Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2019 Supreme(SC) 1302

SUPREME COURT OF INDIA
R.F. NARIMAN, SURYA KANT, V. RAMASUBRAMANIAN, JJ.
Hindustan Construction Company Limited & Anr. – Appellant
Versus
Union of India & Ors. - Respondents
Writ Petition (Civil) No. 1074 of 2019 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
Decided on : 27-11-2019

Advocates Appeared:
For the Petitioner(s):A.M. Singhvi, Neeraj Kishan Kaul, Mahesh Agarwal, Rishi Agrawala, Ankur Saigal, Madhavi Khanna, Shruti Arora, Devika Mohan, E. C. Agrawala, Neeraj Kishan Kaul, Samar Kachwaha, Chanan Parwani, Akash Lamba, Toshiv Goyal, Namisha Chadhha, Pritha Suri, Divyanshu Srivastava, Varun Mathur, Prashant Kumar, Aditya Dev Triguna, Awantika Manohar, Prashant Kumar, Awantika Manohar, Aditya Dev Triguna, For M/s. AP & J Chambers, Advocates
For the Respondent(s):Pinky Anand, ASG Sumit Teterwal, Saudamini Sharma, Snidha Mehra, Hemant Arya, Kirti Dua, Tanisha Samanta, Chakitan V.S. Papta, Mrs. Anil Katiyar, Arvind Kumar Sharma, Astha Tyagi, Madhusweta, Kanika Tandon, Subhashree Mohapatra, Piyush Sharma, Gauhar Mirza, Nishant Dushi, S. S. Shroff, Shailesh Madiyal, Shail Kumar Dwivedi, C.A. Sundaram, Ashish Bhan, Mohit Rohatgi, Ketan Gaur, Ayush Mitruka, Rajendra Dangwal, Syed Jafar Alam, Abhishek Gupta, Zafar Inayat, Rohini Musa, Ashwani Kumar, Peeha Verma, Ravinder Nain, Ravindra Lokhande, Abhishek Atrey, Advocates

IMPORTANT POINTS
Section 36 cannot be inferred as meaning that on an application u/s 34 being made within time, that is, before expiry of time, an automatic-stay ensues. Doctrine of automatic-stay reversed.
Enactment for nullifying a judgment by removing its basis is not required to refer to the judgment.
Section 36 (as amended in 2015) being clarificatory, unamended Section 36 is not a bar to grant of stay of a money decree under the provisions of CPC.
Proceedings u/s 34 are summary proceeding and not in the nature of regular suit. Court cannot sit in appeal. View taken by arbitrator, if possible one, cannot be interfered with on merits.
Deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 by the 2019 Amendment Act struck down.
On challenge to arbitral award the amount said to be due by an operational debtor would become disputed. The IB Code would not be attracted in such situation.
Taking ‘financial position’ into account only for appointment of resolution professional u/s 5(9) and not while adjudicating default u/s 3(12) is not manifestly arbitrary.
The IB Code is not meant to be a debt recovery legislation.
Under Article 32 Court cannot undertake a detailed investigation of disputed facts.

Headnote:
(a) Arbitration and Conciliation Act, 1996 - Section 36 and 35 - Time for making an application to set an arbitral award having expired, or such application been refused - Award becomes final and binding - It shall then be enforced under CPC as if it were a decree of the court - Section 36 cannot be inferred as meaning that on an application u/s 34 being made within time, that is, before expiry of time, an automatic-stay ensues. (Para 22, 25, 26, 30)
(b) Arbitration and Conciliation Act, 1996 - Section 9 - Enables a party to apply to court for relief before the award is enforced in accordance with Section 36. (Para 27)
(c) Arbitration and Conciliation Act, 1996 - Section 36 (as amended in 2015) - Clarificatory - Unamended Section 36 - Not a bar to grant of stay of a money decree under the provisions of CPC. (Para 32)
(d) Interpretation of statute - Validating Act - Enactment for nullifying a judgment by removing its basis - Not required to refer to the judgment. (Para 42)
(e) Interpretation of statute - Validating Act - Section 15 of Arbitration and Conciliation (Amendment) Act, 2019 removing the basis of BCCI by omitting Section 26 of the 2015 Amendment Act, construed in the BCCI judgment, from the very start - Thus one fundamental prop of BCCI removed by retrospectively omitting Section 26 altogether from the very day when it came into force - No error. (Para 45)
(f) Arbitration and Conciliation Act, 1996 - Section 87 - Making 2015 Amendment Act inapplicable to Court proceedings arising out of arbitral proceedings irrespective of whether such court proceedings are commenced before or after the commencement of the 2015 Amendment Act - Making 2015 Amendment applicable only to court proceedings arising out of arbitral proceedings that are commenced on or after the commencement of the 2015 Amendment Act Section 87 explicitly states that court proceedings are merely parasitical on arbitral proceedings - 2015 Amendment would apply if arbitral proceeding commenced after commencement of the 2015Amendment - Not a re hash of section 26 omitted with effect from 23.10.2015. (Para 46)
(g) Arbitration and Conciliation Act, 1996 - Section 34 - Summary proceeding - Not in nature of regular suit - Court cannot sit in appeal - View taken by arbitrator, if possible one, cannot be interfered with on merits. (Para 49, 50)
(h) Arbitration and Conciliation Act, 1996 - Section 87 (inserted by 2019 Amendment) and 26 of 2015 Amendment (deleted by 2019 Amendment) - Automatic stay on award - Resulting in no money flow to award holder by virtue of the award - Further resulting nonpayment to operational creditors by award holder making liable for insolvency - Deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 by the 2019 Amendment Act - Not bifurcating court proceedings and arbitration proceedings with reference to commencement of Amendment Act 2015 - Putting in improvements in the working of the Arbitration Act, 1996 on a backburner - Held manifestly arbitrary under Article 14 of the Constitution of India - Struck down. (Para 51, 53)
(i) Insolvency and Bankruptcy Code, 2016 - Section 3(7) and 3(23)(g) - Government Companies subsumed under section 3(7) - NHAI - A statutory body performing governmental functions which cannot be taken over by a resolution professional - Such Authority cannot also be wound-up - No need for any reading down. (Para 58, 63)
(j) Insolvency and Bankruptcy Code, 2016 - Section 7 and 9 - On challenge to arbitral award the amount said to be due by an operational debtor would become disputed - The Code would not be attracted. (Para 65)
(k) Insolvency and Bankruptcy Code, 2016 - Section 5(9) and 3(12) - ‘Financial position’ - taken into account only for appointment of resolution professional u/s 5(9) and not while adjudicating default u/s 3(12) - Not manifestly arbitrary. (Para 66)
(l) Insolvency and Bankruptcy Code, 2016 - Not meant to be a debt recovery legislation. (Para 67)
Insolvency and Bankruptcy Code, 2016 - Section 5(6) - Dispute - Proceedings relating to existence of amount of debt, quality of goods or service, and breach of a representation or warranty - Dispute must therefore be between parties, even though not containing an Order VIII-A CPC type mechanism. (Para 69, 71)
(m) Constitution of India - Article 32 - Court cannot undertake a detailed investigation of disputed facts. (Para 79, 82)
(n) Government contract - NITI Aayog Office’s Memorandum dated 05.09.2016 - Contractors entitled to retrieve 75% of awarded amount with interest on furnishing bank guarantee of the amount - Contractors also required to furnish additional bank guarantee of 10% per year on pay-out amount, compounded - Additional bank guarantee challenged as being arbitrary - Additional guarantee held to cover the further interest component per annum. (Para 83)
Facts of the case:
This set of Writ Petitions seek to challenge the 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. They also seek to challenge the repeal (with effect from 23.10.2015) of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 by Section 15 of the 2019 Amendment Act. Apart from the aforesaid challenge, a challenge is also made to various provisions of the Insolvency and Bankruptcy Code, 2016 which, as stated by the Petitioners, result in discriminatory treatment being meted out to them.
Finding of the Court:
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.
Result: Writ petitions disposed of. MAs allowed.

