The Micro, Small and Medium Enterprises Development Act, 2006 gives registered micro and small enterprises a fast statutory route to recover delayed payments through the MSE Facilitation Council. When the Council makes an award and the buyer wishes to challenge it, Section 19 of the Act imposes a strict gatekeeping condition: no court will entertain the application to set aside the award or decree unless the buyer first deposits 75 percent of the amount awarded. This explainer looks closely at how that pre-deposit works in practice.
Where the pre-deposit requirement comes from
Chapter V of the MSMED Act, 2006 deals with delayed payments to micro and small enterprises. When a buyer fails to pay a supplier within the time allowed, the supplier may refer the dispute to the Micro and Small Enterprises Facilitation Council under Section 18. The Council first attempts conciliation. If conciliation fails, the Council takes up the dispute itself for arbitration, or refers it to an institution, and Section 18(3) provides that the Arbitration and Conciliation Act, 1996 then applies as if the arbitration were in pursuance of an arbitration agreement between the parties.
The outcome of that process is an arbitral award (or a decree or order). Section 19 then steps in. It provides that no application for setting aside any decree, award or other order made by the Council, or by any institution or centre to which the Council referred the dispute, shall be entertained by any court unless the appellant has deposited with it 75 percent of the amount in terms of the decree, award or order.
A condition of maintainability, not a mere formality
The language of Section 19 is mandatory: the application "shall not be entertained" without the deposit. The deposit is therefore a condition attached to the very entertainment of the challenge. A buyer cannot file a setting-aside application, argue it on merits, and treat the deposit as something to be sorted out later. Until the deposit is made in the manner the court directs, the challenge does not get off the ground, and interim protection against enforcement of the award is not ordinarily available on the strength of an application that the statute says cannot be entertained.
The pre-deposit is the price of admission for the challenge. It reflects the legislative policy of the MSMED Act: cash flow is the lifeblood of micro and small enterprises, and a buyer should not be able to hold up an awarded amount for years of litigation without putting a substantial part of it on the table first.
The route of challenge: Section 34 read with Section 19
Because Section 18(3) makes the 1996 Act applicable to Facilitation Council arbitration, the award is challenged in the same way as any other arbitral award: by an application under Section 34 of the Arbitration and Conciliation Act, 1996, on the limited grounds that provision allows, and within the limitation period it prescribes. What Section 19 of the MSMED Act adds is the deposit condition. In practice, the buyer files a Section 34 application before the competent court and, along with it or as directed, deposits 75 percent of the awarded amount.
The statutory scheme is a complete code for this purpose. A buyer cannot sidestep the deposit by dressing the challenge up as some other proceeding. Attempts to attack a Council award through a writ petition, precisely to avoid the Section 19 deposit, run against the grain of the statute: where the legislature has provided a specific remedy hedged with a specific condition, the general expectation is that the statutory route, deposit and all, must be followed.
Computing the 75 percent
The deposit is 75 percent "of the amount in terms of the decree, award or other order". Points to keep in mind:
- The awarded amount usually comprises the principal plus the compound interest which the Council awards under the Act on delayed payments. The 75 percent is computed on that total awarded sum, not on the bare invoice value.
- Interest under the award may continue to run after the award date. The court dealing with the Section 34 application will indicate the figure and the cut-off date on which the deposit is to be computed; the safe working basis is the full amount payable under the award.
- Where the award is partly in favour of each side, the deposit relates to the amount the challenger has been directed to pay under the award being challenged.
Form of the deposit
Section 19 speaks of a deposit "in the manner directed by such court". The court therefore controls the mode: it may require cash deposit with the registry, a fixed deposit receipt in the name of the court, or such other secured form as it considers appropriate. A buyer should not assume that a bank guarantee or an undertaking will suffice; the form of deposit is for the court to direct, and the order should be complied with strictly and within the time granted.
Release of part of the deposit to the supplier
The proviso to Section 19 is important for suppliers. Pending disposal of the setting-aside application, the court may order that such percentage of the deposited amount as it considers reasonable be paid over to the supplier, subject to such conditions as it deems necessary. In practice this means a micro or small enterprise need not wait out the entire challenge with the money locked up: it can seek release of a portion, typically against safeguards such as an undertaking or security to ensure restitution if the award is ultimately set aside. The provision balances the interim cash-flow needs of the supplier against the possibility that the buyer succeeds.
What happens if the deposit is not made
No deposit, no challenge
If the buyer does not deposit 75 percent as directed, the court cannot entertain the setting-aside application. The challenge fails at the threshold without any examination of merits.
Award becomes enforceable
An award that is not validly challenged becomes enforceable in the same manner as a decree, and the supplier may take out execution to recover the awarded amount with interest.
Deposit made, challenge heard
Once the deposit is made, the Section 34 application proceeds on its own limited grounds. The deposit abides the result: it goes towards satisfying the award if the challenge fails, or is refunded as directed if it succeeds.
Practical notes for both sides
For buyers, the message is to treat the deposit as an unavoidable cost of challenging an MSEFC award and to budget for it before filing, computing 75 percent on the full awarded amount including interest. For suppliers, the deposit is leverage: once the money is in court, an application under the proviso for release of a reasonable portion should be considered early. The wider Samadhaan process, the interest regime under Sections 15 to 17 and the defences available to buyers are covered in separate explainers on this site; this page is confined to the deposit mechanics under Section 19.
Frequently Asked Questions
Can a buyer challenge a Facilitation Council award without depositing 75 percent?
No. Section 19 of the MSMED Act, 2006 says that an application to set aside any decree, award or other order of the Council, or of any institution to which the dispute was referred, shall not be entertained by any court unless the applicant deposits 75 percent of the amount in terms of the award. The deposit is a condition of the challenge being entertained at all.
Is the 75 percent calculated on the principal alone?
The deposit is 75 percent of the amount in terms of the decree, award or order under challenge. Where the award grants both principal and interest, the awarded figure ordinarily includes that interest, so the deposit is computed on the total sum awarded, not on the invoice principal alone. The safe course is to compute 75 percent of the full awarded amount as on the date of the award.
Can the supplier receive any money while the challenge is pending?
Yes. The proviso to Section 19 allows the court, pending disposal of the application to set aside the award, to order that such percentage of the deposited amount as it considers reasonable be paid to the supplier, subject to conditions the court thinks necessary to protect restitution if the challenge succeeds.
Under which provision is the challenge itself filed?
Arbitration before the Facilitation Council under Section 18(3) of the MSMED Act proceeds as if it were arbitration under the Arbitration and Conciliation Act, 1996. The award is therefore challenged by an application under Section 34 of the 1996 Act, read with Section 19 of the MSMED Act, which adds the 75 percent deposit requirement to that application.