India: The Supreme Court Strikes Down Section 87 Of The Arbitration And Conciliation Act, 1996 - Reinstates BCCI v. Kochi Cricket

1. BACKGROUND

Before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 ("2015 Amendment"), Section 36 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") provided that an arbitral award would become enforceable as a decree only after either (a) a petition under Section 34 of the Arbitration Act challenging an arbitral award has been dismissed, or (b) the time limit provided for challenging an arbitral award under Section 34 of the Arbitration Act has expired. In other words, during the pendency of a petition under Section 34 of the Arbitration Act, an arbitral award could not be enforced. This clog on the rights of a bona fide award holder preventing him from reaping the fruits of the arbitral award, was also termed as an "automatic stay".

The 2015 Amendment introduced large scale radical changes to the Arbitration Act which were inter alia aimed at reducing the delay during arbitration proceedings and enforcement of the resultant arbitral awards. More significantly, the 2015 Amendment substituted the then existing Section 36 of the Arbitration Act to provide that merely availing the remedy under Section 34 of the Arbitration Act does not render an arbitral award unenforceable, unless a specific stay has been granted by the court on the arbitral award on a separate application filed in that regard.

Pertinently, Section 26 of the 2015 Amendment expressly provided that the 2015 Amendment would apply to arbitral proceedings which commence on or after the date of commencement of the 2015 Amendment i.e., October 23, 2015 ("Cut-off Date").

The corollary of Section 26 of the 2015 Amendment was that despite the substituted Section 36 of the Arbitration Act coming into force, an automatic stay was operative on the enforcement of all arbitral awards in cases where a petition under Section 34 of the Arbitration Act was pending as on the Cut-off Date.

2. SUPREME COURT'S DECISION IN BCCI v. KOCHI CRICKET

The question of interpretation of Section 26 of the 2015 Amendment and its applicability to the proceedings pending prior to such amendment came before the Supreme Court of India in Board of Control for Cricket in India v. Kochi Cricket Private Limited and Others¹ ("BCCI v. Kochi Cricket"). The Supreme Court therein observed that Section 36 is a procedural provision and a judgment debtor cannot upon filing of a petition under Section 34 of the Arbitration Act, enjoy the substantive vested right of an automatic stay on the execution of an arbitral award. Moreover, the Supreme Court also observed that the usage of the words "has been" in sub-section (2) of Section 36 of the Arbitration Act refers to petitions filed under Section 34 of the Arbitration Act before the Cut-off Date.

In view the observations made, the Supreme Court held that the substituted Section 36 of the Arbitration Act will also apply to arbitral awards in cases where a petition under Section 34 of the Arbitration Act has already been filed as on the Cut-off Date.

3. INTRODUCTION OF SECTION 87 IN THE ARBITRATION ACT

The Arbitration and Conciliation (Amendment) Act, 2019 ("2019 Amendment") introduced many important amendments to the Arbitration Act, which significantly altered the arbitration regime in India. One of the major amendments introduced by the 2019 Amendment was the introduction of Section 87 in the Arbitration Act. The newly inserted Section 87 of the Arbitration Act provided that the 2015 Amendment would be applicable only to the arbitral proceedings which commenced on or after the Cut Off Date and to such court proceedings which emanate from such arbitral proceedings. Moreover, Section 15 of the 2019 Amendment also omitted/deleted Section 26 of the 2015 Amendment.

A logical impact of the introduction of Section 87 in the Arbitration Act by the 2019 Amendment was that it nullified the Supreme Court's decision in BCCI v. Kochi Cricket, and restored the position prevalent prior to the commencement of the 2015 Amendment i.e. automatic stays on arbitral awards where the petition challenging an arbitral award was filed under Section 34 of the Arbitration Act before the Cut-off Date.

4. SUPREME COURT'S JUDGMENT IN HINDUSTAN CONSTRUCTION COMPANY LIMITED v. UNION OF INDIA

The 2019 Amendment was challenged before the Supreme Court of India on the aspects of introduction of Section 87 of the Arbitration Act and the deletion of Section 26 of the 2015 Amendment. The Supreme Court in a judgment passed on November 27, 2019 in Hindustan Construction Company Limited & Another v. Union of India & Another² ("Judgment"), struck down the insertion of Section 87 of the Arbitration Act and deletion of Section 26 of the 2015 Amendment. In the writ petition filed under Article 32 of the Constitution of India, 1950 ("Constitution of India"), the issues before the Supreme Court were as follows:

(a) Whether the introduction of the 2019 Amendment removes the very basis of the decision of the Supreme Court in BCCI v. Kochi Cricket?

