Hindustan Construction Company Limited & Anr. v. UOI and Ors. 2019 SCC Online 1520 (Decided on 27 November 2019)

Relevant Facts:

The Petitioner, Hindustan Construction Company Limited, is the contractor for various projects of government bodies such as NHAI, NHPC Ltd., NTPC Ltd., IRCON International Ltd., PWD. The cost overrun claims of the contractor is almost invariably disputed by the government bodies, leading to disputes for recovery of dues/claims. The claims are arbitrated. The arbitral awards that are in favor of HCC are invariably challenged under Sections 34 and 37 of the Arbitration and Conciliation Act, 1996. 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.

The Petitioner is then subjected to a double-whammy. The government bodies other than government companies are exempt from the Insolvency Code (“IBC”) because they are statutory authorities or government departments. Even if they can be said to be operational debtors, the moment a challenge is filed to an award under Section 34 and/or Section 37 of the Arbitration Act, such debt becomes a ‘disputed debt’ under the judgments of this Court, and proceedings initiated under the IBC at the behest of the Petitioner company, not being maintainable in any case, would be dismissed at the threshold. On the other hand, Petitioner owes large sums to operational creditors for supplying men, machinery and material for the projects. The demand notices are issued to the Petitioner by a large number of operational creditors for sums amounting to over a hundred crores.

In this context, the Petitioners challenged the omission of section 26 of the 2015 Amendment Act and constitutional validity of Section 87 as inserted by the 2019 Amendment Act and certain definitions clauses of the IBC.

Issues:

1.       Whether Section 87 of the Arbitration Act as inserted by Section 13 of the 2019 Amendment Act and repeal of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act are constitutionally valid?

2.       Whether the certain definition clauses in the IBC are unconstitutional? 

Judgement:

The Court has dealt the above issues under different separate headings which are briefly discussed below:

Automatic stay of award / interpretation of Section 36

The Court held that it is incorrect to state that an award when challenged under Section 34 becomes unexecutable merely by virtue of such challenge being made because of the language of Section 36. To read Section 36 as inferring something negative, namely, that where the time for making an application under Section 34 has not expired and therefore, on such application being made within time, an automatic-stay ensues, is to read something into Section 36 which is not there at all. This construction omits to consider the rest of Section 36, which deals with applications under Section 34 that have been dismissed, which leads to an award being final and binding and enforceable under CPC as decree. This also finds support from the language of Section 9 of the Arbitration Act, 1996, which specifically enables a party to apply to a Court for reliefs after the making of the arbitration award but before it is enforced under Section 36.

With above interpretation, the Court held that the reasoning of the judgments in National Aluminum Company Ltd. v. Pressteel & Fabrications (P) Ltd. and Anr. 2004 1 SCC 540 and Fiza Developers and Inter-trade Pvt. Ltd. v. AMCI (India) Pvt. Ltd. and Anr. (2009) 17 SCC 796 being per incuriam in not noticing Sections 9, 35 and the second part of Section 36 of the Arbitration Act do not commend themselves to us and do not state the law correctly.

Whether the 2019 Amendment Act removes the basis of the BCCI judgment?

In BCCI v. Kochi Cricket Pvt. Ltd. (2018) 6 SCC 287, the Supreme Court dealt with the important question as to the true interpretation of Section 26 of the 2015 Amendment Act. The Government was in fact advised to keep Statement of Objects and Reasons in the forefront, if it proposes to enact Section 87 on the lines indicated in the Government’s Press Release dated 7 March 2018. The Court categorically stated that the immediate effect of the proposed Section 87 would be to put all the important amendments made by the Amendment Act on a back-burner. However, 2019 Amendment Act merely omits Section 26 and introduced Section 87 without providing any clarification and merely referring Srikrishna Committee Report. Given the aforesaid judgments, Section 15 of the 2019 Amendment Act removes the basis of BCCI by omitting from the very start Section 26 of the 2015 Amendment Act.

Constitutional Challenge to the 2019 Amendment Act

The Court examined constitutional validity of the introduction of Section 87 into the Arbitration Act, and deletion of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act against Articles 14, 19(1)(g), 21 and Article 300-A of the Constitution of India.

The Srikrishna Committee Report refers about uncertainly caused due to various High Court interpreting Section 26 in different manner. However, the Report is dated 30 July 2017, which is long before Supreme Court’s judgment in the BCCI. Whatever uncertainty there may have been because of the interpretation by different High Courts has disappeared as a result of the BCCI, the law on Section 26 of the 2015 Amendment Act being laid down with great clarity. The Court held that thereafter, to delete this salutary provision and introduce Section 87 in its place, would be wholly without justification and contrary to the object sought to be achieved by the 2015 Amendment Act, which was enacted pursuant to a detailed Law Commission report which found various infirmities in the working of the original 1996 statute. To refer to the Srikrishna Committee Report (without at all referring to this Court’s judgment) even after the judgment has pointed out the pitfalls of following such provision, would render Section 87 and the deletion of Section 26 of the 2015 Amendment Act manifestly arbitrary, having been enacted unreasonably, without adequate determining principle, and contrary to the public interest sought to be subserved by the Arbitration Act, 1996 and the 2015 Amendment Act

The Court ultimately held that the result is that the BCCI 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 October 2015. In this view of the matter, the Court observed found it 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.

Constitutional Challenge to the Insolvency Code

It was argued by the Petitioner that the definition of ‘corporate person’ contained in Section 3(7) of the Insolvency Code should either be read without the words “with limited liability” contained in the third part of the definition, or have Section 3(23)(g) of the Insolvency Code, which is the definition of ‘person’, read into the aforesaid provision. This was not accepted. The Court re-emphasized the object and purpose of the insolvency code and asserted that it is not a debt-recovery legislation and hence such arguments constructed around interest of the creditors to recover debts are not tenable. The Court found the challenge to the provisions of Insolvency Code, insofar as the Writ Petitions are concerned, to be wholly devoid of merit.

Other issues

The Court declined to deal with facts of each case as to deposit of arbitral award etc. It is settled law that when exercising its jurisdiction under Article 32 of the Constitution, the Supreme Court cannot embark on a detailed investigation of disputed facts. Therefore, in exercise of its jurisdiction under Article 32 of the Constitution, the Court refused undertake a detailed investigation to determine the status of monies paid/deposited pursuant to arbitral-awards in favour of the Petitioner company. Consequently, no directions in respect thereof was made.

The Petitioner had argued that the NITI Aayog Office’s Memorandum dated 5 September 2016, which contained a scheme by which contractors were able to retrieve 75% of awarded amounts together with interest thereon – referred to as “pay-out amount”, is arbitrary only to a limited extent. an additional bank guarantee of 10% per year on the pay-out amount, which is then compounded annually, is arbitrary. The Court rejected this argument and held that it does not find anything arbitrary in requiring a 10% additional bank guarantee per annum so that the scheme be availed.

Comments:

The decision brings back the ground laid down by BCCI. The automatic stay of arbitral award was not an intended result or consequence as it prevents to award holder to execute the award pending the challenge, which is not in line with the objective of the Arbitration Act.

The decision is welcome in arbitration world, though it was very well anticipated from the concluding remarks of BCCI itself.