The Supreme Court, in the recent case of M/s Tirupati Steels v. M/s Shubh Industrial Component & Anr.,1 held that the pre-deposit of 75% of the awarded amount as per Section 19 of the Micro, Small and Medium Enterprise Development Act, 2006 (MSMED Act) is mandatory to challenge an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act).

Brief Facts

The parties in the instant matter were governed by the provisions of the MSMED Act, 2006. The appellant, M/s Tirupati Steels, preferred a claim petition before the Micro and Small Enterprises Facilitation Council (MSME Council) for recovery of INR 1,40,13,053­ and interest amounting to INR 1,32,20,100 which comes to a total amounting to INR 2,72,33,153 (Indian Rupees two crores seventy-two lacs thirty-three thousand one hundred and fifty-three)­. On the failure of conciliation proceedings, the dispute was referred to the arbitrator, who was appointed through the MSME Council at Chandigarh. The arbitrator passed an award in favour of the appellant, pursuant to which an execution petition was filed before the District and Sessions Judge, Faridabad. Thereafter, the respondent, M/s Shubh Industrial Component, filed an application before the Special Commercial Court, Gurugram under Section 34 of the Arbitration Act for setting aside the arbitral award.

It was then contended by the appellant that an application under Section 19 of the MSMED Act directs the judgment debtor to deposit 75% of the arbitral award. The Special Commercial Court, Gurugram granted six weeks' time to the respondent to deposit 75% of the amount under the arbitral award before the application filed under Section 34 of the Arbitration Act could be entertained. Feeling aggrieved with the order passed by the Special Commercial Court, respondent filed the commercial appeal before the High Court. The division bench of the Punjab and Haryana High Court (High Court) heavily relied on the case of M/s Mahesh Kumar Singla and Anr. v. Union of India and Ors., CWP No. 23368 of 2015, and while upholding the vires of Section 19 of the MSMED Act, held that the pre­-deposit of 75% of the arbitral award is, in fact, directory and not mandatory. Thus, the High Court permitted the proceedings under Section 34 of the Arbitration Act to continue without insistence on making a pre-­deposit of 75% of the awarded amount. Aggrieved with the impugned order passed by the Division Bench of the High Court permitting the proceedings under Section 34 of the Arbitration Act to go on without insistence for making pre-­deposit of 75% of the awarded amount, the appellant filed an appeal before the Supreme Court.

Issues

Whether the pre ­deposit of 75% of the awarded amount as per Section 19 of the MSMED Act in a challenge to an arbitral award under Section 34 of the Arbitration Act is a mandatory or directory provision?

Decision

The Supreme Court, at the very outset, noted that the issue of whether the pre ­deposit of 75% of the awarded amount as per the MSMED Act while challenging an arbitral award under the Arbitration Act was now no longer res integra in view of the decision of the Apex Court itself, in Gujarat State Disaster Management Authority v. Aska Equipments Limited, (2022) 1 SCC 61.

While interpreting Section 19 of the MSMED Act and relying upon the case of Goodyear (India) Ltd. v. Norton Intech Rubbers (P) Ltd., (2012) 6 SCC 345, the Supreme Court observed 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 MSMED Act is mandatory. However, the Supreme Court also observed that if the appellate court is satisfied that there shall be undue hardship caused to the appellant to deposit 75% of the awarded amount, the court may allow the pre-­deposit to be made in instalments. Therefore, the Apex Court noted that it is specifically observed and held that pre­ deposit of 75% of the awarded amount under Section 19 of the MSMED Act, 2006 is a mandatory requirement.

In view of the conclusion that the Apex Court came to, the impugned order passed by the High Court permitting the proceedings under Section 34 of the Arbitration Act without insistence for making pre-­deposit of 75% of the awarded amount was held to be unsustainable and deserving to be quashed and set aside. The Apex Court also observed and held that unless and until the respondent deposited the 75% of the awarded amount, its application under Section 34 of the Arbitration Act challenging the award shall not be entertained and decided on merits and, in that case, the execution proceedings may continue. The present appeal was accordingly allowed.

While passing the impugned order, the Division Bench of the High Court has relied upon an earlier decision of the Division Bench in the case of M/s Mahesh Kumar Singla (supra), which had taken a contrary view. Therefore, while setting aside the impugned order, the Apex Court also held that the decision of the Division Bench in the case of M/s Mahesh Kumar Singla (supra), is not good law and is specifically overruled to the extent that it holds that pre­ deposit of 75% of the awarded amount under Section 19 of the MSMED Act, 2006, is directory and not a mandatory requirement.

Comments

The decision of the Supreme Court brings in much needed clarity on the nature of pre-deposit requirement set out under Section 19 of the MSMED Act in relation to challenging an arbitral award under Section 34 of the Arbitration Act. The Apex Court has played a fine balance in the instant matter by highlighting the mandatory nature of the requirement of pre-deposit of 75% of the awarded amount under MSMED Act while upholding the right of the aggrieved party to be heard in an appeal.

Footnote

1 Civil Appeal No. 2941 of 2022

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