Supreme Court: No automatic stay on challenges to arbitral awards December 27, 2019
Published in: Between The Lines
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The Supreme Court of India (“SC”) in the case of Hindustan Construction Company Limited and Another v. Union of India and Others (decided on November 27, 2019) struck down the insertion of Section 87 to the Arbitration and Conciliation Act, 1996 (“1996 Act”), calling it “manifestly arbitrary” and in violation of Article 14 of the Constitution of India. The newly inserted Section 87 of the 1996 Act contemplated that there would be an automatic stay on arbitral awards the moment they are challenged under Section 34 of the 1996 Act, if they pertained to arbitral proceedings commenced before October 23, 2015, that is, the date of enactment of the Arbitration and Conciliation (Amendment) Act, 2015 (“2015 Amendment Act”). This was irrespective of the fact that the said court proceedings under Section 34 (application for setting aside arbitral award) of the 1996 Act has commenced prior to or after October 23, 2015, Section 34 application only had to relate to an arbitral proceeding commenced prior to October 23, 2015.
The catena of issues in this case derive their genesis from an amendment to Section 36 (enforcement of arbitral awards) of the 1996 Act by Section 19 of the 2015 Amendment Act, which removed the automatic stay on operation of arbitral awards merely upon being challenged.
The SC also struck down the repeal of Section 26 (Act not to apply to pending arbitral proceedings) of the 2015 Amendment Act by the Arbitration and Conciliation (Amendment) Act, 2019 (“2019 Amendment Act”). In BCCI v. Kochi Cricket Private Limited [(2018) 6 SCC 287], the SC had deliberated upon the scope of Section 26, holding that automatic stay would not apply to Section 34 applications filed on or after October 23, 2015, even if the arbitral proceedings had commenced prior to the said date.
The SC held that insertion of Section 87 to the 1996 Act removed the premise of its judgement in BCCI v. Kochi Cricket Private Limited [(2018) 6 SCC 287], by imposing an automatic stay on arbitral awards if they pertained to arbitral proceedings before October 23, 2015.
A set of writ petitions had been filed before the SC challenging the constitutionality of inserting Section 87 to the 1996 Act and repealing Section 26 of the 2015 Amendment Act. The petitioner in one of the writ petitions, Hindustan Construction Company Limited (“HCC/ Petitioner”) had submitted that as a contractor, it had undertaken projects for several government companies such as NTPC Limited, IRCON International Limited, NHPC Limited, in addition to National Highways Authority of India (“NHAI”) (collectively “Respondents”). All of the aforesaid parties were made respondents to the writ petition. In respect of these projects, cost overrun was always a matter of dispute between HCC and the Respondents. The only way for HCC to receive its dues was by instituting either a civil proceeding or an arbitration proceeding. Even in the scenario that an arbitral award was passed in the favour of HCC, it was invariably challenged by the Respondents by filing an application under Section 34 of the 1996 Act. A Section 34 application resulted in imposition of an automatic stay on the operation of arbitral awards. Consequently, on one hand, HCC’s pending dues would be stuck until the application could be adjudicated upon and on the other hand, HCC’s pending dues would become ‘disputed debt’ as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”). Therefore, any proceeding that could have been initiated by HCC under the IBC against the respondent government companies, would come to be dismissed. In any case, HCC could not initiate any proceeding against a statutory body like NHAI under the IBC.
It was also pertinent that HCC already owed large sums of money to its own operational creditors. In fact, demand notices had already been issued to HCC by these operational creditors for sums amounting to over a hundred crores. Therefore, even if HCC was financially sound, it would be unable to repay its operational creditors because of money being stuck under the automatic stay rule.
I. Whether Section 87 introduced to the 1996 Act by the 2019 Amendment Act was constitutionally valid.
II. Whether Section 26 of the 2015 Amendment Act should have been repealed with effect from October 23, 2015 by the 2019 Amendment Act.
III. Whether Sections 3(7) and 3(23) of the IBC are arbitrary and discriminatory to the Petitioners.
Arguments raised by the Petitioner:
The Petitioner argued that from the plain language of Section 36 of the 1996 Act, automatic stay did not follow, and therefore, judgments of the SC which had held so, would require re-visitation.
