The Supreme Court in a recent judgment, regarding the Micro, Small and Medium Enterprise Development Act, 2006 ("MSME Act") held that the requirement of making a pre-deposit of 75% of the award, in order to challenge any order / decree, as per Section 19 of the MSME Act is mandatory.

Brief Facts

Tirupati Steels (Appellant) filed a claim petition before the Micro and Small Enterprises Facilitation Council (Council) , for the recovery of around INR 27.2 million against Shubh Industrial Component (Respondent) . After the conciliation process failed, the matter was referred to arbitration. The arbitral award was in favour of the Appellant. Post the order, the Appellant filed an execution petition before the district and sessions judge in Faridabad. The Respondent, then made a request to set aside the arbitration award in accordance with Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act") before the Special Commercial Court in Gurugram.

Issue for Consideration

Whether, the pre-deposit of 75% of the awarded amount as per section 19 of the MSMED Act, 2006, under section 34 of the Arbitration Act should be made mandatory?

High Court View

Before considering an application made under Section 34 of the Arbitration Act, the Special Commercial Court in Gurugram gave the respondent six weeks to deposit 75% of the amount due under the arbitral judgement. The respondent filed the commercial appeal before the High Court after feeling wronged by the Special Commercial Court's ruling. While upholding the validity of Section 19 of the MSME Act, the division bench of the Punjab and Haryana High Court (High Court) held that the pre-deposit of 75% of the arbitral award is, in fact, directory and not mandatory. The High Court did not insist on a pre-deposit of 75% of the awarded amount and instead allowed the arbitration proceedings pursuant to Section 34 of the Arbitration Act to commence.

Supreme Court View

The Appellant filed an appeal with the Supreme Court. The Supreme Court set aside the ruling made by the Division Bench of the High Court, which allowed the arbitration proceedings under Section 34 of the Arbitration Act to continue without requiring a pre-deposit of 75% of the awarded amount.

The Supreme Court while interpreting Section 19 of the MSME Act, observed that the requirement of depositing 75% of the amount in terms of the award as a pre-deposit is mandatory. However, the Supreme Court also noted that the court may let the pre-deposit be made in instalments if the court is convinced that the appellant will suffer an undue hardship if required to deposit 75% of the awarded amount as a lumpsum amount.

MHCO Comment : With regard to contesting an arbitral award under Section 34 of the Arbitration Act, the Supreme Court's decision provides much-needed clarification on the scope of the pre-deposit obligation outlined in Section 19 of the MSME Act. The Apex Court has struck a delicate balance in the current case, by underlining the required nature of the pre-deposit requirement under the MSME Act of 75% of the awarded sum and upholding the right of the aggrieved party to be heard in an appeal.

This update was released on 22 Jul 2022.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
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