Hindustan Construction Company Ltd vs Union of India

Supreme Court of India

on 27 Nov 2019

Bench (Judges): Rohinton Fali Nariman, Aniruddha Bose, V. Ramasubramanian

INTRODUCTION TO THE CASE

  1. The Supreme Court of India gave a judgment in Hindustan Construction Company Limited & Anr. v. Union of India & Ors. on  27/09/2019, which challenged the constitutionality of Section 87 of the act –  Arbitration and Conciliation Act, 1996.
  2. The decision allowed award debtors to escape and to secure a portion or entire award amount pending to be given to the award holder, a petition to set aside the award was section 36.
  3. Previous to the amendment act in 2015 the Arbitration and Conciliation Act, of 1996 was arbitrary to the law. The reason was the commanding power of section 36 of the act. Thus, to remove the arbitrariness the introduction of the 2015 amendment to the act was necessary.
  4. Arbitration aims to prevent judicial intervention in the dispute, reduce the burden on the judiciary and accelerate dispute resolution mainly in matters which call be settled through an arbitration procedure.
  5. However, the arbitrariness of the act was brought back by the addition of Sec 87 to the act and removing Sec 26 from the act in the Arbitration & Conciliation Act 1996 (Amendment) Act, 2019 which existed before the 2015 amendment of the act.
  6. Though the arbitrariness was corrected by the 2015 amendment, the 2019 amendment brought the uncertainty back. This commentary analyzes the decision of the Supreme Court in Hindustan Construction Company Limited & Anr. v. Union of India & Ors. (2019).

FACTS OF THE CASE

  1. Hindustan Construction Company Limited is an infrastructure and utility development and construction company, that is involved in public utility and common projects like railway tracks, roads, buildings, bridges, hydropower plants, tunnels, and rail facilities which are all mainly focusing on the public.
  2. The company is a contractor and an agent for the government bodies like NHAI, NHPC, NTPC, IRCON, and PWD. Cost overruns are often disputed by these bodies, causing delays in recovering legitimate dues from the government. The only way to recover the dues or payments from the defaulter is to file a civil suit or move toward the arbitration process.
  3. Arbitration awards were in favor of the Petitioner company which was challenged by the government under Sections 34 and 37 of the Arbitration Act, 1996, requiring over 6 years of defense from the overruns and getting a stay on the awards.
  4. The Petitioners face a double whammy due to the stay of awards and as well as the defense for 6 years.
  5. Government bodies are exempt from the Insolvency Code, not the private companies, but when a challenge is filed, the debt becomes an uncertain debt, leading to the dismissal of Insolvency Code proceedings. This results in significant financial burdens for the Petitioners which is a private company.
  6. Petitioner company be in debt operational creditors over 100 crores in demand notices for supplies, including men, machinery, and materials, to continue operations.

ISSUES RAISED IN THE CASE

  1. Is Section 87 of the 1996 Arbitration and Conciliation Act valid under the Constitution or not?
  2. Is the 2015 Amendment’s Repeal of Section 26 constitutionally permissible with regard to specific IBC provisions?
  3. Whether or not the BCCI v. Kochi Cricket Pvt. Ltd. (2018) court decision was affected by the 2019 change to the Act, 1996?
  4. Is it arbitrary not to split up court and arbitration processes based on the aforementioned date?

CONTENTIONS OF THE LEARNED ADVOCATES

CONTENTION BY THE PETITIONERS:

  1. Section 36 of the act was contended by the petitioner, which was enacted based on the Model UNCITRAL (United Nations Commission on International Trade Law) Law, is contrary to the Act’s object, aim and is violative of the Articles 14,19(1)(g), 21, and 300-A of the Constitution of India, 1949.
  2. The Petitioner contends that the judgments on the matters of Section 36 of the act give an automatic stay on the awards given in the arbitration when a suit under Section 34 of the act is filed challenging the award should be reviewed by a larger bench.
  3. The Government of India endorsed a new Section 87 in the Act in 2018, despite the Supreme Court’s recommendation that the Act should only apply to arbitral proceedings commenced before 23.10.2015.
  4. The petitioners argue that this retrospective revival of the automatic stay will cause award holders who have challenged arbitral awards to claim the award back and as well as the award debtors to escape from the liability they possess.
  5. They contest the Indian Business Company (IBC) on the grounds that Section 87 has an irrational impact on the award debtor as well as that Section 3(7)’s term for a corporate person excludes government entities when read in conjunction with other IBC provisions. An obvious legal bias for governmental organizations is bankruptcy.