JUDGMENT :

R.F. NARIMAN, J.

1. This set of Writ Petitions seek to challenge the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the “Arbitration Act, 1996”) as inserted by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019 (hereinafter referred to as the “2019 Amendment Act”) and brought into force with effect from 30.08.2019. They also seek to challenge the repeal (with effect from 23.10.2015) of Section 26 of the Arbitration and Conciliation (Amendment) Act, 2015 (hereinafter referred to as the “2015 Amendment Act”) by Section 15 of the 2019 Amendment Act. Apart from the aforesaid challenge, a challenge is also made to various provisions of the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as the “Insolvency Code”) which, as stated by the Petitioners, result in discriminatory treatment being meted out to them.

2. The facts relevant for the determination of these matters may be gleaned from Writ Petition (Civil) No.1074 of 2019. The Petitioner No.1 therein, i.e. Hindustan Construction Company Limited, is an infrastructure construction company involved in the business of construction of public-utilities and projects like roads, bridges, hydropower and nuclear plants, tunnels and rail facilities. The Petitioner company, inter alia, undertakes these building projects as a contractor for government bodies such as the National Highways Authority of India (“NHAI”, i.e. Respondent No.5 in the Writ Petition), NHPC Ltd. (“NHPC”, i.e. Respondent No.6), NTPC Ltd. (“NTPC”, i.e. Respondent No.8), IRCON International Ltd. (“IRCON”, i.e. Respondent No.7) and the Public Works Department (“PWD”). Such projects are allotted to the Petitioner through the public tendering system. As Government bodies are owners and beneficiaries of such projects, cost overrun is almost invariably disputed by these bodies, leading to huge delays in the recovery of the legitimate dues of the petitioners. Also, these dues can only be recovered through civil proceedings or through arbitrations.

3. Arbitration awards that are in favour of the Petitioner company are invariably challenged under Sections 34 and 37 of the Arbitration Act, 1996, and on average, more than 6 years are spent in defending these challenges. The major problem in the way of the Petitioners is that the moment a challenge is made under Section 34, there is an ‘automatic-stay’ of such awards under the Arbitration Act, 1996.

4. The Petitioners are then subjected to a double-whammy. Government bodies other than Government companies are exempt from the Insolvency Code because they are statutory authorities or government departments. Even if they can be said to be operational debtors - which is not the case - the moment a challenge is filed to an award under Section 34 and/or Section 37 of the Arbitration Act, 1996, such debt becomes a ‘disputed debt’ under the judgments of this Court, and proceedings initiated under the Insolvency Code at the behest of the Petitioner company, not being maintainable in any case, would be dismissed at the threshold. Huge sums of money are therefore due from all these companies/government/government bodies to the Petitioners.

5. On the other hand, in order that the Petitioner company continue to operate, the Petitioner owes large sums to operational creditors for supplying men, machinery and material for the projects. It is stated in the Writ Petition No.1074 of 2019 that Demand Notices have been issued to the Petitioner by a large number of operational creditors for sums amounting to over a hundred crores.

6. Dr. Abhishek Manu Singhvi, learned Senior Advocate appearing on behalf of the Petitioner No.1 in Writ Petition No.1074 of 2019, has argued that the Arbitration Act, 1996 is based upon the UNCITRAL Model Law on International Commercial Arbitration (as adopted by the United

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2019 Supreme(SC) 1302

Cases Referred (24)