(b) Whether the insertion of Section 87 of the Arbitration Act and deletion of Section 26 of the 2015 Amendment is violative of Article 14, Article 19(1)(g), Article 21 and Article 300A of the Constitution of India?

(c) Whether certain provisions of the Insolvency and Bankruptcy Code, 2016 ("Code") was violative of Article 14 and Article 19(1)(g) of the Constitution of India?

4.1. Removal of the basis of the judgment in BCCI v. Kochi Cricket by the 2019 Amendment

As explained above, the Supreme Court of India in BCCI v. Kochi Cricket clarified that the new Section 36 introduced by way of the 2015 Amendment would apply even to awards in cases where a petition under Section 34 of the Arbitration Act had already been filed as on/before the Cut-off Date, thereby doing away with grant of an automatic stay due to the mere pendency of a petition under Section 34 of the Arbitration Act as on the Cut-off Date. This view taken by the Supreme Court has been seen to be in line with the object of the 2015 Amendment i.e. reducing the delay during arbitration proceedings and enforcement of the resultant arbitral awards. However, the introduction of Section 87 by way of the 2019 Amendment, nullified the effect of the said judgment.

However, in the Judgment, the Supreme Court has held that introduction of Section 87 by the 2019 Amendment which has the effect of reinstating the concept of "automatic stay" on the operation of arbitral awards where a petition under Section 34 of the Arbitration Act challenging an arbitral award was pending on the Cut Off Date, is directly repugnant to the decision of the Supreme Court in BCCI v. Kochi Cricket and the object of the 2015 Amendment. Therefore, Section 15 of the 2019 Amendment removes the basis of the judgment in BCCI v. Kochi Cricket by omitting Section 26 of the 2015 Amendment from the very day it came into force. Since this is the provision that has been construed in BCCI v. Kochi Cricket, the fundamental prop of the said judgment has been removed by retrospectively omitting Section 26 of the 2015 Amendment altogether from the very day when it came into force.

4.2. Constitutional Validity of Section 87 of the Arbitration Act

The thrust of the challenge to the constitutional validity of Section 87 of the Arbitration Act was that as Section 87 of the Arbitration Act makes Section 36 of the Arbitration Act (as substituted by the 2015 Amendment) applicable only to the arbitral proceedings which commenced on or after the Cut-off Date, the concept of "automatic stay" still survives qua a petition under Section 34 of the Arbitration Act which has already been filed as on the Cut-off Date. A plea was taken that as the automatic stay invariably delays the enforcement of arbitral awards, Section 87 of the Arbitration Act is contrary to the object and purpose of the 2015 Amendment.

The Supreme Court held that Section 87 of the Arbitration Act virtually resulted in grant of an automatic stay on all arbitral awards against which a petition under Section 34 of the Arbitration Act was pending as on the Cut-off Date, which in turn delays the final enforcement of arbitral awards and increases the interference of courts in arbitration matters, both of which are against the object and purpose of the 2015 Amendment.

The Supreme Court also held that the insertion of Section 87 in the Arbitration Act places the amendment to Section 36 of the Arbitration Act brought in by the 2015 Amendment on a "backburner". Interestingly, the Supreme Court also observed that the insertion of Section 87 in the Arbitration Act resulting in resurrection of an automatic stay qua the arbitral awards against which a petition under Section 34 was pending as on the Cut-off Date, has led to refund applications being filed in cases where payments were made pursuant to orders granting a conditional stay on such arbitral awards.

The Supreme Court also observed that due to the delay caused in enforcement of arbitral awards due to an automatic stay granted to the judgment debtor as a "vested right" or "privilege" and the award holders being deprived of the fruits of the arbitral award, the said award holders are under a threat of facing insolvency proceedings under the Code due to their inability to pay operational creditors, even after securing an arbitration award in their favour.

For the aforesaid reasons, the Supreme Court struck down the insertion of Section 87 of the Arbitration Act for being in violation of Article 14 of the Constitution of India.