Further, the Petitioner also brought to the SC’s notice that in its judgement in BCCI, it had considered the report chaired by Retired Justice B. N. Srikrishna (“Srikrishna Committee Report”), wherein, it was proposed that Section 87 should be introduced to the 1996 Act. The Petitioner contended that in BCCI, the SC had discouraged the introduction of Section 87 to the 1996 Act as it would have defeated the very object of introducing the automatic stay rule. Even though the judgement in BCCI was sent to Ministry of Law and Justice and to the Attorney General of India, Section 87 was finally inserted in the 1996 Act by the 2019 Amendment Act, without even a mere reference to the SC’s judgement in BCCI. Therefore, the 2019 Amendment Act sought to overturn the judgement in BCCI without disturbing its basis .The Petitioner, inter alia, raised the following contentions:
(i) It was contended that while in a full-blooded appeal, there was no automatic stay, in a summary proceeding as under Section 34 of the 1996 Act, there was an automatic stay merely upon filing of an application.
(ii) It was also contended that payment of a money decree under an arbitral award, even when under challenge, should be the rule whereas the stay should be the exception.
(iii) Further, it was contended that though introduction of Section 87 to the 1996 Act was a direct attack on the judgement in BCCI, the said section did not remove the basis of the said judgement. The said section had also arbitrarily imposed a ‘cut-off date’ qua the application of amended Section 36 of the 1996 Act.
(iv) With reference to NHAI, a statutory body constituted by the NHAI Act, 1988, the Petitioner contended that within Section 3(7) (corporate person)of the IBC, the words ‘limited liability’ should be deleted. Alternatively, Section 3(23) (g) (any other entity established under a statute) of the IBC should be read into Section 3(7) of the IBC. It was strongly contended that there was no level playing field under the IBC as far as HCC was concerned. This was because a statutory authority like NHAI could initiate resolution process against HCC but that could not happen vice-versa, which made the provisions of IBC discriminatory as IBC only provides for reorganization and insolvency resolution of corporate persons, etc. thereby excluding statutory bodies from its ambit.
(v) It was submitted that there was no bar to applying an Order VIII-A of the Civil Procedure Code, 1908 (“CPC”) type procedure to proceedings under the IBC. Such a manner of application would have manifested a situation wherein, if the Petitioner’s sub-contractor triggered the IBC, the Petitioner would be able to make its principal employer a party to such proceedings. Resultantly, the sub-contractor would be able to recover pending amounts directly from the principal employer.
Arguments raised by the Respondents
(i) It was contended that interpretation of Section 26 of the 2015 Amendment Act was only ‘declaratory’ in nature. Moreover, it was open to the Parliament to clarify its original intent by an amendment, if it found that a view expressed by the SC did not reflect its original intent. Such clarification was manifested by deleting Section 26 of the 2015 Amendment Act and introducing Section 87 to the 1996 Act.
(ii) Section 87 of the 1996 Act had also retrospectively removed the basis of the judgment of the SC in BCCI.
(iii) It was also submitted that in a plethora of cases the SC had held that fixing of a ‘cut-off date’ was within the exclusive domain of the Parliament.
(iv) The writ petition filed under Article 32 of the Constitution of India could not be converted into a recovery proceeding by the Petitioners.
(v) The definitions under Sections 3(7) and 3(23) of the IBC were separate and independent of each other. Therefore, nothing from Section 3(23) of the IBC which defined a ‘person’ could be imported into the definition of ‘corporate person’ under Section 3(7) of the IBC.
(vi) NHAI was a statutory body of the Central Government that carried out sovereign functions. Inevitably, the IBC could not be applied against a statutory body, because no resolution professional or private individual could take over the management of a body that performed sovereign functions.
OBSERVATIONS OF THE SUPREME COURT
A. Interpretation of Section 36 of the 1996 Act:
It was incorrect to read Section 36 of the 1996 Act as inferring something negative, that where the time period of ninety days for making an application under Section 34 of the 1996 Act had not expired and when such an application was made within the time frame, an automatic stay automatically ensued. The SC, pointed out that automatic stay of an arbitral award as provided in its previous judgments which are, National Aluminum Company Limited(NALCO) v. Pressteel and Fabrications Private Limited and Another [(2004) 1 SCC 540], National Buildings Construction Corporation Limited v. Lloyds Insulation India Limited [(2005) 2 SCC 367], Fiza Developers and Inter-State Private Limited v. AMCI (India) Private Limited and Another [(2009) 17 SCC 796] were incorrect. The amended Section 36 of the 1996 Act only restated the position that provisions did not stand in the way of law towards granting a stay of a money decree under the provisions of CPC.
