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.
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