DATE OF JUDGEMENT:
27/11/2019
JUDGES:
- Hon’ble Justice R F Nariman
- Hon’ble Justice Surya Kant
- Hon’ble Justice V. Rama Subramanian
PARTIES:
- Petitioner: Hindustan Construction Company Limited and Anr.
- Respondent: Union of India and Ors.
SUBJECT
- The following judgement discusses the constitutional validity of Section 87 of the Arbitration and Conciliation Act and the key issue of stay on enforcement of an award as per Section 34 of the Act.
- An award holder cannot not realize the amount under an award, until the setting aside petition was finally disposed. The petitioner in one of the writ petitions, Hindustan Construction Company Limited, was unable to repay its operational creditors because of the money being stuck under the automatic stay rule and hence, approached the Supreme Court.
OVERVIEW
- The Supreme Court of India delivered a landmark verdict on November 27, 2019, in which the validity of Section 87 of the Arbitration and Conciliation Act, 1996 was challenged.
- Since many award holders in India have had a hard time realizing the proceeds of their awards, due to the stay by the enforcement proceedings, when challenged by debtors, the Supreme Court has now provided an opportunity for them to secure a portion of the award amount as long as the petition is still pending.
RELEVANT PROVISIONS
- Section 3(7) of IBC- It defines “corporate person” as a company as defined in Section 2 of the Companies Act, 2013, a limited liability partnership, as defined in Section 2 of the Limited Liability Partnership Act, 2008. It does not include government bodies.
- Section 87 of Arbitration and Conciliation Act, 1996- Amendments made to the 1996 Act by the Arbitration and Conciliation (Amendment) Act, 2015 will not apply to court proceedings arising out of or in relation to such arbitral proceedings irrespective of their commencement.
- Section 36(3) of Arbitration and Conciliation Act- It states grant of stay of the operation of award for reasons recorded in writing.
- Section 34 of Arbitration and Conciliation Act, 1996- It stipulates grounds to challenge the arbitral award. Provides limitation period of 3 months from the date of receipt of the award, extendable by 30 days in cases where the applicant is able to show sufficient cause for delay in filing petition.
ISSUES
- Whether Section 87 of Arbitration and conciliation Act is constitutionally valid or not?
- Whether the amendments made in 2019 to the Act, which sought to alter the procedure for settling disputes, encroached upon the judgment - the Board of Control for Cricket in India (BCCI) vs. Kochi Cricket Pvt Ltd.?
JUDGEMENT ANALYSIS
- The issue with the Act was that a petition for setting aside an award as per Section 34 automatically stayed pending the enforcement of the award. This dichotomy was corrected by the 2015 Amendment Act, which required the award debtor to file a specific application under Section 36(3) of the Rules to seek a stay against the enforcement of an award. A question on applicability of this amendment, retrospectively or prospectively arose.
- Sri Krishna Committee report highlighted that the amendment to be prospective in nature. However, the SC, in its ruling in the case of Kochi Cricket Private Limited, held that while the 2015 Amendment Act is prospective, the change in position of automatic stay will retrospectively apply. This means that an award holder would not be shut out by a pending petition against the award.
- In 2019, again the legislature enacted an Act to re-visit the provisions of the Arbitration and Conciliation Act, 2019. It repealed Section 26 and stated that Section 87 was prospectively applicable only. Companies were forced to re-examine their standing upon the issue.
- The petitioners contended that since Section 36 of the Act was contrary to the model UNCITRAL Law, it should be revisited by a larger bench so that the automatic stay of arbitral awards can be enforced.
- They stated that despite the fact that the Supreme Court had already decided the case of the Kerala v. Kochi Cricket Company; the government still inserted Section 87 into the Act. They also contended that in addition to being contrary to the object of the Act, Section 87 also violates Articles 14,19(1)(g), 21, and 300-A of the Constitution of India. The petitioners also challenged the IBC on the grounds that the definition of a corporate person under Section 3(7) of the IBC did not include government bodies. Section 87 leads to an absurd outcome i.e. insolvency of the award holder.
- Respondents maintained that the insertion of Section 87 and revoking of Section 26 of the Code of Conduct was not an attack on the judgment of the BCCI. They also stated that if the parliament's original intent was not reflected in the Supreme Court's order, then it can still go ahead with an amendment. A writ petition filed under Article 32 of the Constitution of India cannot be converted into recovery proceedings by the petitioner.
- The Supreme Court held that Section 87 of the Act was resurrected due to the amendments made following the Sri Krishna Committee Report. The court noted that the amendments were only made to remove the ambiguity around the applicability of the 2015 amendment.
CONCLUSION
The court also agreed that Section 87 of the IBC led to absurd results as award holders could not recover the amounts they were promised from the awardees. It also noted that the provisions of the IBC are violative of Article 14. The decision of the Supreme Court will provide much needed relief to the award holders, who usually have to wait for several years for the award to be realized. This will also inject much needed liquidity into the strained sectors.
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