In a significant move, the Supreme Court, in Hindustan Construction Company Ltd v Union of India, granted a huge relief to several debt-ridden private sector companies (which are acting as contractors of the government) by striking down section 87 of the Arbitration and Conciliation Act, 1996. The section was introduced via the Arbitration and Conciliation (Amendment) Act, 2019, which mandates the automatic stay of the enforcement of the arbitral award that arises from arbitration proceedings initiated prior to 23 October 2015.
The court’s decision to strike down section 87 is crucial, as private companies such as Hindustan Construction Company, Gammon Engineers and Contractors and other construction companies are required to receive nearly ₹70 billion (US$983 million) in the form of an arbitral award from government entities. The arbitral award was passed in favour of the private companies, but due to the introduction of section 87, i.e., when a suit is filed under section 34 of the act, it automatically stays the enforcement of the arbitral award, leading the private entities into a financial mess that may ultimately push them into insolvency and bankruptcy.
Section 87 is not only against the preamble of the 2015 amendment act, but is also in contravention of section 35 of the Arbitration Act. This is because in a civil court, where a full appeal is filed, order XLI rule 5 of the Code of Civil Procedure, 1908 (CPC) is to apply, there being no automatic stay of a money decree; whereas in a summary proceeding under section 34 of the Arbitration Act, 1996, where the court does not sit in appeal over the award, there is an automatic stay of an arbitral award on the mere filing of a section 34 application, which in turn takes years for final disposal.
In Leela Hotels Ltd v Housing and Urban Development Corporation Ltd the position is settled that section 36 is to be read conjointly with section 35 of the act, which says that the enforcement of a final award is to be under the CPC, treating the award as if it were a decree of the court.
Therefore, the provisions of section 87, which restrain the enforcement of the arbitral award received from arbitral proceedings that were initiated before 23 October 2015, is held to be arbitrary and struck down by the court. The retrospective effect of such provisions will cause great hardship to the arbitral award holder, as they received an arbitral award after completion of the many rounds of expensive litigation, and through such crafty provisions they have to re-enter into litigation to ask their claims.
The Supreme Court’s decision to strike down the insertion of an automatic stay provision under section 87 of the Arbitration Act will bring major relief to several private entities, which can move the high court to seek enforcement of their awards or move for an application asking the government companies to deposit 75% of the arbitral award monies in the court, although it remains within the exclusive domain of the court to grant a stay or not.
Invalidating section 87 also fetches better valuation for companies and restrains lenders from dragging them into insolvency.
Institute of Law, Nirma University
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