Supreme Court strikes down insertion of Section 87 to Arbitration Act by 2019 Amendment as Manifestly Arbitrary
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Supreme Court strikes down insertion of Section 87 to Arbitration Act by 2019 Amendment as Manifestly Arbitrary

Bar & Bench

Tariq Khan

The Bench of Justices RF Nariman, Surya Kant and V Ramasubramanian struck down the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act in a judgment delivered today in the case of Hindustan Construction Company Limited v Union of India.

The Court held that BCCI v. Kochi Cricket Pvt. Ltd. judgment will, therefore, continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015. 

Issues Raised

A set of Writ Petitions were filed challenging the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019. The Petitioners also sought to challenge the repeal (with effect from 23.10.2015) of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 by Section 15 of the 2019 Amendment Act.

A challenge was also made to various provisions of the Insolvency and Bankruptcy Code, 2016 on the ground that it operates arbitrarily.

Arguments raised by the Petitioners

Submissions made by Senior Counsel Abhishek Manu Singhvi

  • Contrary to Article 36 of the UNCITRAL Model Law, Section 36 of the Arbitration Act, 1996 has been construed by judgments of the Supreme Court by granting an ‘automatic-stay’ the moment a Section 34 application is filed within time. It was contended that from the plain language of Section 36, automatic-stay does not follow, and the judgments of the Supreme Court which have so held would require a revisit by this larger bench. 
  • Despite the fact that this Court specifically opined in the BCCI v. Kochi Cricket Pvt. Ltd. (2018) 6 SCC 287 judgment that Section 87 would be contrary to the object of the 2015 Amendment Act, and despite the fact that the judgment was specifically sent to the Ministry of Law and Justice and to the learned Attorney General for India, Section 87 was enacted, reference being made only to the Srikrishna Committee Report, without even a mention of the aforesaid judgment of this Court in BCCI. It was contended that the basis of a judgment of the Supreme Court can only be removed if there is a pointed reference to the said judgment, obviously, the judgment of this Court has been sought to be directly overturned without removing its basis.
  • Section 87 flies in the face of not only the object of the Arbitration Act, 1996 as a whole and the objects for enacting the 2015 Amendment Act, but is also contrary to Section 35 of the Arbitration Act, 1996.
  • Dr. Singhvi further contended that Section 87 is violative of Articles 14, 19(1)(g), 21 and 300-A of the Constitution of India, as it is contrary to the object of the principal Arbitration Act, 1996 itself and takes away the vested right of enforcement and binding nature of an arbitral award.
  • In effect, the 2019 Amendment Act reverses the beneficial effects of the 2015 Amendment Act which remedied the original mischief contained in the Arbitration Act, 1996, that too after a period of more than 19 years.
  • The Srikrishna Committee Report also did not take into account the enforcement of the Insolvency Code. On the one hand, arbitral awards for crores of rupees will get automatically stayed through the application of Section 87, and on the other hand, non-payment of any amount beyond INR one lakh by the Petitioner to its operational creditors would render it open to being declared insolvent. He contended that the absurd consequence of this is that the fruits of an award are denied to the Petitioner, resulting in financial hardship, which in turn results in applications being filed against the Petitioner under the Insolvency Code for lesser amounts than what is due to it as an award-holder. 
  • Challenging the provisions of the Insolvency Code, Dr. Singhvi contended that ‘corporate person’, as defined by Section 3(7) of the Insolvency Code, should be read to include Government Bodies other than Government Companies.
  • Relying on Article 14 of the constitution, Dr. Singhvi urged the court to either delete the words ‘limited liability’ contained in Section 3(7) of the Code or read Section 3(23)(g) of the Code into Section 3(7). 
  • Lastly it was contended that payment of a money-decree under an award, even when under challenge, is the rule – stay being the exception. Even if deposits are made as a condition of stay of money-decrees, withdrawal ought to be permitted – not on onerous conditions such as bank guarantees – but on other conditions such as corporate guarantees and the like, so that such monies are available for payment to other creditors, including operational creditors, who are free to invoke the Insolvency Code against the Petitioner.

