HINDUSTAN CONSTRUCTION COMPANY LIMITED & ORS. Vs. UNION OF INDIA (UOI) & ORS.
Updated: Mar 1
Citation: 2019 (6) ARBLR 171 (SC), 2019 (16) SC ALE 823
Bench Strength: Rohinton Fali Nariman, Surya Kant and V Ramasubramanian JJ. (3)
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.
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.
Issue(s) & Analysis:
1. Interpretation of Section 36 of 1996 Act, w.r.t Automatic-Stays The petitioner(s) begin their argue that Section 36 of the Act has been formulated on the line of Article 36 of UNCITRAL Model laws and the interpretation of the same in terms of awarding ‘automatic- stay’ on enforcement of arbitral tribunal has to be revisited in the light of recommendations made by 246th Law Commission Report through Arbitration and Conciliation (Amendment), Act, 2015. Moreover, they cite Justice B.N. Srikrishna Committee’s Report on ‘Review the Institutionalisation of Arbitration Mechanism in India’ to drive the basis of 2015 Amendment Act. The said report recommended that amendments introduced via Amendment Act, 2015 be made applicable to only those arbitral proceedings that have commenced after 23.10.2015 excluding the ongoing court proceedings that have commenced after 23.10.15 but emanate from arbitral proceedings prior to 23.10.2015. Further, Shri Nakul Dewan cited the ’two bites of a cherry’ (‘cherry doctrine’) and argued that Section 36 was intended to provide a stronger regime wherein an award passed by virtue of arbitration proceedings can be immediately implemented. While the fail-safe net has also been provided wherein discretionary powers have been conferred upon the court to put a stay on the enforcement of such arbitral award, the practice of ‘automatic-stay’ on such an award under Section 34, 1996 Act, is arbitrary in nature. The Court began by discussed UNCITRAL Model of law as a basis for formulation of arbitration laws in Indiaand accepted that ‘cherry doctrine’ is not applicable. The Court also cited its earlier judgmentshas mistakenly interpreted the language of Section 34, Arbitration Act, 1996 as mandatory in nature thereby putting the requirement of ‘stay’ on the enforcement of arbitration awards in a compulsory category in case:a) expiry of time to make an application or b) the application against the enforcement of such award has been refused. The Court refused tto accept such a reading of the provision calling it an ‘implied prohibition’ thus taking away the discretionary powers of vested in the court. In the case of Dirk India Pvt. Ltd. v Maharashtra State Power Generation Co. Ltd. a protective measure u/s 9 of Arbitration and Conciliation Act, 1996 is provided for an unsatisfied party can resort to seek an interim measure against the award. Hence, the application of ‘automatic-stays’ are not a rule.
2. Removal of BCCI Judgement The petitioner(s) argue that the apex court had taken into consideration and dismissed the provision of Section 87 (via a press release) earlier in the case of BCCI v Kochi Cricket Private. Ltd.on the grounds of it being contradictory to ‘Statement of Objects and Reasons’ of the Amendment, Act, 2015. Thus, without a pointed reference to the BCCI Judgment removing the ‘basis’ of the judgement, the legislature cannot pass such the Amendment Act, 2019. It was further argued that the failure to remove the basis makes Section 87 unreasonable, excessive and arbitrary thus renders the provision constitutionally infirm. The Court disagreed with the petitioner’s argument that a pointed reference to a supreme court judgment by the Legislature is mandatory to introduce amendments with respect to the same. While it agreed that in substance the basis of such judgement declaring a rule requires to be discussed by the Legislature, no requirement of making a pointed reference to the judgement has to be mandatorily undertaken by the Court. Thus, where the Court’s judgment is purely declaratory the courts will lean in support of the legislative power to remove the basis of a court judgement even retrospectively.”. Thus the Court drew a distinction between Section 87, 2019 Amendment and Section 26, 2015 Amendment Act and ruled that the former in no way violates this court’s ruling in the BCCI judgement.
3. Constitutional Challenge to Amendment Act, 2019 The petitioner(s) argued that the 2019 Amendment Act violates the very objective of arbitration regime which is to ensure the timely legal remedy in the form of enforceable and binding arbitral awards. Section 87 under the Amendment Act, 2019 was introduced with an intention to streamline the conflicting opinions of various high courts in terms of applying Section 26, Amendment Act, 2015 and prejudice and uncertainty caused due to retrospective application of Section 26. The Hon’ble SC held that the introduction of Section 87 and deletion of Section 26 under the Amendment Act, 2019 is manifestly arbitrary, enacted unreasonably, without adequate determining principle and contrary to the public interest sought to be subserved by the Arbitration Act, 1996 and Amendment Act, 2015. Section 87 violates the constitutional rights under Article 14, 19(1)(g), 21 and 300-A of Constitution of India. The Court further stated that the application under Section 34 is not in nature of an appeal rather summary proceedings. Courts cannot interfere if the arbitrator’s decision is a viable one ie., the court has no power to review the decision on the merits. The incongruity in the treatment of such an appeal between the applicability of Order XLI Rule 5 of CPC in cases of advanced appeals and no such applicability under review of arbitral awards under Section 36 of the Act (automatic-stay) makes Section 87 rather arbitrary as under Article 14 of Constitution of India. The Court accepted the Dr. Singhvi’s argument regarding ‘automatic-stays’ qualifying for nothing but returning back to the earlier time-consuming and lethargic process, to overcome which the Amendment Act, 2015 was introduced.
