Supreme Court strikes down Section 87 of Arbitration & Conciliation Act

The Hon’ble Supreme Court, on 27th November 2019, in the matter of Hindustan Construction Company Limited & Anr. v. Union of India & Ors. struck down the recently added Section 87 of the Arbitration and Conciliation Act, 1996.

Question before the court

Constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 and brought into force with effect from 30.08.2019.

Court’s Observations

To state that an award when challenged under Section 34 of the Arbitration and Conciliation Act, 1996 becomes unexecutable merely by virtue of such challenge being made because of the language of Section 36 is plainly incorrect. Section 36 was enacted for a different purpose. When read with Section 35, all that Section 36 states is that enforcement of a final award will be under the CPC, and in the same manner as if it were a decree of the Court. (Para 25)

To read Section 36 of the Arbitration and Conciliation Act, 1996 as inferring something negative, namely, that where the time for making an application under Section 34 has not expired and therefore, on such application being made within time, an automatic-stay ensues, is to read something into Section 36 which is not there at all. Also, this construction omits to consider the rest of Section 36, which deals with applications under Section 34 that have been dismissed, which leads to an award being final and binding (when read with Section 35 of the Arbitration Act, 1996) which then becomes enforceable under the CPC, the award being treated as a decree for this purpose. (Para 26)

After the advent of the Insolvency Code on 01.12.2016, the consequence of applying Section 87 is that due to the automatic-stay doctrine laid down by judgments of this Court – which have only been reversed today by the present judgment – the award-holder may become insolvent by defaulting on its payment to its suppliers, when such payments would be forthcoming from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted. Also, an arbitral award-holder is deprived of the fruits of its award – which is usually obtained after several years of litigating – as a result of the automatic-stay, whereas it would be faced with immediate payment to its operational creditors, which payments may not be forthcoming due to monies not being released on account of automatic-stays of arbitral awards, exposing such award-holders to the rigors of the Insolvency Code. For all these reasons, the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India. (Para 51)

Other observations

NHAI is a statutory body which functions as an extended limb of the Central Government, and performs governmental functions which obviously cannot be taken over by a resolution professional under the Insolvency Code, or by any other corporate body. Nor can such Authority ultimately be wound-up under the Insolvency Code. For all these reasons, it is not possible to either read in, or read down, the definition of ‘corporate person’ in Section 3(7) of the Insolvency and Bankruptcy Code, 2016. (Para 63)

When exercising its jurisdiction under Article 32 of the Constitution, the Supreme Court cannot embark on a detailed investigation of disputed facts. (Para 79)

Copy of judgement:Judgement_27-Nov-2019

-Adv. Tushar Kaushik

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