A buyer on the receiving end of an award of the Micro and Small Enterprises Facilitation Council often assumes it can be appealed like an ordinary decree. It cannot. The MSMED Act, 2006 treats the Council’s decision as an arbitral award, confines the challenge to an application for setting aside under Section 34 of the Arbitration and Conciliation Act, 1996, and then adds a gate of its own: under Section 19, no court will entertain the challenge unless the buyer first deposits seventy-five per cent of the awarded amount.
The Council award: a short recap
Under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, a supplier’s delayed-payment claim goes first to conciliation before the Facilitation Council and, if that fails, to arbitration — by the Council itself or an institution to which it refers the dispute. The statute treats this arbitration as one under the Arbitration and Conciliation Act, 1996, as if there were an arbitration agreement between the parties. The working of the Samadhaan reference itself is discussed in a companion article; this one concerns what happens after the Council has ruled.
The consequence of the deeming is decisive. What the Council delivers is an arbitral award, not an administrative order, and there is no appeal on merits to any authority. The only route of challenge is the one the 1996 Act provides for every award: an application to set it aside under Section 34.
The Section 34 application and its clock
A Section 34 application must be filed within three months of the date on which the applicant received the award. The court may condone a further thirty days on sufficient cause, but not beyond; an application filed after three months and thirty days is barred. The application goes to the court as defined in the 1996 Act — for commercial disputes of the specified value, in practice the Commercial Court or the Commercial Division of the High Court having jurisdiction. The buyer should therefore treat receipt of the award as the start of a short, unforgiving limitation period.
The Section 19 gate: deposit before entertainment
Section 19 of the MSMED Act then adds the feature that distinguishes a Council award from every ordinary commercial award. No application for setting aside any decree, award or other order made by the Council, or by any institution to which the Council referred the dispute, 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 order.
The words matter. The deposit is not a condition of a stay or of interim relief; it is a condition of the challenge being entertained at all. A Section 34 application filed against a Council award without the deposit is, in the eye of the statute, a proceeding the court cannot take up. The requirement is statutory and strict. Courts have in practice shown some flexibility about the manner of deposit — permitting instalments in genuine hardship — but that operates within the requirement, not as an exception, and a buyer cannot count on it.
The deposit is computed on the amount in terms of the award, which typically includes the statutory compound interest at three times the bank rate. Since the interest often exceeds the principal, the seventy-five per cent figure can be far larger than the buyer expects, and should be assessed before the decision to challenge is made.
The second limb: interim release to the supplier
Section 19 does not stop at the deposit. It directs that, pending disposal of the setting-aside application, the court shall order that such percentage of the deposited amount as it considers reasonable be paid to the supplier, subject to such conditions as it deems necessary. The provision thus works in two movements: the buyer parts with three-quarters of the award to be heard at all, and the supplier may receive a court-determined portion of that money while the challenge is pending — so that a small enterprise starved of payment is not starved further by litigation.
The narrow grounds of challenge
Crossing the deposit gate only brings the buyer to the ordinary Section 34 terrain, and that terrain is narrow. An award may be set aside on limited grounds: incapacity of a party; invalidity of the arbitration agreement; want of proper notice of the appointment or the proceedings, or inability to present one’s case; the award dealing with matters beyond the reference; defective composition of the tribunal or procedure; and conflict with the public policy of India — confined to fraud or corruption in the making of the award, contravention of the fundamental policy of Indian law, or conflict with basic notions of morality or justice. For domestic awards, patent illegality on the face of the award is an additional ground, but an award cannot be set aside merely for an error of law or a wrong appreciation of evidence.
The point deserves emphasis: a Section 34 court is not an appellate court. It does not reappreciate the evidence led before the Council, substitute its view of the contract for the Council’s, or correct findings of fact. A challenge drafted as a merits appeal — disputing quantities, quality or reconciliation of accounts — is unlikely to fit any ground. From the Section 34 decision, a further appeal lies under Section 37 of the 1996 Act, on the same confined footing. The contrast with an ordinary commercial award is therefore narrow but real:
Ordinary commercial award
Challenge under Section 34 within three months plus a condonable thirty days, on the narrow statutory grounds. No pre-deposit is required to be heard; a stay of enforcement needs a separate application, usually on conditions the court fixes.
MSE Facilitation Council award
Same Section 34 grounds and the same limitation, but the challenge is not entertained unless the buyer first deposits seventy-five per cent of the awarded amount under Section 19 MSMED — and the court then releases a reasonable portion of that deposit to the supplier during the pendency of the challenge.
The supplier’s side of the ledger
For the supplier, the deposit regime is the commercial heart of the scheme. Once the buyer challenges, three-quarters of the award sits in court as security for eventual recovery, and a portion of it may reach the supplier even before the challenge is decided. If no challenge is filed within limitation, or if the challenge fails, the award is enforceable in the same manner as a decree of the court under the 1996 Act, and execution can proceed against the buyer’s assets. The supplier’s task after the award is therefore to watch the limitation period, respond to deposit and release applications, and move to execution once the award attains finality.
A closing word
Section 19 changes the economics of challenging a Council award before any legal argument is reached. A buyer must weigh the deposit — computed on an award carrying heavy statutory interest — against the narrow odds Section 34 offers. A supplier holding an award, conversely, holds security most decree-holders can only litigate towards. Both positions reward early, clear-eyed assessment.
Frequently Asked Questions
Is the 75 per cent deposit negotiable?
The requirement itself is statutory and the court cannot waive it: without the deposit the Section 34 application is not to be entertained at all. What courts have at times permitted, as a matter of practice in cases of demonstrated hardship, is a phased or instalment deposit of the seventy-five per cent. That is a discretionary indulgence about the manner of deposit, not an exemption from it, and a buyer should not plan a challenge on the assumption that it will be granted.
Does filing the challenge automatically stay execution of the award?
No. Under the Arbitration and Conciliation Act, 1996, filing a Section 34 application does not by itself render the award unenforceable; a stay of enforcement requires a separate application and a specific order, usually on conditions. For a Council award the sequence is stricter still: the Section 19 deposit must be made before the challenge is entertained, and only then does the question of staying execution arise.
Can the supplier withdraw the amount released to it unconditionally?
Usually not. Section 19 directs the court to order payment to the supplier of such percentage of the deposited amount as it considers reasonable while the challenge is pending, but since the award may yet be set aside, courts ordinarily attach safeguards — an undertaking to restitute, security, or a bank guarantee — so that the money can be brought back if the buyer ultimately succeeds.
Does a supplier challenging the award also have to deposit 75 per cent?
No. Section 19 imposes the pre-deposit on an applicant not being a supplier. A supplier dissatisfied with the award — for instance, on the quantum allowed — may apply under Section 34 within the same limitation period without any deposit. The gate is designed to protect the supplier who has won, not to burden the supplier who challenges.