In this article, Jeetika Aggarwal and Priyanshi Bainwala are analysing Section 87 of the Arbitration and Conciliation Act in light of Hindustan Construction Company Limited & Anr. v. Union of India & Ors, 2019.

In this article, Jeetika Aggarwal and Priyanshi Bainwala are analysing Section 87 of the Arbitration and Conciliation Act in light of Hindustan Construction Company Limited & Anr. v. Union of India & Ors, 2019.

I. Introduction

The Supreme Court of India (SC) handed down a landmark decision in the matter of Hindustan Construction Company Limited & Anr. & Ors. v. Union of India & Ors. The Supreme Court of India (SC) handed down a landmark decision in the matter of Hindustan Construction Company Limited & Anr. [1] on November 27, 2019.

The constitutional legality of Section 87 of the Arbitration and Conciliation Act, 1996 (Act) was challenged, among other things.

The Hindustan Construction Company Ltd (HCC), who is the petitioner in the present case, is an infrastructure company involved in the business of large-scale infrastructure projects who undertook infrastructure projects as a contractor for various government companies like NHAI, NHPC, NTPC, IPCON International and various public work department. Because of the idea of these undertakings and the expense invades included, HCC, at last, had questions with these administrative bodies and government organizations.

Several awards were passed in favour of HCC in the arbitral proceedings. The arbitral award was challenged under Section 34 of the Arbitration Act. However, due to the newly inserted Section 87, by such challenges to the arbitral awards, the award debtors (i.e. the government companies and government bodies) were successful in getting automatic stays on the execution proceedings HCC’s essential conflict was that this would additionally defer the interaction of requirement of an arbitral honour and make new obstacles for organizations like HCC who are real honour banks.

Moreover, this implied a one-two punch for HCC. On the one hand, recording of the challenge to the arbitral honour would be interpreted as a contested obligation for the motivations behind IBC, and if any petitions were documented by HCC as a functional lender, the equivalent would be dismissed as not viable, and then again, different functional loan bosses that had provided work and hardware for such activities were giving interest notification to HCC.

Considering the above dispute, the established legitimacy of Section 87 of the Arbitration Act was tested by HCC additionally, it looks for the cancellation of Section 26 of the 2015 Amendment Act and certain arrangements of the IBC.

II. Issues

The major issues before the Hon’ble Supreme Court were:

  1. Whether Section 87 of the Arbitration and Conciliation Act, 1996 is constitutionally valid or not?
  2. Whether the 2019 amendment to the Arbitration and Conciliation Act, 1996 encroached upon the judgment of the court in BCCI v. Kochi Cricket Pvt. Ltd. (2018)[2] or not?

III. Arguments From Both The Sides

Arguments from Petitioner

The petitioners argued that, despite being based on Section 36 of the Model UNCITRAL Law, Section 36 of the Act was in conflict with it because, unlike Section 36 of the Model UNCITRAL Law, Section 36 of the Act, when constructed with various Supreme Court judgments, provided for an automatic stay of arbitral awards the moment an application under Section 34 was filed. As a result, such decisions must be reviewed by a bigger bench.

Despite the fact that the 2015 amendment removed the Act’s arbitrariness, the Government of India issued a press release on 07.03.2018 to enact the new Section 87 based on the recommendations of Justice B.N. Sri Krishna Committee, which recommended in its report submitted on 30.07.2017 that the 2015 amendment Act should not apply to pending court proceedings that have commendable merits (including the court proceedings).

They said that notwithstanding the Supreme Court’s decision in BCCI v. Kochi Cricket Pvt. Ltd., the government incorporated Section 87 into the Act through the 2019 amendment. Ltd. (2018) further evaluated the Sri Krishna Committee’s recommendations and concluded in the said decision that the aforementioned provision would be contradictory to the 2015 amendment Act’s aim, and forwarded the verdict to the Ministry of Law and Justice and the Attorney General of India.

They argued that because the automatic stay has been reinstated retroactively, all award debtors who have contested arbitral awards and paid payments to the award holders will now be able to claim the award back.

The petitioners argued that Section 87 is a direct challenge to the Supreme Court’s decision in National Aluminium Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd[3]. They further claimed that Section 87 breaches Articles 14,19(1)(g), 21, and 300-A of the Indian Constitution, in addition to being contradictory to the Act’s intent. It was further argued that while a money decree is not immediately stayed in a civil appeal, an award automatically stays in arbitration proceedings the moment an application under Section 34 is submitted.

The petitioners further argued that government bodies were not included in the definition of a business person under Section 3(7) of the IBC. They further claimed that when read in conjunction with other sections of the IBC, Section 87 leads to an illogical result, namely the award holder’s insolvency.

Arguments from Respondent

The respondent justified the 2019 amendment’s inclusion of Section 87 and revocation of Section 26 by claiming that the interpretation of Section 26 in the BCCI case[4] was simply declaratory. They also stated that if the parliament believes its original objective is not being reflected in the Supreme Court’s decision, it is allowed to alter the law to explain its original intent. Thus, the 2019 amendment confirmed the parliament’s original meaning, indicating that Section 87 is only clarifying and not an attack on the BCCI verdict.

