On 27 November 2019, the Supreme Court of India (SC), delivered a seminal verdict in the case of Hindustan Construction Company Limited & Anr. v. Union of India & Ors. wherein, inter alia2, the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 (Act) was challenged.

Award holders in India have historically had an arduous time realizing the proceeds of an award when awards are challenged by award debtors and the enforcement proceedings automatically stay. By the present decision, the SC, under the Act, has given means to an award holder to secure a part or whole of the award amount pending the outcome of the petition to set aside the award under the Act. The award debtor, pending the outcome of the challenge to the award, is compelled to file an application for a stay against the enforcement of the award wherein it may be required to deposit the award amount in court. This position which was made available through the Arbitration and Conciliation (Amendment) Act, 2015 (2015 Amendment Act) has now been extended to even those matters which commenced prior to 23 October 2015.

Relevant Facts

The present petition has been filed in order to challenge Section 87 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the Act) brought in by Section 13 of Arbitration and Conciliation (Amendment) Act, 2019 (hereinafter referred to as ‘the 2019 Act’) and repeal of Section 26 of the Act via Section 15 of the 2019 Act. This petition also challenges the provisions under the Insolvency and Bankruptcy Code, 2016 on the grounds of it being discriminatory towards the petitioners.

The issue before the SC

These companies (Petitioners) hence moved the SC, by way of a writ, challenging the constitutionality of section 87 introduced by the 2019 Amendment Act, the repeal of section 26 of the 2015 Amendment, as also certain provisions of IBC.

The Verdict and Reasoning

The SC agreed with the Respondents that there was no requirement to expressly refer to the BCCI decision in order to nullify it by way of legislation. The SC also agreed that the very foundation of the BCCI decision having been uprooted, there was no direct assault on the decision.

However, the SC agreed with the Petitioners that the reading of the unamended Act leads to the conclusion that there was a conscious deviation from the UNCITRAL Model Law by not allowing two bites at the cherry to an award debtor, i.e., one during setting aside proceedings under section 34 and one during enforcement proceedings under section 36. The SC read section 35 (which deals with finality of an award) along with section 34 and 36 to state that it was never intended that a setting aside petition would automatically stay enforcement.

This obviously was a complete departure from the earlier position that had been stated by the SC itself. In NALCO6, Fiza7, and National Buildings8 the SC had held that a setting aside petition would inherently stay the enforcement of an award. Thus, in the decision under discussion, while coming to its conclusion as above, the SC expressly overruled these decisions.9

The SC also relied upon section 9, which enables a party to apply for interim reliefs after making of the award but before it is enforced, in support of the conclusion that the award is enforceable and there is no automatic stay against enforcement upon the filing of a setting aside petition. The SC thus clarified that even under the Act, there was never any automatic stay intended and that the 2015 Amendment Act was merely clarificatory in this regard. By extension, the SC implied that the 2015 Amendment Act was therefore retrospectively applicable.

The SC observed that section 87 was introduced merely on the basis of the recommendation in the Srikrishna Committee Report to remove uncertainty around the prospective applicability of the 2015 Amendment Act, when in fact such uncertainty was removed by the BCCI decision. The SC clarified that having held that there was no automatic stay under the unamended Act, the 2015 Amendment Act was only introduced to clarify such position. Therefore, section 87 was contrary to the object sought to be achieved by the 2015 Amendment Act as it sought to make the 2015 Amendment Act only applicable from 23 October 2015. Further, the legislature without referring to the BCCI decision which had pointed out the pitfalls of introducing such a provision had brought into play a provision that was manifestly arbitrary, without adequately determining principle, and contrary to the public interest.

The SC agreed with the Petitioner that the introduction of section 87 resurrects the mischief sought to be corrected by the 2015 Amendment Act and was therefore unconstitutional. At first blush this seems contrary to the reasoning adopted by the SC that there was no mischief under the Act itself – namely, there was no automatic stay under the unamended Act. However, it would appear that the SC was referring to its earlier decisions in NALCO and Fiza, which had led to an erroneous interpretation of the Act, that the 2015 Amendment Act aimed to rectify.

The SC also concurred with the Petitioners that when reading with the IBC, the consequence of section 87 leads to an absurd result, i.e., the award holder becoming insolvent as it was unable to recover sums under arbitral awards. The SC hence found the introduction of section 87 and the repeal of section 26 of the 2015 Amendment Act to be violative of Article 14 of the Constitution of India.

Notably, the SC made short work of the Respondents' contention that the cut-off date was not arbitrary by holding that the question before it was not whether the date was arbitrary but whether the non-bifurcation of court proceedings and arbitration proceedings with reference to the said date was arbitrary. The SC had struck down the said provision on the basis of Article 14, did not venture further into its constitutionality vis-à-vis Article 19(1)(g), 21 and 300-A.

The SC then clarified that the position in BCCI continues to hold good as on date, i.e., by filing a setting aside petition there would be no automatic stay against the enforcement of any arbitral award, irrespective of when the arbitration was commenced

Ratio

The power of grant of stay on an arbitration award has been passed by an arbitral tribunal under Section 36 of the Indian Arbitration Act, 1996 is a discretionary provision rather than mandatory.