriums, the Right to Cross-Examination, and the Non-Arbitrability of Mortgage Enforcement in Multi-Party Debt Disputes.

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Case: MONIKA AJEET MULAY v. ABHYUDAYA CO.OP. BANK LIMITED
Court: Bombay High Court
Date: 09-06-2026
Law: Multi-State Co-operative Societies Act, Insolvency and Bankruptcy Code, Arbitration and Conciliation Act, Indian Contract Act, Maharashtra Stamp Act.

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In the complex ecosystem of Indian commercial law, the intersection of insolvency proceedings and arbitration often creates a jurisdictional fog. A recent judgment by the Bombay High Court in the case of Ajeet Madhukar Mulay vs. Abhyudaya Co-operative Bank Limited provides a masterclass in navigating this terrain. The ruling serves as a stern reminder that while arbitration is designed for efficiency, it cannot bypass the fundamental protections of the Insolvency and Bankruptcy Code (IBC) or the basic tenets of natural justice.

The case involved guarantors challenging arbitration awards passed under the Multi-State Co-operative Societies Act, 2002. The High Court’s decision to set aside these awards highlights several counter-intuitive and impactful legal principles that every commercial lawyer and business owner should understand.

1. The Moratorium is About the Debt, Not Just the Debtor

Perhaps the most significant takeaway is the court’s interpretation of Section 96 of the IBC. In this case, two co-guarantors had filed for personal insolvency, triggering an interim moratorium. The arbitrator had stayed proceedings only against those two individuals, continuing the case against the other guarantors. The High Court found this to be a fatal error.

The court clarified that unlike the moratorium under Section 14 (which is debtor-centric), the interim moratorium under Section 96 is "debt-centric". This means that once an insolvency application is filed by one guarantor, the entire debt is put in abeyance.

"The filing of the personal insolvency applications extends the benefit of moratorium not only to the applicants but has the effect of keeping all the debts in abeyance."

This prevents the "splitting" of arbitration proceedings, ensuring that a single debt isn't litigated in piecemeal fashion across different fora.

2. Cross-Examination is a Right, Not a Luxury

In a move that surprised the arbitrator, the High Court reaffirmed that the right to cross-examine a witness is an integral part of the audi alteram partem rule, even in summary-style arbitrations. The arbitrator had rejected the petitioners' request to cross-examine the Bank’s witness, arguing that the matter was a simple banking transaction and the burden of proof lay on the defendants.

The High Court disagreed, noting that under Section 18 and Section 24 of the Arbitration and Conciliation Act, parties must be treated with equality. If one side leads evidence via an affidavit, the other side generally has a right to test that evidence through cross-examination. Denying this right constitutes a violation of natural justice, rendering the resulting award patently illegal.

3. Arbitrators Cannot Enforce Mortgages

A common misconception in commercial disputes is that an arbitrator can grant any relief a civil court can. The High Court corrected this by citing the landmark Booz Allen principle. The arbitrator in this case had directed the attachment and sale of mortgaged properties. However, the enforcement of a mortgage is a right in rem (a right against the world at large) rather than a right in personam (a right against a specific person).

Because mortgage enforcement involves public interest and the rights of third parties, it is inherently non-arbitrable.

"The enforcement of right of mortgage is enforcement of right in rem, which will have to be decided by the Courts of law and not by Arbitral Tribunals."

By attempting to sell the house, the arbitrator exceeded their jurisdiction, stepping into the shoes of a civil court.

4. The Danger of the "Naked Eye" Comparison

The judgment also touched upon the evidentiary standards required in arbitration. The petitioners had claimed their signatures on the guarantee documents were forged. Instead of appointing a handwriting expert, the arbitrator compared the signatures with the "naked eye" and concluded they were genuine.

The High Court found this approach unscientific and legally shaky. While an arbitrator has some flexibility with the Rules of Evidence, they cannot substitute expert testimony with personal observation when a specific plea of forgery is raised. Basing a multi-crore award on a visual signature check, without allowing the defendant to challenge the documents, was deemed "patently illegal" as it was essentially a decision based on no legal evidence.

Conclusion: A Victory for Procedural Integrity

This judgment is a powerful reminder that the "commercial" nature of a dispute does not grant a license to ignore procedural safeguards. Whether it is the overarching reach of an IBC moratorium or the granular right to cross-examine a witness, the Bombay High Court has signaled that the "fundamental policy of Indian law" remains the ultimate yardstick for any arbitral award. For practitioners, the message is clear: efficiency must never come at the cost of equity.