Delhi HC decides upon the applicability of section 19 of MSMED Act to proceedings which have not been initiated as per Section 18 of the MSMED Act

The Delhi High Court vide its judgment dated May 8, 2020 in the case of AVR Enterprises (petitioner) vs. Union of India (respondent) CM(M)769/2018, adjudicated upon whether section 19 (application for setting aside decree, award or order) of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) would apply to a proceeding which has not been initiated as per section 18 (reference to micro and small enterprises facilitation council) of the MSMED Act? Facts of the case Dispute arose between the parties with regard to supplies. Liquidated damages were imposed by the respondent and balance payment was also adjusted. The petitioner vide their letter dated July 23, 2010 invoked arbitration and requested that matter may be referred to arbitration. The respondents thereafter, appointed a sole arbitrator to adjudicate upon the disputes. Thereafter, the arbitrator published his award dated July 14, 2016, inter-alia, reducing the quantum of liquidated damages and directed payment of the balance amount with compound interest. The said award was challenged by the respondents by filing a petition under section 34 (application for setting aside arbitral award) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the Trial Court. During the course of the hearing before the Trial Court, the petitioner took a preliminary objection that the petition filed by the respondent under section 34 of the Arbitration Act was not maintainable because the respondent had failed to deposit 75% of the awarded amount in terms of section 19 of the MSMED Act. However, the Trial Court in its judgment dated April 18, 2018 held that the provisions of MSMED Act are not applicable and has thus rejected the preliminary objection raised by the petitioner. Findings of the court The court observed that in terms of section 18 of the MSMED Act, any party to a dispute with regard to any amount due under section 17 (recovery of amount due) of the MSMED Act, can make a reference to the Micro and Small Enterprises Facilitation Council (“Council”). On receipt of the 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 by applying the provisions under sections 65 to 81 of the Arbitration Act. Further, where conciliation initiated under sub-section (2) of section 18 of the MSMED Act 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 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 disputes as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of the Arbitration Act. The court further observed that in terms of section 19 of the MSMED Act, 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. On deposit of the 75% of the awarded amount, the court shall order that such%age of the amount deposited, as it considers reasonable, be paid to the supplier, subject to such conditions as it deems necessary to impose. However, the Delhi High Court while considering the facts and circumstances of the instant case, noted that no reference was made to the Council by the petitioner and no proceedings were conducted by the Council under section 18 of the MSMED Act. There was also, no reference made by the Council to any institution or centre for conducting conciliation. Further, there was no conciliation either by the Council or by any institution or centre providing alternate dispute resolution services. The Council also did not take up any dispute for arbitration nor did it refer any dispute to any institution or centre providing alternate dispute resolution services for such arbitration. Therefore, as per the court, the arbitration in the present case was not an ‘Institutional Arbitration’ as contemplated under section 18 of the MSMED Act but was conducted under the Arbitration Act by an arbitrator privately appointed by the respondent. The court thus, held that “21. Since there was no arbitration conducted under the MSMED Act so there is no question of any decree, award or other order being made either by the Council or by any Institution or Centre providing alternate dispute resolution services to which a reference is made by the Council thus Section 19 of the MSMED Act is not applicable to the present case. 22. Even though the petitioner may be covered under the MSMED Act, as Petitioner did not invoke its claim under section 18 of the MSMED Act or seek reference thereunder, there is no question of section 19 of the MSMED Act being applicable to the present case.” Thus, as per the court, if the objection of the petitioner were to be accepted, it would imply that even in a case where there is a civil suit for recovery filed and a decree obtained by a supplier, section 19 of the MSMED Act would apply and the buyer would be mandated to deposit 75% of the decreed amount as a precondition for consideration of his appeal. The court therefore, stated that the same would be contrary to Order 41 Rule (1)(3) of the Civil Procedure Code, 1908 (“CPC”) since under Order 41 Rule (1)(3) of CPC, the appellate court can waive the pre-deposit subject to conditions and failure to deposit entitles the appellate court to dismiss only the stay application but not the appeal. The court, also, while examining the scheme of section 19 of MSMED Act, noted that, if section 19 of the MSMED Act, were to apply to every decree award or other order irrespective of whether it was made by the Council, or an institution or centre to which reference has been made by the Council or by any other court, forum or tribunal, there would have been no necessity for 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”. The Delhi High Court thus, held that “44. In my view, Section 19 of the MSMED Act would apply only to proceedings initiated under section 18 of the MSMED Act and would not apply to an award published by an Arbitrator appointed by the parties otherwise than in accordance with section 18 of the MSMED Act. 45. In view of the above, I find no infirmity in the view taken by the Trial Court, in the impugned order, that the provisions of the MSMED Act for deposit of 75% of the awarded amount are not applicable.” (emphasis supplied) This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate). Download Pdf