Mandatory Pre-Deposit of Awarded Amount under MSMED Act- Not Sine Qua Non For Private Arbitration

INTRODUCTION

          The system of dispute resolution such as Alternate Dispute Resolution (ADR) facilitate parties to deal with the underlying issues in dispute in a more cost-effective manner and with increased efficacy. The resolution through the ADR apart from being cost effective and speedy, is more viable and private. One of such ADR mechanism is in the form of Arbitration, which is often used to resolve commercial disputes. Arbitration in India is governed by the law of arbitration enacted in India which provides for dispute resolution mechanism, an agreement to that effect signed by the disputed parties. The parties to the dispute can mutually submit themselves to the jurisdiction of the Arbitrator(s) as agreed between them or else either party claiming under the contract can get the dispute be referred to the Arbitration through the process of court of law as provided under the Arbitration and Conciliation Act, 1996 (in short ‘The Arbitration Act’). So far as the Micro, Small and Medium Enterprises are concerned, in India, a separate ADR mechanism with an object of facilitating expeditious recovery of amount due to an MSME is provided by a special legislation namely the Micro, Small and Medium Enterprises Development Act, 2006 (in short ‘The MSMED Act’).

ARBITRATION PROCEDURE UNDER ARBITRATION ACT VIZ A VIZ MSMED ACT

          Arbitration in India is governed by the Arbitration Act, which states that for adopting the arbitration as a dispute resolution mechanism, an agreement to that effect should be signed between the disputing parties. Part I of the Arbitration Act deals with the general provisions with regards to the domestic arbitration and Part II of the Arbitration Act deals with enforcement of foreign awards. As discussed above, the parties to the dispute can either submit themselves to the arbitration as agreed between them or else can seek the reference of the dispute to arbitration by invoking the provisions of Section 11 of the Arbitration Act before the Court of law. Further, any party feeling aggrieved with the award passed by the arbitrator can appeal before the higher court of law in terms of the provisions provided under Section 34 and 37 of the Arbitration and Conciliation Act, 1996.

          So far as the MSMED Act is concerned, any MSME can apply to the ‘Micro and Small Enterprises Facilitation Council’ of a state having jurisdiction to entertain the matter regarding the dispute resolution where any buyer has failed to make payment of the amount to the supplier. The MSMED Act provides that the MSME Facilitation Council on receipt of an application by an MSME, shall initially conduct conciliation proceedings inter se the parties in accordance with the provisions contained under Section 65 to 81 of the Arbitration Act. It is when the conciliation proceedings fail between the parties to the dispute, the MSMED Act provides that the Facilitation Counsel 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 Act shall then apply to the dispute. For reference, Section 18 of the MSMED Act is reproduced as under:-

          “Section 18 in The Micro, Small and Medium Enterprises Development Act, 2006

18. Reference to Micro and Small Enterprises Facilitation Council.—

(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.

(2) On receipt of a reference under sub-section (1), 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 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.

(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer to it any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 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.

(4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises 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.

(5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference. ”

In terms of Section 19 of the MSMED Act, no application for setting aside any decree, award or other order made either by the Facilitation Council itself or by any institution or centre providing ADR services, shall be entertained by any court unless the appellant (not being the supplier) has deposited   75 % of the amount in terms of the decree, award or, as the case may be, other order in the manner directed by such court. On receipt of the said 75 % amount, the court shall order such amount to be released to the supplier, subject to such conditions as it deems necessary to impose. For reference, Section 19 of the MSMED Act is reproduced as under:-

“Section 19 in The Micro, Small and Medium Enterprises Development Act, 2006

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 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. ”

Considering the above legal background, the moot question which arises is that whether the provisions of Section 18 and 19 of the MSMED Act would apply to arbitration being conducted under the normal route by invoking the provisions of the Arbitration Act, 1996 and not the MSMED Act, even if, the party-claimant is a registered MSME under the MSMED Act and has not invoked the arbitration under the MSMED Act.

ESSENTIALITY OF THE PRE-DEPOSIT CLAUSE

            The Scheme of the MSMED Act was no doubt framed to expeditiously recover the amounts due for supplies made by the MSME as it is understood in common business parlance that a MSME do not command a significant bargaining power. It is for this reason, this policy support in the form of special ADR mechanism under the Act and more particularly the condition of pre-deposit of 75 % of the awarded amount was incorporated into the Act.

            However, if the reference by a registered MSME for settling its dispute was not made the Facilitation Council by invoking the provisions of the ADR mechanism as provided under the MSMED Act, then there was no conciliation either by the Council or by any Institution or Centre providing such services under the provisions of the Act. The Council would in such a scenario would not have taken any dispute for arbitration nor would have any occasion to refer the said dispute to an alternate Institution or a Centre providing such services. The arbitration in such a scenario can not be said to be an Institutional Arbitration in accordance with the provision provided under Section 18 of the MSMED Act.

            In such a situation, if a registered MSME invokes the provisions of the Arbitration Act, 1996 by invoking the arbitration agreement entered into between the parties to the dispute, then the condition of pre-depositing would not be applicable to such proceedings being conducted under the provisions of the Arbitration Act under the normal recourse and not under the MSMED Act. Thus, in my view the conditions of mandatory deposit of 75 % of the awarded amount in terms of Section 19 of the MSMED Act will not be a sine qua non for an arbitration being conducted by invoking the provisions of the Arbitration Act under the normal recourse.

PRE-DEPOSIT CONDITION UNDER MSMED ACT AND JUDICIAL DECISIONS

            The aforesaid legal preposition was considered recently by the Hon’ble Delhi High Court in the case of AVR Enterprises vs. Union of India which was decided on 08.05.2020, wherein, the Hon’ble Court while refereeing to the provisions of the MSMED Act and the relevant case laws on this issue, observed that      Section 19 of the MSMED Act qualifies the expression ‘decree award or other order’ with the expression ‘made either by Council or by any Institution or Centre providing alternate dispute resolution services to which reference has been made by the Council, shall be entertained unless….’. The Hon’ble Court further observed that if provisions of Section 19 of the MSMED act were to be applied to every decree, award or other order irrespective of the fact the same was made by the Council or not, there was no necessity of the legislators to provide for the expression ‘made either by Council or by any Institution or Centre providing alternate dispute resolution services to which reference has been made by the Council’.

            In another judgment namely Bharat Heavy Electrical Limited vs. The Micro and Small Enterprises Facilitation Centre and another, W.P. (C) 10866 of 2016, again the Hon’ble Delhi High Court observed and held that the ADR mechanism provided under the MSMED Act was a policy support to provide a legal framework to the MSME Sector. It is for this reason that Section 18 (3) of the MSME Act does not contemplate arbitration to be conducted by an arbitrator appointed by either party, but expressly provides that the same would be conducted by MSEFC or by an Institution or Centre providing ADR services on being referred to by the MSEFC. Therefore, the benefit of the provisions of the MSMED Act cannot be availed in a case of arbitrations in terms of the agreements between the parties.