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Section 87 of The Arbitration and Conciliation Act inserted by 2019 amendment was struck down by Sup

Hindustan Construction Company Limited & Anr. Versus  Union of India & Ors. WITH WRIT PETITION (CIVIL) No.1276 of 2019 WITH WRIT PETITION (CIVIL) No.1310 of 2019 WITH M.A. NOS.2140-2144 OF 2019 IN CIVIL APPEAL NOS. 2621-2625 OF 2019 – 27/11/2019

The bench comprising of Justice R.F.Nariman, Justice Surya Kant, Justice V. Ramasubramanian held that 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.

The Supreme Court observed that:

The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed. In fact, refund applications have been filed in some of the cases before us, praying that monies that have been released for payment as a result of conditional stay orders be returned to the judgment-debtor

The Court also observed that:

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.

The result is that the BCCI judgment (supra) will therefore continue to apply so as to make applicable the salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after 23.10.2015. 55. In this view of the matter, it is unnecessary to examine the constitutional challenge to the 2019 Amendment Act based on Articles 19(1)(g), 21 and 300-A of the Constitution of India.

While interpreting Section 36 of the Arbitration and conciliation act, 1996, the court observed that

“Given the fact that we have declared that the judgments in NALCO (supra), National Buildings Construction Corporation Ltd. (supra) and Fiza Developers (supra) have laid down the law incorrectly, it is also clear that the amended Section 36, being clarificatory in nature, merely restates the position that the unamended Section 36 does not stand in the way of the law as to grant of stay of a money decree under the provisions of the CPC.”

While answering the question whether the 2019 Amendment Act removes the basis of the BCCI judgment (supra) of this Court? the apex court states that

“This Court’s judgment in BCCI (supra) had occasion to deal with the important question as to the true interpretation of Section 26 of the 2015 Amendment Act. This Court, in paragraph 28, referred to the transitory provision contained in Section 85-A as proposed in the 246th Law Commission Report, and thereafter in paragraphs 29 to 31, referred to the debates on the floor of the House. In paragraph 32, this Court referred to the differences between Section 26 and Section 85-A. Section 26 was then stated to have bifurcated proceedings with a great degree of clarity into two sets of proceedings – arbitral proceedings themselves, and court proceedings in relation thereto. After construing Section 26 in the manner stated in the judgment, this Court cautioned the Government by stating that the immediate effect of enacting the proposed Section 87 would bedirectly contrary to the Statement of Objects and Reasons of the 2015 Amendment Act, which made it clear that the law prior to the 2015 Amendment Act resulted in delay of disposal of arbitral proceedings, and an increase in interference by courts in arbitration matters, which tends to defeat a primary object of the Arbitration Act, 1996 itself. It was therefore stated that all the amendments made by the 2015 Amendment Act, and important amendments in particular that were made to Sections 28 and 34, would now be put on a backburner, which would be contrary not only to what the 246th Law Commission had in mind, but also directly contrary to the salutary provisions that were made to correct defects that were found in the working of the Arbitration Act, 1996”

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