It is seldom that the Supreme Court or any one of the 24 high courts strike down part of a law passed by the law-makers in Parliament. More so, when these law-makers have an absolute majority in Parliament and are supposed to debate and discuss matters of economic policy before the law is enacted. For those who came in late, all Indian courts are wary of crossing the lakshman rekha between the legislature and the judiciary because the latter are supposed to interpret the law but not pronounce it.
This often results in manifesting injustice to those who seek justice from the courts like a section of beleaguered husbands who allege their wives have misused the provisions of the law to harass their aged in-laws. This is why when the Supreme Court struck down section 87 of the Arbitration and Conciliation Act, 1996, on Wednesday, it made waves.
Shorn of legal jargon, this provision provided for an automatic stay on enforcement of an arbitral award once the loser challenged it in any high court. The judges observed at least six years were spent in defending these challenges, and the money to be handed over to the corporate winner, was stuck for a long time.
Hindustan Construction Company Ltd which challenged the validity of Section 87, built roads, bridges, hydropower and nuclear plants, tunnels and railway lines for the government through its agencies such as the National Highways Authority of India (NHAI), National Thermal Power Corporation (NTPC) and the government railway company abbreviated as IRCON International Ltd apart from the Public Works Department. These government companies invariably disputed the amounts claimed by HCC.
The contracts to build these projects were allotted to HCC through public tendering which disputed hike in price due to delay caused by the government itself. This resulted in huge delays in the recovery of the legitimate dues of companies like HCC forcing them into insolvency although they held arbitral awards far in excess to the amounts claimed against them by their creditors which was Rs 100 crores. This was why HCC challenged the validity of section 87 of the Arbitration and Conciliation Act, 1996.
Unlike civil and criminal litigation where the government has to furnish the infrastructure such as the court buildings and also pay the judges their salaries from the Consolidated Fund of India, in arbitration proceedings, the victor and loser share the cost of hiring the venue for the arbitration proceedings, pay retired supreme court and high court judges their astronomical reading charges and also foot the cost of lunch, or at least high tea and snacks.
A three-judge bench of Justices Rohinton Nariman, Surya Kant and V Ramasubramaniam observed the introduction of Section 87 by the 2019 amendment would delay quick disposal of arbitration proceedings, increase interference by the courts in arbitration matters, which thwarted the purpose of the Arbitration Act, 1996, which was strengthened by its amendment in 2015.
The Arbitration and Conciliation Act was enacted in 1996 to extricate commercial disputes from the courts which have to rigidly adhere to the Indian Evidence Act, 1872 and other technical laws which complicate rather than simplify disputes. In arbitration proceedings, the retired judge will decide his own procedure including whether to admit telephone calls as evidence. In court proceedings, emails and telephone calls cannot be accepted as primary evidence without a certificate declaring that the email or bank statement obtained from a computer is an authentic document which has not been tampered.
To return to this landmark verdict, the judges observed the mischief of misinterpreting a provision of the Arbitration Act was corrected after 19 years in 2015 and to bring back the same mischief through an amendment which stayed the recovery of money once the losing party approached the courts was manifestly unfair to companies like HCC. An arbitral award is equal to a decree of a civil court and is enforced by execution proceedings which are laid down in the Civil Procedure Code, 1908.
The order came on a plea by HCC and Gammon India Ltd. which had challenged the provisions of the Arbitration Act as well as the newly-enacted Insolvency and Bankruptcy Code (IBC). Senior Advocate Abhishek Manu Singhvi, representing HCC, argued that because of Section 87 the company was being forced into insolvency despite the fact that state-run companies including the National Highways Authority of India owed it nearly Rs 6,000 crore. HCC said its creditors were forcing the company into insolvency, but it could not exercise the same option against the Central government-owned NHAI.
The judges said companies such as the NHAI acted as an external limb of the central government and it could not permit such corporates to be dragged into insolvency under the provisions of the insolvency code. The Supreme Court did not grant any relief in individual cases of HCC and Gammon India and also did not strike down any of the provisions of the new bankruptcy code.
HCC submitted that for any ‘default’ of HCC in making payment to its supplier of goods or services, which was above Rs 1 lakh, HCC would suffer the consequences under Section 9 of the IBC. However, even if a statutory body like NHAI defaulted in making payments to HCC, it was exempted from the effect of Sections 7 and 9 of the IBC. “This unequal treatment among equals made the provisions of the IBC discriminatory and violative of Article 14, 19(1)(g), 21, and 300A of the Constitution.” HCC argued.
The petitioners exhorted the Supreme Court to protect private companies from the consequences of being dragged into insolvency proceedings if they were in possession of arbitral awards above the claims made against them. They also sought the right to take government bodies to IBC proceedings for recovery of their awards and staying the proceedings against them until their arbitral awards were decided.
To conclude, the striking down of section 87 of the Arbitration Act of 1996 means the Supreme Court judges have asserted their freedom from the executive and the legislature. Whether HCC got what they wanted is another matter for another day.
The writer holds a Ph.D in Media law and is a journalist-cum-lawyer of the Bombay high court.