Ruling to enable many companies to lay hands on locked-up funds, ward off bankruptcy threat
Several companies in the infrastructure, construction and other segments unable to promptly recover disputed amounts from government-sector firms despite having arbitral awards in their favour could soon be laying hands on parts of such funds running into hundreds of crores, with the Supreme Court striking down a recently instituted regime of automatic stay on the bulk of the existing arbitral awards, when challenged.
The relief could also enable some firms in the insolvency arena to get better valuation for themselves and for others to avoid being dragged by their lenders to the bankruptcy courts. With the apex court invalidating the recently amended Section 87 of the Arbitration and Conciliation Act that provided for an automatic stay of awards in proceeding initiated prior to October 2015, the companies can move the high courts to seek enforcement of their awards or move applications asking the government, PSUs and statutory bodies to deposit 75% of arbitration award money in the court, in case the orders are challenged already. It will be left to the court’s discretion to decide if the award is to be stayed or the monies be asked to be deposited with it or paid to the award holder.
Of course, arbitral awards rarely go unchallenged, so there will actually be very few instances of the courts straightaway asking any firm to pay up. While Ajit Gulabchand-led Hindustan Construction Company (HCC) is seeking to recover Rs 6,070 crore from the Central government and other PSUs, including NHAI and NTPC, Gammon Engineers & Contractors wanted its dues of over Rs 837 crore that is stuck with PSUs like NHPC, Gail, DMRC, etc in terms of various arbitration awards.
While opening the window for all firms to seek legal remedy without being constrained by the automatic stay provision, the SC hasn’t, however, given any summary or specific relief to these firms. Left with no effective remedy to initiate action against the government, PSUs and other statutory bodies for recovery of thousands of crores of rupees, HCC, Gammon and other construction companies had approached the Supreme Court to bail them out of the financial mess and prevent their lenders from pushing them into insolvency.
A Bench led by Justice RF Nariman while striking down Section 87, as inserted by the 2019 Amendment Act, said that the provision was “manifestly arbitrary”. Section 87 provided that for all arbitral proceedings that commenced prior to October 23, 2015 there shall be an automatic stay of the arbitral awards when challenged under Section 34 of the 1996 Act.
The retrospective resurrection of an automatic-stay not only turns the clock backwards contrary to the object of the Arbitration Act, 1996 and the 2015 Amendment Act, but also results in payments already made under the amended Section 36 to award-holders in a situation of no-stay or conditional-stay now being reversed,” the SC said.
According to the top court, after the advent of the Insolvency Code on December 1, 2016, the consequence of applying Section 87 was that the award-holder may become insolvent by defaulting on its payment to its suppliers, when such payments would be forthcoming from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted.
Also, an arbitral award-holder is deprived of the fruits of its award — which is usually obtained after several years of litigating — as a result of the automatic stay, whereas it would be faced with immediate payment to its operational creditors, which payments may not be forthcoming due to monies not being released on account of automatic-stays of arbitral awards, exposing such award-holders to the rigors of the Insolvency Code. For all these reasons, the deletion of Section 26 of the 2015 Amendment Act, together with the insertion of Section 87 into the Arbitration Act, 1996 by the 2019 Amendment Act, is struck down as being manifestly arbitrary under Article 14 of the Constitution of India,” the SC said in its 95-page judgment.
With regard to the constitutionality of few provisions of the IBC, the apex court said that the petitions challenging the IBC as being violative of fundamental rights is “devoid of merits.” It rejected the contention of HCC and Gammon that the provisions of the Insolvency Code would operate arbitrarily on them as, on the one hand, an automatic stay of arbitral awards takes away the vested right of enforcement and binding nature of an arbitral award. On the other hand, non-payment of any amount to its operational creditors would render a company open to being declared insolvent under IBC.
Government bodies other than government companies are exempt from the Insolvency Code because they are statutory authorities or government departments,” the apex court said.
—With inputs from Shubhra Tandon/Mumbai