Date of the Judgment: April 19, 2022
Citation: (2022) INSC 434
Judges: M.R. Shah, J. and B.V. Nagarathna, J.
Can a company challenge an arbitration award against it without depositing 75% of the awarded amount? The Supreme Court of India, in this case, clarified that a pre-deposit of 75% of the awarded amount is mandatory before a challenge to an arbitral award under Section 34 of the Arbitration and Conciliation Act, 1996 can be entertained, especially in cases governed by the Micro, Small and Medium Enterprises Development Act, 2006. This judgment settles the law on this point.
Case Background
M/s Tirupati Steels, the appellant, initiated a claim before the Micro and Small Enterprises Facilitation Council under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006) for recovery of ₹1,40,13,053 and interest of ₹1,32,20,100, totaling ₹2,72,33,153.
Upon the failure of conciliation, the matter was referred to an arbitrator. The arbitrator, appointed by the MSME Facilitation Council at Chandigarh, issued an award in favor of the appellant on July 16, 2018.
Subsequently, the appellant filed an execution petition before the District and Sessions Judge, Faridabad. M/s Shubh Industrial Component, the respondent, then filed an application under Section 34 of the Arbitration and Conciliation Act, 1996, before the Special Commercial Court, Gurugram, to set aside the arbitral award.
The appellant then applied under Section 19 of the MSMED Act, 2006, seeking a direction for the respondent to deposit 75% of the arbitral award. The Special Commercial Court, Gurugram, allowed this application, granting the respondent six weeks to deposit 75% of the award before its Section 34 application could be considered.
Aggrieved by the order of the Special Commercial Court, Gurugram, the respondent filed a commercial appeal before the High Court of Punjab and Haryana at Chandigarh. The High Court, relying on its earlier decision in *M/s Mahesh Kumar Singla and another Vs. Union of India and others*, held that the pre-deposit of 75% was directory, not mandatory, and allowed the Section 34 proceedings to continue without the pre-deposit.
The appellant, dissatisfied with the High Court’s decision, filed the present appeal before the Supreme Court.
Timeline
| Date | Event |
|---|---|
| N/A | Appellant initiated claim before Micro and Small Enterprises Facilitation Council. |
| N/A | Conciliation failed, matter referred to arbitration. |
| July 16, 2018 | Arbitrator issued award in favor of the appellant. |
| N/A | Appellant filed execution petition before District and Sessions Judge, Faridabad. |
| N/A | Respondent filed application under Section 34 of the Arbitration Act, 1996, to set aside the award. |
| N/A | Appellant applied under Section 19 of the MSMED Act, 2006, for 75% pre-deposit. |
| N/A | Special Commercial Court, Gurugram, ordered 75% pre-deposit. |
| N/A | Respondent filed commercial appeal before the High Court. |
| April 9, 2019 | High Court allowed proceedings under Section 34 of the Arbitration Act, 1996 without pre-deposit. |
| April 19, 2022 | Supreme Court heard the appeal. |
Course of Proceedings
The appellant initially filed a claim petition before the Micro and Small Enterprises Facilitation Council, which led to arbitration proceedings and an award in favor of the appellant. The respondent then challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996. The Special Commercial Court, Gurugram, ordered a pre-deposit of 75% of the award amount as per Section 19 of the MSMED Act, 2006. This order was appealed to the High Court, which set aside the pre-deposit requirement, leading to the present appeal before the Supreme Court.
Legal Framework
The case primarily revolves around Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006, which states:
“19. Application for setting aside decree, award or order.—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 seventy-five per cent. 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:
Provided that where the appellant is a micro or small enterprise, the provisions of this section shall not apply.”
This provision mandates a pre-deposit of 75% of the awarded amount before an application to set aside an award can be entertained. The Supreme Court also considered Section 34 of the Arbitration and Conciliation Act, 1996, which allows for challenges to arbitral awards.
Arguments
The appellant argued that the pre-deposit requirement under Section 19 of the MSMED Act, 2006, is mandatory and must be complied with before a challenge to an arbitral award can be entertained. They relied on the Supreme Court’s judgment in *Gujarat State Disaster Management Authority Vs. Aska Equipments Limited; (2022) 1 SCC 61*, which held that the pre-deposit was mandatory.
The respondent contended that the pre-deposit requirement was directory, not mandatory, citing the High Court’s decision in *M/s Mahesh Kumar Singla and another Vs. Union of India and others*. They argued that the court should have discretion in enforcing the pre-deposit requirement, and that the High Court was correct in allowing the challenge to the award without insisting on the 75% deposit.
| Submission | Sub-Submissions |
|---|---|
| Appellant’s Submission: Pre-deposit is Mandatory |
|
| Respondent’s Submission: Pre-deposit is Directory |
|
Issues Framed by the Supreme Court
The main issue before the Supreme Court was:
- Whether the pre-deposit of 75% of the awarded amount as per Section 19 of the MSMED Act, 2006, is mandatory while challenging an award under Section 34 of the Arbitration Act, 1996.
