No automatic stay on enforcement of arbitration award if challenged: SC

Apex court strikes down Section 87 of Arbitration Act; Does not give interim relief to petitioners, HCC, Gammon India

A three-judge Bench of the Supreme Court, led by Justice R F Nariman, has struck down Section 87 of the Arbitration and Conciliation Act, 1996, which was inserted through 2019 Amendment Act. The provision provided for an automatic stay on enforcement of the award once the opposite party challenged the award in court. The Bench noted that on an average, about six years were spent in defending these challenges, and the money, therefore, is stuck for a long time.

The case was filed through a writ petition in the Apex Court by infrastructure firm Hindustan Construction Company (HCC) and Gammon India. Senior advocate Abhishek Manu Singhvi, arguing for the petitioners, said that they were being forced into insolvency, even when the National Highways Authority of India (NHAI) owed them over Rs 6,000 crore. He argued that while operational creditors had initiated legal action against their claim, HCC couldn’t proceed against such government-run bodies.

HCC, however, wasn’t granted any relief on the premise that this was a writ petition and that the Supreme Court could not go into a detailed investigation of disputed facts. The company had sought interim reliefs from the Court on the sum awarded to it in arbitration proceedings against respondent PSUs. The petitioners had also argued in favour of striking some provisions of the Insolvency and Bankruptcy Code, which was denied by the Court.

The Apex Court noted that the provision under Section 87 was a “double-whammy” for firms in favour of whom arbitration awards were passed. As soon as the award was challenged, the enforcement was stayed, and the debt became a “disputed debt” under the judgment of the Court.  At the same time, these companies owed huge sums to operational creditors for supplying men, machinery and material for projects.

According to Ashish Bhan, partner, Trilegal, the Supreme Court has once again affirmed the fact that Indian courts are pro-arbitration. “This will bring much cheer to the arbitration community in India and would send a positive signal to the investors globally,” he added.
 

Experts noted that a number of amendments have been introduced in the Arbitration Act since 2015. “There has been some uncertainty on whether these changes would apply to existing arbitrations or only new proceedings. The court had partially extended these to old arbitrations and cautioned against changing this status quo,” said Vikas Mahendra, partner, Keystone Partners.

Another problem with the Section was its retrospective application. “Section 26 of the 2015 Amendment Act, which amended the 1996 Act, had created confusion with respect to applicability to arbitration proceedings and post-arbitration court proceedings,” said Mohit Singh, an arbitration practitioner.

The Supreme Court in the BCCI vs Kochi Cricket judgment delivered in March 2018 sought to remove this confusion. The Court in this case had enforced a timeline after which the earlier 2015 amendment would apply to the initiation of proceedings.

Experts said the position laid down by the BCCI judgment, which did away with the automatic stay in a limited number of arbitration proceedings, will now continue to be in operation.
 

Justice Nariman, in his judgment stated: “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.”

How frequent amendments in the Arbitration Act led to confusion
 

1996 The Arbitration and Conciliation Act was enacted— Section 34 provided for an ‘automatic stay’ of                    arbitration award once it was challenged

2015 Arbitration and Conciliation (Amendment) Act, 2015 was enacted, under which Section 26 did away
         with ‘automatic stay’ provision

2017 The Srikrishna Committee report was published, highlighting the problem with contradicting views by               different HC’s over date of applicability of the 2015 amendment provision

2018 SC delivered the BCCI judgment, which clarified the position on date of applicability

2019 Government passed another Arbitration Amendment Act, which deleted Section 26 and inserted                     Section 87, bringing back the provision of automatic stay of arbitration awards