CONTENTION FROM THE RESPONDENTS:

  1. The respondents stated that the addition of section 87 and removal of section 26 in the recent amendment of 2019 of the act is only a declaratory but not a mandatory one. Adding on to the case of BCCI, the respondent interpreted the 26th section of the act to justify it.
  2. They argued that Parliament could elucidate its original intent of enacting the section through an amendment and that Section 87 is only clarificatory, declaratory, and explanatory but not an attack on the BCCI judgment.
  3. They also argued that challenging the arbitrariness of the IBC, cutting off the date 23.10.2015 for prospective applicability was unsubstantiated and that courts should interfere only in the matters if there is any discrimination.
  4. The defendants argued that a writ petition filed under Article 32 of the Constitution of India cannot be converted into recovery proceedings by the petitioner as the petition filed by the Petitioner is not maintainable.
  5. The petitioner cannot convert the writ petition filed under Article 32 into a recovery proceeding due to the infirmity in the maintainability.
  6. The Respondents argued that the Petitioners’ claims of unconstitutionality, arbitrary cut-off dates, and discriminatory cut-off dates were unfounded as the object of the enaction of the legislation was clearly established.
  7. They argued that the BCCI decision was declaratory and clarified the original legislative’s intention, and that section 87 did not encroach upon the BCCI decision.
  8. The Respondents argued that the courts must intervene only if the removal of the date is deliberately discriminatory.

RATIONALE IN THE CASE

  1. The Supreme Court agreed on both things, one is about the contention of the Respondent that there was no need for the Petitioner to expressly mention to the Board of Control for Cricket in India’s case because the decision made by the Supreme Court didn’t directly assault the foundation of it.
  2. The Supreme Court ruled unamended Act deviates from UNCITRAL (United Nations Commission on International Trade Law) Model Law, preventing the two-bite treatment of debtors in setting aside the awards and enforcement of civil proceedings.
  3. After reading provisions 35, 34, and 36 of the Arbitration Act, the Supreme Court ruled that it was never meant for a petition for setting aside to be submitted to automatically continue in effect. This was a change from the Supreme Court’s former stance, which it had previously declared in similar instances.
  4. The Supreme Court relied on Section 9, which allows interim reliefs to the award holders after an award is enforced against the award debtors, to support the conclusion that the award is enforceable without any doubt.
  5. The Supreme Court clarified that the Act never intended to pass an automatic stay and that the 2015 Amendment Act was merely clarificatory but not to remove an act of automatic stay.
  6. The Supreme Court agreed that section 87 of the Arbitration Act is unconstitutional. And also agreed with the Petitioners, stating section 87’s irrational consequence results in award debtors becoming insolvent due to the incapability to recover sums under arbitral awards.
  7. The Supreme Court invalidated the clause on the grounds that it violated Article 14, which it deemed to be a basic right, but did not further evaluate whether it was lawful under Articles 19(1)(g), 21, or 300-A.
  8. BCCI’s position states that filing a setting aside petition by the award debtors for escaping from awards does not prevent an automatic stay on implementation of arbitral awards, irrespective of arbitration initiation.

DEFECTS OF LAW IN THE CASE

  1. The court also noted that the provisions of the IBC are violative of Article 14, thus considering it unconstitutional. The bias here is made between the governmental bodies and other institutions mentioned in the corporate bodies.
  2. 2. The Supreme Court’s ruling will help award holders who often have to wait many years for the award to be realized, bringing liquidity to distressed industries and reducing the chance that award debtors would be able to avoid accountability.
  3. The Supreme Court made it clear that contesting an arbitral decision does not immediately result in a stay; instead, the award would be automatically enforced if the award debtor is successful in obtaining a stay.
  4. The court attaches requirements to ensure the group’s bona fides before granting a stay.
  5. The judgment does not harm individual sentiments and does not cover errors caused by human error.
  6. Award holders can recover dues from long-standing litigation or arbitration, benefiting stressed sectors.
  7. The judgment prevents Section 36 amendments from being put on the back burner by restoring the legally acknowledged order following the Supreme Court’s ruling in the BCCI case.

INFERENCE DERIVED FROM THE CASE

  1. The 2015 Amendment Act corrected the automatic stay of award petitions caused due to the 2019 amendment, requiring the award debtor to file a separate specific application under Section 36(3) of the Rules for passing the stay on the award passed.
  2. The Supreme Court ruled that the changes made would have a retrospective effect on the legislation.
  3. In 2019, the Arbitration and Conciliation Act was re-visited, repealing Section 26 and stating that Section 87 will have a prospective effect only.
  4. The Supreme Court made it clear that the original language of Article 36 never implied that disputing an arbitral award would result in an instant annulment of the award, its invalidation, or the awardee’s inability to receive it.
  5. The automatic stay will no longer be in effect and the award will be automatically executed without further notice if the recipient is currently serving a death sentence.
  6. This decision does not seek to offend any particular group, sect, or religion and the White Code VIA Mediation and Arbitration Center is not responsible for human error and therefore does not violate any fundamental rights.
  7. Awardees can recover debts that were previously caught up in litigation or arbitration, providing a boost to distressed businesses and reducing the likelihood that award debtors will be released from their obligations.
  8. Because of this, this Court is unable to conduct a thorough inquiry to ascertain the status of funds received or deposited in accordance with arbitral rulings in favor of the Petitioner corporation while exercising its authority under Article 32 of the Constitution.
  9. As a result, no orders in that regard may be made in the current proceedings.

REFERENCES MADE FOR THE COMMENTARY

Name: Suriya Badrinath S

Course: 2nd Year of 3 years LLB

College: Government Law College, Vellore, Tamil Nadu.

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