Calcutta High Court: Court Cannot Entertain Application Seeking to Set Aside Award Unless Buyer Deposits 75% of the Award under Section 19 of MSMED Act

Calcutta High Court: Court Cannot Entertain Application Seeking to Set Aside Award Unless Buyer Deposits 75% of the Award under Section 19 of MSMED Act

The Calcutta High Court has dismissed an application filed by the Board of Major Port Authority for the Shyama Prasad Mookerjee Port, Kolkata, for staying the operation of an arbitral award passed by the West Bengal State Micro Small Enterprises Facilitation Council (MSME Council).

The single judge, Justice Moushumi Bhattacharya held, that in the absence of a pre-deposit of 75% of the award, in compliance with Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), the application under Section 34 of the Arbitration and Conciliation Act, 1996 (1996 Act) would remain ‘stillborn’ for the purpose of stay of the award.

The present application was filed the petitioners for staying an award passed by the MSME Council u/s 18(3) of the MSMED Act. The petitioners also sought an unconditional stay of the award u/s 36(3) of the 1996 Act on the ground taken that “the Council became de jure unable to perform its functions and consequently the award is without jurisdiction and void.”

It was submitted by the petitioners that the mandate of the Council would stand terminated on the expiry of the period specified under Section 18(5) of the MSMED Act, which specifies that a reference made under it shall be decided within 90 days from the date of making the reference.

According to petitioners, the reference in this case was made on 4th December, 2017 while the impugned award was passed on 28 April, 2022, and that even under Section 29-A (1) of the 1996 Act, arbitral tribunals were mandated to make an award within 12 months from the date of completion of pleadings in case of domestic arbitrations.

The petitioners further attempted to distinguish the words ‘filed’ in Section 36(2) of the 1996 Act and ‘entertained’ in Section 19 of the MSMED Act to submit that filing of the s. 34 application would be sufficient for a Court to consider stay of an award under Section 36(2) of the 1996 Act.

Per contra, the respondents opposed to the maintainability of the present application. It was argued that to successfully move an application for stay under Section 36(2), the petitioner would have to first comply with Section 19 of the MSMED Act and deposit 75% of the award, before applying for setting aside of the award, and that such a requirement would have an overriding effect over all existing laws under section 24 of the MSMED Act.

The issues for adjudication by the Court were as followed:

Firstly, whether compliance of section 19 of the MSMED Act is mandatory for seeking stay of an award; and

The Court noted that Section 19 of the MSMED Act, 2006, contains a mandate on a ‘Buyer’ to deposit 75% of the amount of the decree or award or an order or such other percentage as may be directed by a Court, for setting aside any award made by the Facilitation Council.

The Court held that there was no scope for any ambiguity in construing the mandate since the words in Section 19 are peremptory in nature and pins a buyer down to the mandate if the buyer chooses to apply for setting aside the award made by the Council.

The Judge clarified that, “the only exception made in the section is for a supplier; there is no other exit route under the section for a buyer to seek setting aside of an award without the pre-deposit. The framing of the section also makes it clear that the 75% deposit is a condition precedent for a buyer for seeking setting aside of the award of the Council.”

Thus, the Court was of the view that Section 19 read with 24 leaves little doubt that a buyer cannot seek setting aside of an award made by the Council unless the buyer first deposits 75% of the awarded amount. Only upon fulfilment of the condition will a Court ‘entertain’ the application for setting aside of the award.

The second issue determined by the Court was whether filing of an application under section 34 of the 1996 Act, without the pre-deposit under section 19 of the MSMED Act, makes the application for seeking stay of the award under section 36(2) of the 1996 Act, imperfect in the eye of law.

In the present case, the Court noted that since the petitioner had admittedly not made the pre-deposit, the Section 34 application remains stillborn which, in other words, means that there is no section 34 application at all in the eye of law for the purposes of maintaining an application under section 36(2) for stay of the award. The Court is hence statutorily-precluded from entertaining the application for stay of the award, the Judge opined.

With respect to the ‘File’ vs. ‘Entertain’ dichotomy, the Court on conjoint reading of Section 19 of the MSMED Act and Section 36(2) of the 1996 Act, found that there appears to be a dissonance in the words ‘entertain’ in section 19 and ‘file’ in section 36(2).

The Court remarked that, “the conflict however must be resolved in favor of section 19 that is the section 34 application must be entertain-able for maintaining a Section 36(2) application in view of the overriding effect of section 19 as provided under section 24 of the MSMED Act.”

The Judge laid emphasis on Section 24 which contains a non-obstante clause and declares that sections 15-23 of the MSMED Act shall override any inconsistent provisions in any law for the time being in force.

Therefore, the inescapable conclusion was held that a Court cannot ‘entertain’ an application under section 36(2) unless a buyer puts in 75% of the awarded amount before seeking setting aside of an award under section 19 of the MSMED Act. Until that is done, the section 34 application is stillborn.

Lastly, the Court observed that 'filing' of a Section 34 application for the purpose of stay of an award under section 36(2) cannot be construed to imply the mere ministerial act of filing an application for setting aside of an award under section 34 of the said Act.

The Court reasoned due to the statutory window within which an award has to be filed under section 34(3) of the 1996 Act. Section 34(3) requires an application for setting aside to be ‘made’ within three months from the date on which the party receives the arbitral award with a proviso for the Court assessing the sufficiency of the cause shown by the applicant for making the application within an additional period of 30 days. The word ‘entertain’ comes within the wording of the proviso; the Court avowed.

Therefore, the Court held that it can entertain an application for setting aside of an award only if the application is filed within the time period provided under section 34(3) or on the extended time frame under the proviso on the Court being satisfied of the sufficiency of the cause shown.

The Court elucidated the correct sequence under the Acts as follows:

(a) First: Award passed by the Facilitation Council under section 18(3) of the MSMED Act.

(b) Second: Application filed by the buyer for setting aside of the award under section 19 of the MSMED Act.

(c) Third: The buyer / applicant puts in 75% of the awarded amount under section 19 of the MSMED Act.

(d) Fourth: The application under section 34of the 1996 Act becomes entertainable by the Court as a valid application for stay of the award under section 36(2) of the 1996 Act.

In the present case, since the petitioner had not paid the pre-deposit under section 19 of the MSMED Act, the Court held that the section 34 application filed by the petitioner remains eclipsed in the eye of law as the foundation for a prayer for stay of the arbitral award under section 36(2) of the 1996 Act.

Therefore, the Court ruled that the present application for stay of the impugned award filed under section 36(2) of the 1996 Act cannot be entertained as the said application was foisted on a stillborn section 34 application.