In the seminal ruling in hindustan construction company ltd vs union of india & Ors, the Supreme Court of India raised several issues, including the substantive legality of section 87 of the arbitration and conciliation act 1996 (Act).
hindustan construction company ltd vs union of india Case Facts
- The public is the primary target of Hindustan Construction Company Limited’s infrastructure and utility development and construction projects, which include building, tunneling, railway tracks, roads, buildings, bridges, hydropower plants, and rail facilities.
- The business works as an agent and contractor for many government agencies, including PWD, NHPC, NTPC, IRCON, and NHAI. These organizations frequently contest cost overruns, which delays the collection of rightfully owed money from the government. The only methods to get the money back from the defaulter are to initiate arbitration proceedings or launch a civil lawsuit.
- The government contested the arbitration verdicts in favour of the petitioner corporation under section 34 of the arbitration act 1996 and section 37 of the arbitration act 1996, demanding more than six years to defend against the overruns and obtaining a stay on the awards.
- The stay of awards and the six-year defense present the petitioners with a double punch.
- Not private corporations, but government entities are excluded from the Insolvency Code. However, in the event of a challenge, the debt turns into an unclear debt, and the Insolvency Code proceedings are dismissed. This causes the Petitioners, a private firm, to bear heavy financial difficulties.
- The petitioner company is facing over 100 crores in operational creditors’ demand notices for supplies, including labour, equipment, and materials, in order to maintain operations.
hindustan construction company ltd vs union of india Issues
- Is the section 87 of the arbitration and conciliation act 1996 constitutionally valid?
Contentions by the Parties
Petitioner:
- The petitioner argued that Section 36 of the Act, which was based on the Model UNCITRAL, violates Articles 14, 19 (1)(g), 21, and 300-A of the Constitution of India, 1949, as well as the Act’s purpose and intent.
- The petitioner argues that when a suit according to Section 34 of the act is filed contesting the award, the decisions on the issues of Section 36 of the act automatically place a stay on the arbitrator’s awards, pending review by a higher court.
- Notwithstanding the Supreme Court’s decision that the Act ought to be limited to arbitral proceedings initiated before to October 23, 2015, the Government of India approved a new Section 87 in the Act in 2018.
- The petitioners contend that both award debtors and award holders who have contested arbitral awards will be able to avoid liabilities as a result of the retroactive reinstatement of the automatic stay.
Respondent:
- The respondents claimed that the most recent 2019 modification to the statute, which included section 87 and removed section 26, is only declaratory and not mandatory. In addition, the respondent used the act’s 26th section as justification in the BCCI case.
- They contended that statute 87 is just clarifying, declaratory, and explanatory and is not an attack on the BCCI ruling, and that Parliament might change the statute to clarify its original objective.
- Additionally, they said that there is no evidence to support their challenge to the IBC’s arbitrariness, that the date of 23.10.2015 for prospective applicability was unjustified, and that courts should only become involved in cases where there has been discrimination.
- The defendants contended that the petitioner cannot convert a writ petition filed under article 32 of the indian constitution into recovery proceedings since the petition is not viable.
- The Respondents contended that since the purpose of the legislation’s enactment was made abundantly evident, the Petitioners’ allegations of unconstitutionality, arbitrary cut-off dates, as well as discriminatory cut-off dates were baseless.
- Their argument was that section 87 did not infringe upon the BCCI decision, which was declarative in nature and clarified the original legislative objective.
- According to the Respondents, the courts should only get involved if the date was purposefully removed in a discriminatory manner.
hindustan construction company ltd vs union of india Judgment
- According to the Supreme Court, the only reason section 87 was passed was to carry out the recommendation made in the Srikrishna Committee Report, which was to clear up any ambiguity regarding the Amendment Act’s possible applicability.
- But such doubt has already been removed by the BCCI verdict. The Supreme Court clarified that the Act was only passed to provide an explanation for the circumstance, as the unamended version did not automatically provide an automatic hold.
- Because of this, section 87 did not comply with the 2015 Amendment Act’s declared intention to make it effective only as of October 23, 2015.
- In addition, the legislature passed a bill that was obviously illegal, lacked a sound guiding principle, and hurt the interests of the public without consulting the BCCI decision, which had already determined the risks associated with putting such a clause into effect.
- The Petitioner and the Supreme Court came to the conclusion that section 87’s inclusion is illegal because it revives the issue that the Amendment attempted to resolve.
- The IBC was designed to settle troubled properties rather than serve as a rehabilitation instrument, according to the Supreme Court, which made this determination based on its ruling in Pioneer Urban Land and Infrastructure Limited and Others v. Union of India and Others. Therefore, Section 87 of them, which gives an automatic stay on an arbitral award, is struck down by the Supreme Court.
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