PRE DEPOSIT OF 75% UNDER SECTION 19 OF MICRO, SMALL AND MEDIUM ENTERPRISES DEVELOPMENT ACT, 2006 – MANDATORY?

[Mr. M. GOVINDARAJAN]

Liability of buyer

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 (‘Act’ for short) provides that where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment there for on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day.  In no case the period agreed upon between the supplier and the buyer in writing shall exceed 45 days from the day of acceptance or the day of deemed acceptance.

If the buyer fails to make the payment within the stipulated time then he is liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.

Reference to Facilitation Council

Section 18 of the Act provides that any party to a dispute may, with regard to any amount due, make a reference to the Micro and Small Enterprises Facilitation Council.

On receipt of a reference, the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.  If such conciliation is failed the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act.

The  Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.

Setting aside award

Section 19 of the Act provides that no application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it 75% of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court.  Pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case, subject to such conditions as it deems necessary to impose.

Issue

The issue to be discussed in this article is whether 75% of the amount in terms of the award is to be payable for filing application to set aside the award is mandatory or not as per section 19 of the Act with reference to decided case law.

Case law

In M/S TIRUPATI STEELS VERSUS M/S SHUBH INDUSTRIAL COMPONENT & ANR. [2022 (4) TMI 981 - SUPREME COURT] the parties to the present case are governed by the Act.  The appellant preferred a claim before the Facilitation Council under the Act to the tune of ₹ 1,40,13,053/- along with interest ₹ 1,32,20,100/-.  The Facilitation initiated conciliation proceeds to arrive at settlement between the parties.  The conciliation was failed.  Therefore the dispute was referred to arbitrator.  The arbitrator, appointed by the Facilitation Council, passed an award in favor of the appellant.

Since the respondent did not pay the dues as per the terms of arbitration award, filed an execution petition before District and Sessions Judge, Faridabad.

The respondent filed an application under section 34 of the Arbitration and Conciliation Act, to set aside the award passed by the Arbitrator before the Commercial Court, Gurugram.

The appellant filed an application under section 19 of the Act with the prayer to direct the respondent to deposit 75% of the arbitral award.  The Court directed that 75% of deposit is payable within 6 weeks time from the date of this order.  The respondent filed the commercial appeal before the appellate authority.  The Court further held that the pre deposit of 75% of the arbitral award under section 19 of the Act is directory and not mandatory, has permitted the proceedings under section 34 of the Arbitration Act, 1996 to continue without insistence on making a pre deposit of 75% of the awarded amount.

On appeal the Division Bench held that the High Court permitted the proceedings under section 34 of the Arbitration Act, 1996, to go on without insistence for making pre deposit of 75% of the awarded amount.  Against the order of Division Bench, the appellant filed the present appeal before the Supreme Court. 

The Supreme Court considered the points raised by both the parties to the present case.  The question which is posed for consideration of this Court is, whether, the pre deposit of 75% of the awarded amount as per section 19 of the Act, while challenge to the award under section 34 of the Arbitration Act, 1996, is made mandatory or not.

The Supreme Court relied on its own judgment in GOODYEAR INDIA LIMITED VERSUS NORTON INTECH RUBBERS (P) LTD. AND ANR. [2012 (3) TMI 611 - SUPREME COURT] the Supreme Court held that the requirement of deposit of 75% of the amount in terms of the award as a pre deposit as per section 19 of the Act, is mandatory.  The Supreme Court further held that at the same time, considering the hardship which may be projected before the appellate court and if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a pre deposit at a time, the court may allow the pre deposit to be made in installments.  Further the Supreme Court held that 75% of pre deposit under the Act is mandatory.  The Supreme Court observed and held that on a plain/fair reading of Section 19 of the MSME Act, 2006, reproduced hereinabove, at the time/before entertaining the application for setting aside the award made under Section 34 of the Arbitration and Conciliation Act, the appellant/applicant has to deposit 75% of the amount in terms of the award as a pre deposit.  The requirement of deposit of 75% of the amount in terms of the award as a pre deposit is mandatory. However, at the same time, considering the hardship which may be projected before the appellate court and if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a pre deposit at a time, the court may allow the pre deposit to be made in installments.

Considering the above said judgment the Supreme Court held that the impugned order passed by the High Court permitting the proceedings under section 34 of the Arbitration Act, 1996 without insistence for making pre deposit of 75% of the awarded amount is unsustainable and the same deserves to be quashed and set aside.

The Supreme Court further held that unless and until respondent No. 1 deposits the 75% of the awarded amount, its application under section 34 of the Arbitration Act, 1996, challenging the award shall not be entertained and decided on merits and, in that case, the execution proceedings may continue.