Supreme Court Strikes Down Arbitration Amendment Section 87, Upholds 2015 Amendment to Prevent Automatic Stay of Arbitral Awards

SC Rules Section 87 of Arbitration and Conciliation Act, 1996 (2019 Amendment) Manifestly Arbitrary Under Article 14; Clarifies Insolvency Code Exemption for Statutory Bodies like NHAI

In a landmark judgment delivered on November 27, 2019, a Constitution Bench of the Supreme Court of India comprising Justices R.F. Nariman, Surya Kant, and V. Ramasubramanian, adjudicated on a batch of writ petitions challenging the constitutional validity of Section 87 of the Arbitration and Conciliation Act, 1996 as inserted by the Arbitration and Conciliation (Amendment) Act, 2019. The petitions were filed by leading infrastructure contractors, including Hindustan Construction Company Limited, who challenged the retrospective effect of the 2019 amendment which reintroduced the automatic stay on enforcement of arbitral awards upon challenge under Section 34 of the Arbitration Act, a mischief that the 2015 Amendment had sought to cure.

The Court also examined challenges to certain provisions of the Insolvency and Bankruptcy Code, 2016 ("IBC") raised by the petitioners, who argued that statutory bodies such as the National Highways Authority of India (NHAI) were arbitrarily excluded from the IBC’s insolvency resolution framework, leading to discriminatory treatment.

Key Findings on Arbitration Law:

The Court took an extensive view of Section 36 of the Arbitration Act, 1996, which governs enforcement of arbitral awards. It held that the previously prevailing judicial interpretation—that an arbitral award automatically became unenforceable upon the filing of a challenge under Section 34—was incorrect and not supported by the plain language of the statute or the UNCITRAL Model Law on which the Arbitration Act is based.

The 2015 Amendment had clarified that the mere filing of a challenge under Section 34 would not automatically stay enforcement unless the court expressly grants a stay on application, with conditions and reasons recorded in writing. This was designed to prevent indefinite delays and reduce judicial interference in arbitration matters, promoting speedy resolution and enforcement of awards.

However, the 2019 Amendment introduced Section 87, which retrospectively excluded court proceedings arising out of arbitrations commenced before October 23, 2015, from the 2015 Amendment’s provisions. This effectively resurrected the old regime of automatic stay for pending cases, undermining the object of the 2015 Amendment.

The Supreme Court struck down Section 87 as manifestly arbitrary and violative of Article 14 of the Constitution. The Court emphasized that the retrospective resurrection of automatic stay provisions not only reverses the beneficial effects of the 2015 Amendment but also disrupts settled rights and results in unjust delays, defeating the very purpose of arbitration as an alternative dispute resolution mechanism.

The Court further held that the 2015 Amendment applies to all court proceedings initiated after October 23, 2015, in line with its earlier judgment in BCCI v. Kochi Cricket Pvt. Ltd. (2018), thereby upholding the principle of speedy enforcement of arbitral awards.

On the Insolvency and Bankruptcy Code:

The Court addressed the contention by petitioners that statutory bodies such as the National Highways Authority of India (NHAI), although not government companies, should be considered 'corporate persons' under Section 3(7) of the IBC and be subject to insolvency proceedings.

Drawing upon a detailed analysis of the NHAI Act, 1988, and relevant constitutional provisions, the Court held that NHAI is a statutory authority functioning as an extended limb of the Central Government, performing sovereign governmental functions. Such bodies cannot be taken over by a resolution professional under the IBC, nor can they be wound up under the Code. Therefore, the exclusion of such statutory authorities from the insolvency framework is constitutionally valid and not discriminatory.

The Court also reiterated that the IBC is not a debt recovery statute but a mechanism for resolution of stressed assets. The Code mandates that if a debt is disputed—such as when an arbitral award is challenged—the insolvency resolution process cannot be initiated. This ensures protection against premature or vexatious insolvency proceedings.

Further, the Court rejected the petitioners’ plea to read down the definition of 'corporate person' to include statutory bodies without limited liability or to import the definition of 'person' under Section 3(23) into Section 3(7) of the IBC.

Additional Observations:

The Court rejected the petitioners’ challenge to the NITI Aayog scheme allowing contractors to recover 75% of awarded amounts against bank guarantees, holding that the additional 10% bank guarantee per annum requirement is reasonable and not arbitrary.

The Court dismissed the writ petitions on the ground that disputed factual issues relating to payments made by the government entities and stay orders granted by courts could not be adjudicated under Article 32 jurisdiction.

Impact and Significance:

This judgment reaffirms the 2015 Arbitration Amendment Act as the prevailing law ensuring minimal judicial interference and swift enforcement of arbitral awards, thereby promoting India's reputation as an arbitration-friendly jurisdiction.

It clarifies the limited scope of the Insolvency Code concerning statutory bodies, ensuring that government authorities performing sovereign functions remain outside the insolvency regime.

The Court’s detailed analysis on the interplay between arbitration and insolvency laws provides significant guidance on the enforcement of arbitral awards and the initiation of insolvency proceedings against operational debtors.

Statutory provisions

Arbitration and Conciliation Act, 1996 Sections 3, 9, 26 (2015 Amendment), 34, 35, 36, 37, 87 (2019 Amendment); Insolvency and Bankruptcy Code, 2016 Sections 3(7), 3(8), 3(11), 3(23), 5(6), 5(9), 6; National Highways Authority of India Act, 1988 Sections 3, 5, 11, 12, 14, 15, 16, 17, 18, 19, 22, 23, 24, 33; Code of Civil Procedure, 1908 Order 41 Rule 5

Hindustan Construction Company Limited v. Union of India (SC) : Law Finder Doc Id # 1627040