4. Constitutional Challenge to Insolvency and Bankruptcy Code (“IBC”) The petitioner(s) brought the court’s attention towards the practical financial hardship such grant of automatic stay creates on them. In cases where awards are passed by the arbitral tribunals when dispute arose between the parties and the same are challenged before the courts, the provision of automatic stay leading to remarkable delay in the release of funds to the companies like the petitioners. Under the newly introduced Insolvency and Bankruptcy Code, the petitioners cannot file a claim against the government companies by virtue of the exemption provided to them considering they are statutory authorities or government departments which implies that the petitioner cannot move the NCLT against such bodies because the ongoing dispute related to arbitration deals with the same debt and is ‘under dispute’. However, operational creditors of petitioners can initiate insolvency proceedings against them demanding the repayment of their debt. It was further argued that even though financial position of the company is an important yardstick when it comes to determining insolvency but it comes at a later stage during the formulation of the resolution plan. Hence, the proceedings against the company are already triggered causing loss which is completely arbitrary. The petitioner cited the judgement of Mobilox Innovations Pvt. Ltd. v Kirusa Software Private Limited arguing that when an application is filed by the operational creditors of petitioners the principal employer be made a party to the dispute so as to ensure that easy and faster recovery of amounts.The petitioners urged the court to find a casus omissus and apply the principle of indemnity or contribution that the principle employer. The Court said that the resolution process under IBC is not a debt enforcement procedure and with respect to an ‘operational debt’, including a dispute where an application has been filed under Section 34 of the Arbitration Act, 1996 such a debt cannot be pursued to file an application against the operational creditor under IBC.Hence, the object of IBC with respect to operational creditors is to accept such applications wherein a real dispute with respect to debt owed between parties does not exist.This Court referred to the definition of dispute u/s 5(6) of the IBC and further highlighted the various criteria under Section 9 of IBC which the adjudicating authority employs to ascertain whether a dispute exists among the parties, one of which is, : “if there is existence of dispute between the parties or the record of the pendency of a suit or arbitration proceeding filed before the receipt of demand notice of the unpaid operational debt in relation to such dispute”. Thus, in such a scenario, application before the NCLT will not be accepted in the first place.
Conclusion The Court held that Section 87 of Amendment Act, 2019 is unconstitutional.
Remarks Supreme Court has rightly taken a ‘pro-arbitration’ approach which is the need-of-the-hour in India considering delays in enforcement of awards making arbitration a less attractive option. The aim of the introduction of arbitration regime was to ensure resolution of disputes with timely recovery while their being minimum intervention by court proceedings. This is true especially when it comes to foreign investors investing in India via international arbitration treaties. For instance, an Australian company resorted to invoking the jurisdiction of UNCTRAL Tribunal for enforcement of its award due to more than nine years delay in seeking enforcement of awards in India.Moreover, when it comes to application of the ‘two bites of cherry’ doctrine, this Court has rightly held that the same cannot be applied in the circumstances of the present case. While Indian courts had earlier taken a similar view, foreign national jurisdictions have arrived at similar conclusions.Finally, the Supreme Court removed any doubt as to the insolvency proceedings against the insolvency proceedings. The fact that insolvency regime is not a ‘debt enforcement’ regime has been hammered down by the Court so as to provide a clear ratio that applicability of stay orders in no way violate a party’s interests under insolvency regime by highlighting that an application with respect to a disputed debt cannot be admitted by the adjudicating authority (NCLT) under the IBC regime. In other jurisdictions such as US there exists a bifurcation when it comes to automatic stays on the enforcement of arbitral award when it comes to bankruptcy proceedings. While domestic awards can be made subject to the automatic stay of the bankruptcy court, foreign awards could not be meted the same unless the foreign party to the proceeding has sufficient contacts with the United States to subject it to in personam jurisdiction in the United States. Thus, the apex court has made a correct decision so as to make India a lucrative site for companies to seek investment opportunities considering speedier resolution of disputes under the arbitration regime and enforcement of the awards thereunder.
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