B. Removal of the basis of the BCCI judgement by the 2019 Amendment Act:
The retrospective omission of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act had indeed resulted in removal of the basis of the judgement in BCCI. The SC observed that at the time of passing of the judgment in BCCI, it was well aware of the recommendation of the Srikrishna Committee Report towards introducing Section 87 to the 1996 Act. It had noted that an immediate effect of enactment of Section 87 in the 1996 Act would put all important amendments on a back-burner.
Further, it was noted that such enactment would become contrary to the statement of objects and reasons of the 2015 Amendment Act. The statement of objects and reasons of the 2015 Amendment Act had made it very clear that the law prior to the 2015 Amendment Act had resulted in delay of arbitral proceedings and increased interference by courts in arbitration matters.
C. Constitutional challenge to the 2019 Amendment Act:
The SC agreed with the contentions of the Petitioner that mischief of the old Section 36 of the 1996 Act as regards automatic stay had been remedied after a period of more than 19 years by way of the 2015 Amendment Act, and now enactment of Section 87 to the 1996 Act would mean working in a reverse direction. Moreover, payments already made under the amended Section 36 of the 1996 Act to award-holders in a situation of ‘no stay’ or ‘conditional stay’ would be sought to be refunded. It was observed that the Srikrishna Committee Report did not refer to the provisions of the IBC. As a result of an automatic stay, the award holder may become insolvent by defaulting on payments to its creditors, when such payments would have been ordinarily forthcoming from the arbitral awards. Therefore, deletion of Section 26 of the 2015 Amendment Act and insertion of Section 87 to the 1996 Act were struck down as being manifestly arbitrary under Article 14 of the Constitution of India.
As far as the fixing of ‘cut-off date’ was concerned, it was the non-bifurcation of court proceedings and arbitration proceedings with reference to October 23, 2015 that was found to be manifestly arbitrary. The challenge was not in respect of fixing of a cut-off date. The SC also held that the ratio decidendi in BCCI would have continued application, so as to enable application of salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after October 23, 2015.
D. Constitutional challenge to the IBC:
The SC held that as far as the statutory body, that is, NHAI was concerned, the Petitioner’s argument as to deletion of words in Section 3(7) of the IBC or addition of words from Section 3(23) (g) of the IBC into Section 3(7) of the IBC was not acceptable. NHAI was a statutory body that functioned as an extended limb of the Central Government, and these governmental functions could not be taken over by a resolution professional under the IBC, or any other corporate body. It was also impossible that such a statutory body could be ultimately wound-up under the provisions of IBC. Relying upon its judgment in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [(2019) 8 SCC 416], the SC held that the IBC is not meant to be a recovery mechanism, what it did in fact intend, was the resolution of stressed assets. Further, the argument that an Order VIII-A type mechanism as under the CPC was not barred under IBC, was totally rejected by the SC. It was observed that a dispute must be between the parties as provided under the IBC. The IBC was not a debt recovery legislation, wherein by some theory of indemnity or contribution debt owed to the Petitioners could be fastened on to public sector units.
Vaish Associates Advocates View
The myriad of legal conflicts started right from the enactment of 2015 Amendment Act. A body of conflicting decisions across High Courts as to the applicability of the automatic stay rule, had resulted in constant uncertainty until the SC finally rendered its judgement in BCCI. The primary principle of this judgement is to prevent an automatic stay on an arbitral award when challenged, merely because it pertained to an arbitral proceeding commenced before October 23, 2015, that is, the date of enactment of the 2015 Amendment Act. The SC, in a welcome decision, clearly has recognized the need for India to become an arbitration friendly destination, which had been suddenly nullified by introduction of Section 87 to the 1996 Act. Excessive interference of courts and undue delay would have been the ultimate result of the retrospective resurrection of the automatic stay rule.
More particularly, an award holder would have been rendered insolvent because of obstruction of dues pending under an arbitral award on the one hand, and the escalating debt, now being owed to the award holder’s creditors on the other hand. The perpetuation of this vicious cycle would have taken a toll on the financial health of the award holder, and simply defeat the purpose and object of deleting the automatic stay rule. The judgement has done well in green signaling India as a business and arbitration friendly regime.
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