BENCH – Rohinton Fali Nariman, Surya Kant and V Ramasubramanian JJ. (3).
FACTS –
A set of writ petitions had been filed before the SC challenging the constitutionality of inserting Section 87 to the 1996 Act and repealing Section 26 of the 2015 Amendment Act.
The petitioner in one of the writ petitions, Hindustan Construction Company Limited (“HCC/ Petitioner”) had submitted that as a contractor, it had undertaken projects for several government companies such as NTPC Limited, IRCON International Limited, NHPC Limited, in addition to National Highways Authority of India (“NHAI”) (collectively “Respondents”).
All of the aforesaid parties were made respondents to the writ petition. In respect to these projects, cost overrun was always a matter of dispute between HCC and the Respondents.
The only way for HCC to receive its dues was by instituting either a civil proceeding or an arbitration proceeding. Even in the scenario that an arbitral award was passed in the favour of HCC, it was invariably challenged by the Respondents by filing an application under Section 34 of the 1996 Act.
A Section 34 application resulted in imposition of an automatic stay on the operation of arbitral awards.
Consequently, on one hand, HCC’s pending dues would be stuck until the application could be adjudicated upon and on the other hand, HCC’s pending dues would become ‘disputed debt’ as per the provisions of the Insolvency and Bankruptcy Code, 2016 (“IBC”).
Therefore, any proceeding that could have been initiated by HCC under the IBC against the respondent government companies, would come to be dismissed. In any case, HCC could not initiate any proceeding against a statutory body like NHAI under the IBC.
It was also pertinent that HCC already owed large sums of money to its own operational creditors.
In fact, demand notices had already been issued to HCC by these operational creditors for sums amounting to over a hundred crores.
Therefore, even if HCC was financially sound, it would be unable to repay its operational creditors because of money being stuck under the automatic stay rule.
ISSUES –
Whether Section 87 introduced to the 1996 Act by the 2019 Amendment Act was constitutionally valid.
Whether Section 26 of the 2015 Amendment Act should have been repealed with effect from October 23, 2015 by 2019 Amendment Act
Whether Section 3(7) and 3(23) of IBC are arbitrary and discriminatory to the Petitioners.
JUDGEMENT –
Interpretation of Section 36 of the 1996 Act:
It was incorrect to read Section 36 of the 1996 Act as inferring something negative, that where the time period of ninety days for making an application under Section 34 of the 1996 Act had not expired and when such an application was made within the time frame, an automatic stay automatically ensued.
The SC pointed out that automatic stay of an arbitral award as provided in its previous judgments which are, National Aluminum Company Limited(NALCO) v. Pressteel and Fabrications Private Limited and Another [(2004) 1 SCC 540], National Buildings Construction Corporation Limited v. Lloyds Insulation India Limited [(2005) 2 SCC 367], Fiza Developers and Inter-State Private Limited v. AMCI (India) Private Limited and Another [(2009) 17 SCC 796] were incorrect.
The amended Section 36 of the 1996 Act only restated the position that provisions did not stand in the way of law towards granting a stay of a money decree under the provisions of CPC.
Removal of the basis of the BCCI judgement by the 2019 Amendment Act:
The retrospective omission of Section 26 of the 2015 Amendment Act by the 2019 Amendment Act had indeed resulted in the removal of the basis of the judgement in BCCI.
The SC observed that at the time of passing of the judgment in BCCI, it was well aware of the recommendation of the Srikrishna Committee Report towards introducing Section 87 to the 1996 Act.
It had noted that an immediate effect of the enactment of Section 87 in the 1996 Act would put all important amendments on a back-burner.
Further, it was noted that such enactment would become contrary to the statement of objects and reasons of the 2015 Amendment Act. The statement of objects and reasons of the 2015 Amendment Act had made it very clear that the law before the 2015 Amendment Act had resulted in a delay of arbitral proceedings and increased interference by courts in arbitration matters.
Constitutional challenge to the 2019 Amendment Act:
The SC agreed with the contentions of the Petitioner that mischief of the old Section 36 of the 1996 Act as regards automatic stay had been remedied after a period of more than 19 years by way of the 2015 Amendment Act, and now enactment of Section 87 to the 1996 Act would mean working in a reverse direction.
Moreover, payments already made under the amended Section 36 of the 1996 Act to award-holders in a situation of ‘no stay’ or ‘conditional stay’ would be sought to be refunded. It was observed that the Srikrishna Committee Report did not refer to the provisions of the IBC.
As a result of an automatic stay, the award holder may become insolvent by defaulting on payments to its creditors, when such payments would have been ordinarily forthcoming from the arbitral awards.
Therefore, deletion of Section 26 of the 2015 Amendment Act and insertion of Section 87 to the 1996 Act were struck down as being manifestly arbitrary under Article 14 of the Constitution of India.
As far as the fixing of ‘cut-off date’ was concerned, it was the non-bifurcation of court proceedings and arbitration proceedings with reference to October 23, 2015, that was found to be manifestly arbitrary. The challenge was not in respect of fixing a cut-off date. The SC also held that the ratio decidendi in BCCI would have continued application, to enable the application of salutary amendments made by the 2015 Amendment Act to all court proceedings initiated after October 23, 2015.
Constitutional challenge to the IBC:
The SC held that as far as the statutory body, that is, NHAI was concerned, the Petitioner’s argument as to deletion of words in Section 3(7) of the IBC or addition of words from Section 3(23) (g) of the IBC into Section 3(7) of the IBC was not acceptable. NHAI was a statutory body that functioned as an extended limb of the Central Government, and these governmental functions could not be taken over by a resolution professional under the IBC, or any other corporate body.
It was also impossible that such a statutory body could be ultimately wound-up under the provisions of IBC. Relying upon its judgment in Pioneer Urban Land and Infrastructure Limited and Another v. Union of India and Others [(2019) 8 SCC 416], the SC held that the IBC is not meant to be a recovery mechanism, what it did intend, was the resolution of stressed assets. Further, the argument that an Order VIII-A type mechanism as under the CPC was not barred under IBC, was rejected by the SC. It was observed that a dispute must be between the parties as provided under the IBC.
The IBC was not a debt recovery legislation, wherein some theory of indemnity or contribution debt owed to the Petitioners could be fastened on to public sector units.
