Section 87: Supreme Court Strikes Down Provision Granting Automatic Stay On Arbitral Award

The Supreme Court today struck down Section 87 of the Arbitration and Conciliation Act, 1996 which provided for an automatic stay on an arbitral award as soon as it was challenged in a court.

A bench headed by Justice Rohinton Fali Nariman ruled that the provision was “manifestly arbitrary” and rejected the arguments of the Central Government to allow the retrospective effect of the amendment.

Section 87 allowed automatic stay on all arbitral awards handed out in proceedings that commenced before Oct. 23, 2015. The top court said the provision turns the clock backwards and also pushes companies into insolvency. The automatic stay provision 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'', the bench ruled.

“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,” the court said. Such 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”, it said citing reasons for the judgment.

The order came on a plea by Hindustan Construction Company Ltd. and Gammon India Ltd. which had challenged the provisions of the Arbitration Act as well and the Insolvency and Bankruptcy Code.

Senior Advocate Abhishek Manu Singhvi, representing HCC, had argued that because of Section 87 the company was being forced into insolvency despite the fact state-run companies including the National Highways Authority of India owed it nearly Rs 6,000 crore. HCC said while its operational creditors were dragging the company to insolvency, it couldn't exercise the same option against the NHAI.

The court says companies such as the NHAI act as an external limb of the central government and it cannot permit such bodies to be allowed to be dragged into insolvency under the provisions of the insolvency code. The top court didn't grant any relief in individual cases of HCC and Gammon and also didn't strike down any of the provisions of the bankruptcy code.