Section 19 of the MSMED Act, 2006 bars any court from entertaining an application to set aside an award, decree or order of the Facilitation Council unless seventy-five per cent of the amount is first deposited. Two earlier explainers on this site examine that bar as such. This piece takes up the less-discussed second limb: the proviso under which the deposited money can be released to the supplier while the challenge is still pending, and how counsel for the supplier should pursue it.
The rule, briefly restated
Section 19 of the MSMED Act provides that no application for setting aside any decree, award or other order made by the Facilitation Council — or by any institution to which the Council referred the dispute — shall be entertained by any court unless the applicant has deposited with it seventy-five per cent of the amount in terms of the decree, award or order. The provision is framed as a bar on entertainment, so the deposit is the gateway through which every buyer’s challenge must pass. The general contours of this bar are covered in two earlier pieces on this site; what follows concentrates on the supplier’s side of the deposit once it has been made.
The proviso: money moves during the challenge
Section 19 does not treat the deposit as a dormant sum waiting for the challenge to end. Its proviso directs that, pending disposal of the setting-aside application, the court shall order that such percentage of the deposited amount be paid to the supplier as it considers reasonable in the circumstances of the case, subject to such conditions as it deems necessary to impose. Three features of this language repay attention. First, it is addressed to the period while the challenge is alive, not after it. Second, the measure is a percentage of the deposit, fixed by reference to reasonableness rather than any rigid fraction. Third, the release is conditional — the court controls the terms on which the supplier holds the money.
The legislative design is visible on the face of the chapter: Sections 15 and 16 exist because delayed payment starves small enterprises of working capital, and the proviso ensures that a buyer cannot restore the starvation simply by filing a challenge and letting the deposit sit in court.
How counsel for the supplier seeks release
The challenge to an MSEFC award travels as an application under Section 34 of the Arbitration and Conciliation Act, 1996, and the release application is moved in those very proceedings once the deposit is in. A workable application typically contains: the award and the computation it rests on; proof that the deposit has actually been made and in what form; a concise statement of the supplier’s financial position and need for the funds; the percentage of the deposit sought; and the security the supplier offers. The offer of terms is tactically important — an affidavit undertaking to restitute the amount with interest if the award is set aside, or security such as a bank guarantee or charge over assets, meets the court’s concern before it is voiced and makes a larger release easier to order.
Anchor in the proviso
Frame the prayer in the statute’s own words: payment of a reasonable percentage of the deposited amount, pending disposal, on conditions.
Prove the deposit
Annex the court’s receipt or the order recording the deposit; the proviso operates only on money actually deposited.
Offer the conditions
A restitution undertaking, security or guarantee proposed upfront shifts the debate from whether to release to how much.
What courts weigh
Because the proviso leaves the percentage and the conditions to judicial discretion, release applications are decided on circumstance. Described neutrally, the considerations that recur include: the supplier’s size and dependence on the receivable for working capital; the apparent strength or narrowness of the grounds pressed against the award, to the limited extent visible at an interim stage; whether the dispute concerns the whole award or only a severable part; the supplier’s ability to restitute if the challenge succeeds, and the quality of security offered; the conduct of the parties, including any part payments; and the time the challenge is likely to take. The conditions imposed mirror these concerns — an undertaking on affidavit, a bank guarantee for the released sum, periodic reporting, or release in tranches tied to stages of the proceeding.
Timelines under Section 34, and why they matter here
The setting-aside application itself must be filed within the limitation fixed by Section 34(3) of the 1996 Act — three months from receipt of the award, with a further thirty days available on sufficient cause shown, and no more. The Section 19 deposit conditions the entertainment of that application; it does not enlarge the time for filing it. For the supplier this sequencing creates a practical rhythm: once the limitation window closes without a challenge, execution proceeds on the full award; once a challenge is filed, the supplier’s immediate task is to see that the deposit is made and promptly to move for release, so that the interim period of the challenge is not a period of total non-payment.
When the challenge is decided
If the challenge fails, the award stands and the amounts — released and still deposited — are adjusted against it, with the supplier entitled to execute for the balance together with the interest the award carries. If the challenge succeeds, the released money becomes repayable on the terms fixed at the time of release: this is where the undertaking or security given earlier operates, and the court winds back the interim payment through restitution. The deposit that remained in court is returned to the applicant in accordance with the court’s directions.
A release application is strongest when it is boring: the statutory proviso quoted, the deposit proved, the need stated factually and the restitution terms volunteered. The discretion is the court’s, but a supplier who makes the conditions easy to impose usually finds the percentage easier to obtain.
Frequently Asked Questions
Does the supplier get the whole 75% deposit released?
Not automatically. The proviso to Section 19 speaks of such percentage of the deposited amount as the court considers reasonable in the circumstances, subject to conditions. The court may release a part or, in a fit case, a substantial portion, usually against security or an undertaking to restitute if the award is later set aside.
When should the release application be moved?
As soon as the deposit is actually made in the setting-aside proceedings. The proviso operates pending disposal of the challenge, so the application is moved in those very proceedings, supported by the award, proof of the deposit and material on the supplier’s need for working capital.
What happens to released money if the award is set aside?
Release is interim, not appropriation. It is ordinarily granted against conditions — security, a bank guarantee or an undertaking — precisely so that the amount can be restored with such interest or terms as the court directs if the challenge ultimately succeeds. The conditions imposed at release govern the restitution.
Does the deposit requirement extend the time to challenge the award?
No. The application to set aside the award remains governed by the limitation in Section 34(3) of the Arbitration and Conciliation Act, 1996 — three months, extendable by a further thirty days on sufficient cause. The Section 19 deposit is a condition for the court entertaining the application, not a substitute for filing within time.