India: Arbitration Act Versus The MSME Act: The Delhi High Court Clears The Air.

Introduction

In a recent decision , a single judge of the Delhi High Court ("High Court") held that Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSME Act") mandating a judgment debtor to deposit seventy-five percent of the awarded amount is not applicable, in the event the arbitration proceedings were commenced under the Arbitration and Conciliation Act, 1996 ("Arbitration Act") and not under Section 18 of the MSME Act.

Facts

AVR Enterprises ("Petitioner"), a company registered under the MSME Act submitted its bid to Union of India ("Respondent") and issued a tender enquiry for procuring water proof covers of a specific dimension. This was accepted by the Respondent and a contract dated April 5, 2005 ("Contract") was entered into between the parties.

During the performance of the Contract, disputes arose between the parties as to the supplies made by the Petitioner leading to the Respondent imposing costs in the form of liquidated damages upon the Petitioner. The Respondent also adjusted the balance payments owed to the Petitioner against the aforesaid liquidated damages.

Aggrieved by the actions of the Respondent, the Petitioner invoked arbitration proceedings under the Arbitration Act by its letter dated July 23, 2010 and a sole arbitrator was appointed by the Respondent, in terms of the arbitration clause contained in the Contract

By his award dated July 14, 2016 ("Award"), the sole arbitrator reduced the quantum of liquidated damages levied by the Respondent and directed the Petitioner to pay the balance amount with compound interest to the Respondent.

Aggrieved by the Award, the Respondent filed a petition under Section 34 of the Arbitration Act ("Section 34 Petition") before the trial court.

Trial Court proceedings

Before the trial court, the Petitioner relied upon the decision of the Hon'ble Supreme Court of India ("Supreme Court") in M/s. Snehadeep Structures Private Ltd. v Maharashtra Small Scale Industries Development Corporation Ltd. and took a preliminary objection that the Section 34 Petition was not maintainable since the Respondent had failed to deposit seventy-five percent of the awarded amount in terms of Section 19 of the MSME Act.

The trial court rejected the Petitioner's challenge and held that the provisions of the MSME Act, including the precondition of deposit contained in Section 19 thereof, were not applicable since the arbitration proceedings were held under the Arbitration Act and not under the MSME Act. Aggrieved by the decision of the trial court, the Petitioner filed an appeal before the High Court.

Issue

Whether Sections 18 and 19 of the MSME Act are applicable to arbitration proceedings initiated under the Arbitration Act by a party registered under the MSME Act?

Petitioner's arguments

The Petitioner relied on the decisions of the Hon'ble Guwahati High Court in Union of India v Hindustan Metal Refining Works (P) Ltd. and of the Hon'ble Gujarat High Court in Saryu Plastics Private Limited & Ors. v Gujarat Water Supply and Sewerage Board respectively, and contended that the Section 34 Petition was not maintainable as the Respondent had failed to deposit the mandatory seventy-five percent of the awarded amount in terms of Section 19 of the MSME Act. The Petitioner also relied upon the Supreme Court's decision in the matter of Snehadeep Structures to draw a correlation between the provisions of the Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993 ("Interest Act") and the MSME Act (which had repealed the former), in order to establish that the Respondent was in breach of Section 19 of the MSME Act.

Decision

The High Court relied upon a judgment passed by a coordinate bench in Bharat Heavy Electrical Limited v. The Micro and Small Enterprises Facilitation Centre & Anr., and held that Sections 18 and 19 of the MSME Act would not be applicable to arbitration proceedings initiated under an arbitration agreement entered into between the parties, as opposed to proceedings commenced in a statutory reference under Section 18(3) of the MSME Act. The High Court further held that Section 18 of the MSME Act, which provides for a statutory arbitral reference, did not contemplate the appointment of an arbitrator by either of the parties but only by the Medium and Small Enterprises Facilitation Centre.

As regards the decision of the Guwahati High Court in Hindustan Metal which was relied upon by the Petitioner to contend that the Respondent's application under Seciton 34 was not maintainable on account of failure in pre-depositing seventy-five percent of the awarded sum, the High Court held that the said decision was not applicable to the present case since the arbitral reference in Hindustan Metal had not been made under Section 19 of the MSME Act and that the objections under the said application had been rejected by the court on merits.

The High Court also did not agree with the decision of the Gujarat High Court in Saryu Plastics , which had held that Section 19 of the MSME Act would also apply to arbitral references where the arbitrator was appointed by the parties and not under Seciton 18 of the MSME Act. The High Court also did not agree with the Gujarat High Court's interpretation of the word 'decree' in Seciton 19 of the MSME Act to include awards rendered in arbitral references outside of Section 18 of the MSME Act, and held that the same ought to be interpreted narrowly to only mean awards rendered in arbitral references filed under section 18 of the MSME Act and not otherwise.

Finally, the High Court also distinguished the Supreme Court's decision in Snehadeep Structures from the present case, since the Supreme Court's decision had been rendered on an issue of delayed payments under the Interest Act and not under the MSME Act.

Accordingly, the High Court held that since the appointment of the arbitrator was made under the arbitration agreement entered into between the parties, and not by way of a statutory reference under Section 18 of the MSME Act, the pre-condition of depositing seventy-five percent of the awarded sum by a judgement debtor prior to challenging an award under the MSME Act, would not arise. The High Court dismissed the Petitioner's appeal and upheld the order of the trial court.

Views

The present decision helps delineate the difference between the recourse against an award passed in arbitration proceedings invoked under the MSME Act and under the Arbitration Act, respectively.

Additionally, given the spike in potential future disputes in the wake of the successive COVID-19 lockdowns, this decision will also help MSMEs elect the appropriate dispute resolution process, keeping in mind the remedies available under the MSME Act and the Arbitration Act.

Footnotes

AVR Enterprises v. Union of India [CM(M) 769/2018 with CM APPL. 27219/2018 decided on May 8, 2020]

2 2010 (3) SCC 34

3 MANU/GH/0577/2014

4 MANU/GJ/1526/2017

5 See Supra note 2

6 W.P.(C) 10886/2016 decided on September 18, 2017

7 See Supra note 3

8 See Supra note 4

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