Submissions made by Senior Counsel Neeraj Kishan Kaul

  • Section 87 is nothing but a re-hash of Section 26 and is, therefore, a direct attack on the judgment of this Court in BCCI, without removing its basis.
  • Since there is no set-off mechanism provided by the Insolvency Code, the provisions of the Insolvency Code will have to be held to be manifestly arbitrary

Submissions made by Senior Counsel CA Sundaram

  • Section 87 needs to be set aside as it is directly contrary to this Court’s judgment in BCCI.
  • Section 87 retrospectively removes a vested right in the Petitioner, as is reflected in paragraphs 62 and 63 of the BCCI judgment.

Submissions made by Senior Counsel Ritin Rai

  • The introduction of Section 87 is manifestly arbitrary.
  • There is no bar to applying an Order VIII-A of the CPC type procedure to proceedings under the Insolvency Code, so that sub-contractor triggers the Insolvency Code against the contractor, the contractor in-turn should be able to make its principal employer a party to such proceedings, so that the subcontractor may then recover these amounts from the principal employer directly, thereby absolving the contractor from the clutches of the Insolvency Code.

Submissions made by Senior Counsel Nakul Dewan

  • Section 87 destroyed a level playing field in relation to enforcement of arbitral awards, by re-imposing an arbitrary cut-off date qua application of the amended Section 36.
  • Even though Section 15 of the 2019 Amendment Act has deleted Section 26 of the 2015 Amendment Act, this has not changed the basis on which the judgment in BCCI was delivered, as there is no vested right to resist the enforcement of an arbitral award, and that arbitration proceedings and court proceedings are distinct sets of proceedings as recognized by section 87 itself
  • Based on a treatise by Ian F. Fletcher on the law of insolvency, Mr. Dewan pointed out that a distinction is made in insolvency law between refusal to pay and inability to pay.

Arguments raised by the Respondents

Submissions made by Ld. Attorney General for India KK Venugopal

  • He contended that in BCCI’s case, the interpretation of Section 26 of the 2015 Amendment Act is only declaratory in nature. Since the said judgment neither sets aside any executive action, nor any provision of a statute, it does not require a validating act to neutralise its effect. It is open to Parliament if it finds that a view expressed by the Apex Court does not reflect its original intent, to clarify its original intent through amendment. This is in fact what was done by deleting Section 26 of the 2015 Amendment Act and inserting Section 87 into the Arbitration Act, 1996. 
  • Further, there is no substance to the challenge to Section 87 on the ground of the date being fixed as 23.10.2015, as cut-off dates have been upheld in a plethora of cases as being within the exclusive domain of Parliament, and the courts should not normally interfere with the fixation of such cut-off date, unless blatantly arbitrary or discriminatory. 

Submissions made by Ld. Solicitor General of India Tushar Mehta

  • Defending the constitutional challenge to the provisions of the Insolvency Code, he argued that a Writ Petition filed under Article 32 of the Constitution of India cannot be converted into a recovery proceeding by the Petitioners. 
  • The Insolvency Code is not a statute for recovery of debts, but is a statute for the reorganization of corporate persons and resolution of stressed assets of corporate persons.

Ld. ASG Pinky Anand supported the submissions of both the Attorney General and the Solicitor General.

Findings of the Court

At the outset, the court observed that an award does not become unexecutable when challenged under Section 34 merely by virtue of such a challenge being made because of the language of Section 36. The court pointed out that Section 36 was enacted for a different purpose. When read with Section 35, all that Section 36 states is that enforcement of a final award will be under the CPC, and in the same manner as if it were a decree of the Court. Court also observed that to read Section 36 as inferring something negative, namely, that where the time for making an application under Section 34 has not expired and therefore, on such application being made within time, an automatic-stay ensues, is to read something into Section 36 which is not there at all.