4.3. Constitutional Validity of deletion of Section 26 of the 2015 Amendment

As explained above, Section 26 of the 2015 Amendment clearly postulated prospective applicability of the 2015 Amendment. In the Judgment, the Supreme Court has drawn a clear distinction between Section 26 of the 2015 Amendment and Section 87 of the Arbitration Act. The Court observed that the scheme of Section 87 of the Arbitration Act is different from that of Section 26 of the 2015 Amendment, as the scheme of Section 87 explicitly states that court proceedings are "merely parasitical" on arbitral proceedings, and specifically held that only the date of commencement of arbitral proceedings has to be looked at to ascertain the applicability of the 2015 Amendment.

On the constitutional validity of the deletion of Section 26 of the 2015 Amendment by the 2019 Amendment, the Court held that as the judgment in BCCI v. Kochi Cricket had laid down the law on Section 26 of the 2015 Amendment with great clarity, deletion of the provision and introduction of Section 87 of the Arbitration Act in its place reinstates the concept of "automatic stay" on the operation of arbitral awards in cases where a petition under Section 34 of the Arbitration Act is pending as on the Cut-off Date.

It may also be noteworthy to mention that the statement of objects and reasons of the 2019 Amendment which introduced Section 87 in the Arbitration Act, in paragraph 6(vi) clarified as follows:

However, no such clarification was made in the 2019 Amendment with respect to Section 26 of the 2015 Amendment, rather it was simply deleted.

The Supreme Court thus held that the repeal of Section 26 of the 2015 Amendment was constitutionally invalid.

4.4. Constitutional Validity of the Insolvency and Bankruptcy Code, 2016

The thrust of the challenge made to the constitutionality of the Code was that the Code results in discriminatory treatment meted out to the award holders.

In support of the challenge it was argued that the regime under the Code gives preferential treatment to government bodies as they are exempt from the rigors of the Code and they do not fall within the definition of "corporate person" under Section 3(7) of the Code. It was also argued that while government bodies can initiate a corporate insolvency resolution process against corporate persons (as defined under the Code), but not vice versa.

It was further argued before the Supreme Court that due to such preferential treatment, while award holders are not able to enjoy the fruits of the arbitral awards passed in their favour, they are also subjected to the rigors of the Code. On the other hand, government bodies such as the National Highways Authority of India ("NHAI") are granted an automatic stay, the moment they file a petition under Section 34 of the Arbitration Act challenging an arbitral award.

In a plea to curb such preferential treatment, it was suggested on behalf of the award holders to exclude the words "with limited liability" from the definition of "corporate person" under Section 3(7) of the Code or have the definition of the word "person" under Section 3(23)(g) of the Code read into the definition of "corporate person", in order to bring government bodies within the purview of "corporate person" under Section 3(7) of the Code.

The Supreme Court held that government bodies such as the NHAI are statutory bodies and function as an external limb of the Central Government, the management of which cannot be taken over by a resolution professional or by any other corporate body which is contemplated under the Code. In light of the said reasoning, the Supreme Court refused to accede to the challenge made to the constitutionality of the Code.

5. INDUSLAW VIEW

By striking off Section 87 of the Arbitration Act, the Judgment brings the Hon'ble Supreme Court of India's decision in BCCI v. Kochi Cricket back into operation, which held that the Section 36 of the Arbitration Act (as substituted by the 2015 Amendment) will have retrospective applicability i.e. even if a petition under Section 34 of the Arbitration Act is pending as on the Cut-off Date, it would not attract an automatic stay on the enforceability of the Arbitral Award.

The Judgment has rightly removed the clog of automatic stays which prevents award holders from realizing the proceeds out of arbitral awards and seeks to effectively fulfill the object and purpose of the 2015 Amendment i.e. reducing the delay during arbitration proceedings and enforcement of the resultant arbitral awards.

The Judgment is a much needed rectification to the arbitration law in the country, as grant of a stay on the operation of the arbitral award merely upon filing of a petition challenging the arbitral award, without even an appreciation of the merits of the said challenge, was repugnant to the letter and spirit of arbitration as an internationally recognized mode of dispute resolution. This will also now result in speedier disposal of the backlog of cases pending since decades.

The Judgment will have far reaching positive consequences as it would result in faster realization of the amounts awarded to award holders under an arbitral award which is in sync with the global arbitration standards.

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