The Supreme Court of India handed down a landmark decision in Hindustan Construction Company Limited & Anr. v. Union of India & Ors in which the substantive validity of Section 87 of the Arbitration and Conciliation Act, 1996 (Act) was questioned, among other things.
Whether Section 87 of the Arbitration and Conciliation Act, 1996 is constitutionally valid or not?
The Petitioner, Hindustan Construction Company Limited (HCC), is an engineering company that specialises in large-scale infrastructure projects. It has worked as a contractor for NHAI, NHPC, NTPC, and IRCON International.
HCC subsequently had disagreements with these government agencies and government contractors due to the design of these programs and the associated cost overruns. Several awards were made in favour of HCC during the subsequent arbitral hearings. Section 34 of the Act was used to contest these prizes. Invariably, the reward debtors effectively obtained compulsory stays on the execution proceedings due to the recently inserted Section 87 through specific appeals to the arbitral awards. HCC's main argument was that this would prolong the procedure of enforcing an arbitral award and introduce additional obstacles for legitimate award creditors like HCC.
HCC received a double whammy as a result of this. On the one hand, filing an appeal to the arbitral award would be considered a contested debt for the IBC, and any petitions submitted by HCC as an operational creditor would be dismissed as unmaintainable, while on the other hand, numerous operational creditors who had supplied labour and equipment for certain ventures were sending demand notices to HCC.
Instead of this, HCC sought to have Section 87 of the Arbitration Act, Section 26 of the 2015 Amendment Act, and some clauses of the IBC declared unconstitutional.
The Supreme Court stated that section 87 was enacted solely to implement the Srikrishna Committee Report's suggestion to eliminate confusion surrounding the potential applicability of the Amendment Act. However, the BCCI ruling had already eliminated such uncertainty. The Supreme Court explained that because the unamended Act did not provide an automatic hold, Act was merely passed to explain the situation. As a result, section 87 was incompatible with the 2015 Amendment Act's stated goal of making it only effective as of October 23, 2015. Furthermore, the legislature enacted a manifestly unconstitutional law, lacked proper deciding principle, and was detrimental to the general interest without appealing to the BCCI ruling, which had found out the dangers of implementing such a provision. The Supreme Court concluded with the Petitioner that the addition of section 87 resurrects the problem that the Amendment tried to address and is therefore unlawful. The Supreme Court, relying on its decision in Pioneer Urban Land and Infrastructure Limited and Others v. Union of India and Others, held that the IBC was not intended to be a rehabilitation tool but rather to resolve strained properties. As a result, the Supreme Court strikes down Section 87 of them, which grants an automatic stay on an arbitral award.
This ruling restores the legally established order after the Supreme Court's decision in BCCI, preventing changes to Section 36 from being pushed to the back burner.
As a result, when new legal cases, such as an appeal to an arbitral decision, are involved (i.e. court proceedings started after October 23, 2015), the 2015 Amendment Act may occur regardless of whether arbitral proceedings begin. This essentially means that the terms of the Amendment Act would extend even though parties appeal an arbitral award today issued in arbitration that started before the Amendment Act.
As a result, there will be no immediate stay if legal action is filed to challenge the arbitral award. In particular, the Supreme Court has explained that the initial Section 36 never implied that simply challenging an arbitral award would trigger an immediate stay and make the prize ineffective.
If the award debtor effectively obtains a stay of execution, the arbitral award will be executed automatically. Furthermore, before granting a stay on managing an arbitral award, the Courts attach some requirements to guarantee the group attempting to contest the award's bona fides.
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