The Court declared that the judgments in National Aluminum Company Ltd. (NALCO) v. Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540, National Buildings Construction Corporation Ltd. v. Lloyds Insulation India Ltd. (2005) 2 SCC 367 and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr. (2009) 17 SCC 796 have laid down the law incorrectly. Further, the court observed that the amended Section 36, being clarificatory in nature, merely restates the position that the unamended Section 36 does not stand in the way of the law as to the grant of stay of a money decree under the provisions of the CPC.

Constitutional Challenge to the 2019 Amendment Act

The court held that referring to the Srikrishna Committee Report (without at all referring to BCCI judgment) even after the judgment has pointed out the pitfalls of following such provision, would render Section 87 and the deletion of Section 26 of the 2015 Amendment Act manifestly arbitrary, having been enacted unreasonably, without adequate determining principle, and contrary to the public interest sought to be subserved by the Arbitration Act, 1996 and the 2015 Amendment Act.

The court observed that a key finding of the BCCI judgment is that the introduction of Section 87 would result in a delay of disposal of arbitration proceedings, and an increase in the interference of courts in arbitration matters, which defeats the very object of the Arbitration Act, 1996, which was strengthened by the 2015 Amendment Act.

The court reiterated that an application under Section 34 of the Arbitration Act, 1996 is a summary proceeding not in the nature of a regular suit As a result, a court reviewing an arbitral award under Section 34 does not sit in appeal over the award, and if the view taken by the arbitrator is possible, no interference is called for. The court reiterated that after the 2015 Amendment Act, the court cannot interfere with an arbitral award on merits

The court further observed that retrospective resurrection of an automatic-stay not only turns the clock backward contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed. The court highlighted the fact that refund applications have been filed in some of the cases before the court, praying that monies that have been released for payment as a result of conditional stay orders be returned to the judgment-debtor.

The court took note of the fact that the Srikrishna Committee Report did not refer to the provisions of the Insolvency Code. The court pointed that after the advent of the Insolvency Code on 01.12.2016, the consequence of applying Section 87 is that due to the automatic-stay doctrine laid down by judgments of Supreme Court the award-holder may become insolvent by defaulting on its payment to its suppliers, when such payments would be forthcoming from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted. Also, an arbitral award-holder is deprived of the fruits of its award – which is usually obtained after several years of litigating – as a result of the automatic-stay, whereas it would be faced with immediate payment to its operational creditors, which payments may not be forthcoming due to monies not being released on account of automatic-stays of arbitral awards, exposing such award-holders to the rigors of the Insolvency Code.

For the foregoing reasons, the Court held that deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India.

The Court concluded that the BCCI Judgment will, therefore, continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015. 

Constitutional Challenge to the Insolvency Code

Rejecting the contention of the Petitioner the court held that it is clear that NHAI is a statutory body which functions as an extended limb of the Central Government, and performs governmental functions which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor can such Authority ultimately be wound-up under the Insolvency Code. For the said reason the court held that it is not possible to either read in, or read down, the definition of ‘corporate person’ in Section 3(7) of the Insolvency Code. The court reiterated that the moment challenges are made to the arbitral awards, the amount said to be due by an operational debtor would become disputed, and therefore be outside the clutches of the Insolvency Code

Court clarified that the Insolvency Code is not meant to be a recovery mechanism. Also, the Insolvency Code, belonging to the realm of economic legislation, raises a higher threshold of challenge, leaving the Parliament a free play in the joints. It was further observed that the dispute must be between the parties as understood under the Insolvency Code, which does not contain an Order VIII-A CPC type mechanism.

For the foregoing reasons the challenge to the provisions of Insolvency Code, was held to be devoid of merit.

Solicitor General Tushar Mehta appeared for Union of India (on the question of IBC) and for Respondent PSUs, assisted by counsel Kanu Agrawal (for Union of India), Shailesh Madiyal represented NTPC, Singhania & Partners LLP represented NHAI, Counsel Piyush Sharma appeared for NHPC.

Shardul Amarchand Mangaldas represented IRCON while Patel Engineering was represented by Trilegal through Ashish Bhan, Mohit Rohatgi, Ketan Gaur, Aayush Mitruka and Rajendra Dangwal

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HCCL-Judgment.pdf
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