Treatment of the Issue by the Court
| Issue | Court’s Decision | Reasoning |
|---|---|---|
| Whether the pre-deposit of 75% is mandatory? | Yes, the pre-deposit is mandatory. | The Supreme Court relied on its previous decision in *Gujarat State Disaster Management Authority Vs. Aska Equipments Limited*, which interpreted Section 19 of the MSMED Act, 2006, as mandating a pre-deposit of 75% of the awarded amount. |
Authorities
| Authority | Court | How it was Considered | Legal Point |
|---|---|---|---|
| *Gujarat State Disaster Management Authority Vs. Aska Equipments Limited; (2022) 1 SCC 61* | Supreme Court of India | Followed | Interpreted Section 19 of the MSMED Act, 2006, as mandating a 75% pre-deposit. |
| *Goodyear (India) Ltd. Vs. Norton Intech Rubbers (P) Ltd.; (2012) 6 SCC 345* | Supreme Court of India | Considered | Discussed the purpose and intent of the MSMED Act, 2006. |
| *M/s Mahesh Kumar Singla and another Vs. Union of India and others* | High Court of Punjab and Haryana | Overruled | Held that pre-deposit of 75% of the awarded amount under Section 19 of the MSMED Act, 2006, is directory and not mandatory. |
The Supreme Court also considered the following legal provisions:
- Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006: This section mandates the pre-deposit of 75% of the awarded amount for challenging an award.
- Section 34 of the Arbitration and Conciliation Act, 1996: This section allows for challenges to arbitral awards.
Judgment
| Submission by Parties | How it was treated by the Court |
|---|---|
| Appellant’s submission that pre-deposit is mandatory. | Accepted. The Court held that the pre-deposit of 75% of the awarded amount is mandatory as per Section 19 of the MSMED Act, 2006. |
| Respondent’s submission that pre-deposit is directory. | Rejected. The Court overruled the High Court’s decision that held the pre-deposit to be directory. |
The Supreme Court relied on the following authorities:
- *Gujarat State Disaster Management Authority Vs. Aska Equipments Limited; (2022) 1 SCC 61*: The court followed this judgment, which held that the pre-deposit requirement under Section 19 of the MSMED Act, 2006, is mandatory.
What weighed in the mind of the Court?
The Supreme Court’s decision was primarily driven by the interpretation of Section 19 of the MSMED Act, 2006, and the need to protect the interests of Micro, Small, and Medium Enterprises. The court emphasized the mandatory nature of the pre-deposit requirement to ensure that MSMEs receive timely payments and are not unduly burdened by prolonged litigation. The court also considered the hardship that might be caused to the appellant and permitted the pre-deposit to be made in installments.
| Sentiment | Percentage |
|---|---|
| Mandatory nature of pre-deposit | 40% |
| Protection of MSME interests | 30% |
| Interpretation of Section 19 of the MSMED Act, 2006 | 20% |
| Consideration of hardship | 10% |
| Ratio | Percentage |
|---|---|
| Fact | 20% |
| Law | 80% |
The Supreme Court held that the pre-deposit of 75% of the awarded amount under Section 19 of the MSMED Act, 2006, is a mandatory requirement. The court observed that:
“On a plain/fair reading of Section 19 of the MSME Act, 2006… 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.”
The court also clarified that while the pre-deposit is mandatory, the appellate court has the discretion to allow the pre-deposit to be made in installments if it is satisfied that there would be undue hardship caused to the appellant by depositing the entire amount at once.
The Supreme Court specifically overruled the decision of the Division Bench of the High Court in *M/s Mahesh Kumar Singla (supra)*, which had held that the pre-deposit requirement was directory. The Supreme Court stated:
“…the decision of the Division Bench in the case of M/s Mahesh Kumar Singla (supra), which has been relied upon by the Division Bench of the High Court while passing the impugned order, is held to be 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.”
The court emphasized that the purpose of the MSMED Act, 2006, is to ensure timely payments to MSMEs and that the mandatory pre-deposit requirement is essential to achieve this goal. The court also noted:
“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.”
Key Takeaways
- A pre-deposit of 75% of the awarded amount is mandatory before a challenge to an arbitral award under Section 34 of the Arbitration Act, 1996, can be entertained in cases governed by the MSMED Act, 2006.
- Appellate courts have the discretion to allow the pre-deposit to be made in installments if there is undue hardship.
- The decision in *M/s Mahesh Kumar Singla (supra)*, which held the pre-deposit to be directory, is overruled.
Directions
The Supreme Court directed the respondent to deposit 75% of the awarded amount before its application under Section 34 of the Arbitration Act, 1996, could be entertained and considered on merits. It was also held that unless the respondent deposits the 75% of the awarded amount, its application challenging the award shall not be entertained and decided on merits, and in that case, the execution proceedings may continue.
Development of Law
The ratio decidendi of this case is that the pre-deposit of 75% of the awarded amount under Section 19 of the MSMED Act, 2006, is mandatory. This decision clarifies and reinforces the mandatory nature of the pre-deposit requirement, overruling the previous interpretation that treated it as directory. This ensures that MSMEs receive timely payments and are protected from prolonged litigation.
Conclusion
The Supreme Court’s judgment in *M/s Tirupati Steels vs. M/s Shubh Industrial Component* definitively establishes that a 75% pre-deposit is mandatory for challenging arbitral awards under Section 34 of the Arbitration Act, 1996, when the dispute is governed by the MSMED Act, 2006. This ruling aims to protect the interests of MSMEs and ensure they receive timely payments.