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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.
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
Submissions made by Senior Counsel Neeraj Kishan Kaul
Submissions made by Senior Counsel CA Sundaram
Submissions made by Senior Counsel Ritin Rai
Submissions made by Senior Counsel Nakul Dewan
Arguments raised by the Respondents
Submissions made by Ld. Attorney General for India KK Venugopal
Submissions made by Ld. Solicitor General of India Tushar Mehta
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