They also stated that the claim that the 23.10.2015 cut-off date for potential application was arbitrary was without merit and that courts should not intervene unless the cut-off date is obviously discriminatory. The respondents defended the IBC’s objection by claiming that a writ petition filed under Article 32 of the Indian Constitution cannot be transformed into recovery proceedings by the petitioner.

IV. Ratio Decidendi

The SC agreed with the Respondents that no explicit reference to the BCCI judgement was required in order to invalidate it through legislation. The Supreme Court further concluded that because the BCCI decision’s basic base had been removed, there was no direct attack on the judgement.

The SC agreed with the Petitioners that reading the unamended Act leads to the conclusion that there was a deliberate departure from the UNCITRAL Model Law by denying an award debtor two bites at the cherry, one during setting aside proceedings under section 34 and the other during enforcement proceedings under section 36. The Supreme Court read section 35 (which deals with the finality of an award), as well as sections 34 and 36, to conclude that a setting aside petition was never meant to automatically stay enforcement.

This was plainly a complete 180-degree turn from the SC’s previous position. The Supreme Court has previously decided in NALCO[5], Fiza[6], and National Buildings[7] that a setting aside petition would naturally suspend the implementation of an award. As a result, although reaching the same conclusion as the Supreme Court, the SC specifically rejected these rulings in the case under consideration.[8]

The Supreme Court stated that section 87 was enacted solely to implement the Sri Krishna Committee Report’s suggestion to remove confusion around the potential applicability of the 2015 Amendment Act when the BCCI judgement had already addressed such uncertainty.

The Supreme Court emphasised that while the unamended Act did not provide for an automatic stay, the 2015 Amendment Act was introduced to explain the situation. As a result, section 87 was incompatible with the 2015 Amendment Act’s stated goal of making the 2015 Amendment Act only effective as of October 23, 2015. Furthermore, the legislature enacted a provision that was plainly arbitrary, without appropriate deciding principle. It was averse to the public interest without referring to the BCCI judgement, which had pointed up the risks of enacting such a provision.

The SC further agreed with the Petitioners that, when read in conjunction with the IBC, section 87 results in an illogical conclusion, namely, the award holder being bankrupt due to its inability to collect monies under arbitral awards. As a result, the Supreme Court held that the 2015 Amendment Act’s insertion of section 87 and removal of section 26 violated Article 14 of the Indian Constitution.

The SC, for example, rejected the Respondent’s contention that the cut-off date was not arbitrary, stating that the question before it was not whether the date was arbitrary but whether the non-bifurcation of court and arbitration processes with respect to the said date was. After striking down the provision under Article 14, the Supreme Court did not assess its legality under Articles 19(1)(g), 21, or 300-A. The Supreme Court went on to say that the BCCI’s stance is still true today, namely that filing a setting aside petition does not automatically result in a stay on the enforcement of any arbitral judgement, regardless of when the arbitration was started.

V. Analysis

The money owed under arbitral awards has not been deposited due to the automatic stay available to the award debtor by merely filing a setting aside petition under section 34. It is generally known that over INR 38,000 crores is tied up in litigation in the roads sector alone.[9] This ailment affects a wide range of industries and is not confined to situations in which government authorities reward debtors.

The Supreme Court’s ruling will thus give much-needed relief to award recipients, who will no longer have to wait an average of six to seven years to receive their awards. In the short term, this may provide much-needed cash to stressed industries and help numerous firms’ balance sheets. The most important lesson, however, is the judiciary’s shift in attitude and approach to arbitration in India, which speaks well for the future of arbitration in India.

The award debtors will no longer be able to avoid their obligation by submitting an application under Section 34 after this ruling. The award holders will be able to recover their dues that were previously locked in litigation or arbitration for a lengthy period since there would be no automatic stay of the award. It would also help strained industries where significant sums of money are entangled in legal wrangling. As a result of this decision, an award holder can now secure a portion or all of the award money awaiting the conclusion of the Act’s petition to set aside the award.

VI. Conclusion

With this ruling, the drama of the application of the 2015 Amendments has finally come to a conclusion after four rounds of litigation. It will be interesting to see how this case plays out in reality because, in situations where parties have sought to withdraw their deposit, deposit orders will have to be issued afresh, no automatic stays will apply, and enforcement procedures will be able to proceed. Overall, though, this ruling is a positive step forward in the Indian arbitration system.

Author(s): Jeetika Aggarwal and Priyanshi Bainwala
School of Law, NMIMS Bangalore

[1] 2019 SCC OnLine SC 1520

[2] (2018) 6 SCC 287

[3] 2004 1 SCC 540

[4] BCCI v. Kochi Cricket Private Limited, (2018) 6 SCC 287

[5] National Aluminium Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr., (2004) 1 SCC 250

[6] Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd., (2009) 17 SCC 796

[7] National Buildings Construction Corporation Ltd. v. Lloyds Insulation India Ltd., (2005) 2 SCC 367

[8] The SC clarified that the said decisions were only overruled on this limited aspect.

[9] P. (2017, April 25). Highway dispute resolution committee in a month: NHAI chief. The Indian Express, Available Here

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