As per Section 36 of the Arbitration and Conciliation Act, 1996 (herein after referred as the Act) an arbitral award becomes enforceable as a decree only after the time for filing a petition under Section 341 of the Act has expired or after the Section 34 petition has been dismissed. Consequentially, during the pendency of Section 34 petition, an arbitral award becomes unenforceable, leaving no discretion in the court to pass any interim awards.
Pending enforceability of arbitral award was not only in violation of main object of arbitration proceeding i.e. speedy trail and less involvement of court in arbitration matter, but, also had adverse effect on the interest of award holder.
In 2015, to cure the defect of "automatic stay" on the enforceability of the arbitral award Section 36 of the Act was amended. After that, a separate application would have to be filed seeking for a stay on the operation/enforcement of the arbitral award. If the court is satisfied that a stay should be granted (for reasons to be recorded), it could do so by requiring the award debtor to provide suitable security or make a deposit in court.
In BCCI vs Kochi Cricket Pvt. Ltd.2 the Supreme Court held that the award holders could finally get the benefit of money deposits or security furnished by award debtors once the award was challenged under Section 34, albeit after furnishing bank guarantees to the court. It held that generally the 2015 amendments applied prospectively i.e. only to all arbitrations and court proceedings filed after 23 October 2015. However, in so far as the amendment to Section 36 was concerned, these would apply retrospectively to even such court proceedings that were filed before 23 October 2015.
In 2019, by Section 13 of the Arbitration and Conciliation (Amendment) Act, 2019, Parliament inserted Section 87 of the Act which read as,
Unless the parties otherwise agree, the amendments made to this Act by the Arbitration and Conciliation (Amendment) Act, 2015 shall-
a) not apply to-
i. arbitral proceedings commenced before the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;
ii. court proceedings arising out of or in relation to such arbitral proceedings irrespective of whether such court proceedings are commenced prior to or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015;
b) apply only to arbitral proceedings commenced on or after the commencement of the Arbitration and Conciliation (Amendment) Act, 2015 and to court proceedings arising out of or in relation to such arbitral proceedings.
As instant outcome of the Section 87, all the important amendments made by the Amendment Act, 2015 has been put away. And the amendment will now not be applicable to Section 34 petitions filed after 23 October 2015, but will be applicable to Section 34 petitions filed in cases where arbitration proceedings have themselves commenced only after 23 October 2015. This would mean that in all proceedings which are ongoing, despite the fact that Section 34 proceedings have been initiated only after 23 October 2015, yet, the old law would continue to apply and there will be an automatic stay on enforceability of arbitral awards on filing an application under Section 34 of the Act.
In Hindustan Construction Company Limited and Ors vs UOI,3 the Hon'ble Supreme Court held that, Section 87 of the Act (2019 Amendment) reverses the beneficial effects of the 2015 Amendment Act which remedied the original mischief contained in the Arbitration Act, 1996, thus stroked it down on following grounds:
- Section 87 of the act is in contravention of Article 36 (2) of UNCITRAL Model Law- Article 36 (2) of UNCITRAL Modal Law is provision under which applications for setting aside or suspension of an award, in which the other party may provide appropriate security, can be filed, any award passed by the arbitral tribunal does not automatically becomes unenforceable on filing of petition against it.
- Principle of "automatic stay" is in contravention of the very objects of the Arbitration Act, 1996 such as -minimum judicial intervention, speedy determination and recovery of amounts contained in arbitral awards
- Section 87 of the Act make the Section 35 of the Act, superfluous, which makes an arbitral award final and binding on the parties and persons claiming under them respectively.
- Violation of Article 14: the present judgment 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.
- 2019 Amendment act has inserted Section 87 without removing the basis of the judgment of the Supreme Court in BCCI (Supra) as the Supreme Court, specifically opined that the provision would be contrary to the object of the 2015 Amendment Act, Section 87 was enacted.
The Hon'ble Supreme Court has rightly struck down the provision of automatic stay as it denies an opportunity to companies to pay their creditors from the money received from arbitral awards in cases where there is no stay, or even in cases where conditional stays are granted. Further, it had adverse effects on the interest of arbitral award-holder.
1 provides for setting aside of an arbitral award by making an application to the Court, on the grounds stated therein.
2 MANU/SC/0256/2018 : (2018) 6 SCC 287
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