Delhi High Court
Indian Oil Corporation Limited vs Fepl Engineering (P) Limited & ... on 30 July, 2020
* IN THE HIGH COURT OF DELHI AT NEW DELHI
% Date of decision: 30th July, 2020
+ OMP (COMM) 144/2019, I.As. 5291/2020, 5918/2020 & 5919/2020
INDIAN OIL CORPORATION LIMITED .....Petitioner
Through: Ms. Madhavi Divan, ASG with
Mr. Amit Meharia and Ms.
Tannishtha Singh, Adv.
versus
FEPL ENGINEERING (P) LIMITED & ANR. ..... Respondents
Through: Mr. Mahesh Jethmalani, Sr. Adv.
with Ms. Mugdha Pande, Adv.
CORAM:
HON'BLE MR. JUSTICE V. KAMESWAR RAO
V. KAMESWAR RAO, J. (ORAL)
I.A. 5291/2020
1. The present application has been filed by the
applicant/respondent with the following prayers:
"i) Direct the Petitioner to deposit 75% of the interest amount
in addition to the Principal amount already deposited
ii) Direct the release of the pre-deposit to the Respondent as
per Proviso to Section 19 of the MSME Act on furnishing
Indemnity Bond
iii) Pass any other order which this Hon'ble Court deems fit
and proper in the facts and circumstances of the present
case."
OMP (COMM) 144/2019 Page 1
2. Before delving into the issues raised in this application, an
overview of factual matrix that surrounds the filing of the present
application by the respondent/applicant needs to be stated.
3. An Arbitral Award dated December 14, 2018 ('Award', for
short) was passed by the Micro and Small Enterprises Facilitation
Council, Konkan Region, Thane, Maharashtra ('Council', for short)
under the provisions of the Micro, Small and Medium Enterprises
Development Act, 2006 ('MSME Act', for short). Aggrieved by
Award, the petitioner/non-applicant has challenged the Award in the
main petition filed under Section 34 of the Arbitration and
Conciliation Act, 1996 ('Act of 1996', for shot). Subsequent thereto
on October 21, 2019, this Court directed the petitioner to deposit 75%
of the awarded amount as pre-deposit in terms of Section 19 of the
MSME Act, for entertaining the main petition filed under Section 34
of the Act.
4. However, the petitioner/non-applicant deposited with the
Court only 75 % of the principal amount in terms of the Award
without the interest component. Aggrieved by the non-deposit of the
75% interest amount, the present application has been filed by the
applicant/respondent seeking release of the entire pre-deposit made by
OMP (COMM) 144/2019 Page 2
the petitioner/non-applicant along with directions against the
petitioner to deposit the remainder 75% of the interest amount as
awarded to the applicant/respondent by the Council in terms of the
Award.
5. It is the case of the applicant/respondent that the MSME Act is
unambiguously clear in terms of Section 19 of the MSME Act which
mandates a pre-deposit of 75 % of the amount in terms of the
decree/award/order for entertaining an application for setting aside the
Award and provides for the release of the deposited amount in favour
of the supplier (applicant herein), as Court considers reasonable,
pending the disposal of the said application.
6. It is stated by the applicant/respondent that the MSME Act
being a beneficial/special legislation, the intent of the legislature in
envisaging a proviso to Section 19 for withdrawal of the pre-deposit
amount is to keep the small supplier, protected under the MSME Act,
viable during litigation and that the non-deposit of the entire quantum
as per the said Section defeats the vital objective of the MSME Act.
7. It is stated by the applicant/respondent that the petitioner/non-
applicant, with malafide intent has been trying to stall the execution of
OMP (COMM) 144/2019 Page 3
the Award by resorting to different kinds of litigation before other
forums.
8. It is stated by the applicant, vide order dated October 21,
2019, this Court had held that though the petition was maintainable
under Section 34 of the Act without pre-deposit, the petition will not
be entertained unless the 75 % of the awarded amount is deposited in
terms of Section 19 of the Act and granted six weeks' time for making
the deposit. Pursuant to the said order, the petitioner/non-applicant
only deposited 75 % of the principal amount and when the matter
came for hearing on February 26, 2020, on the objection of the
applicant/respondent to the non-deposit of entire amount as per
Section 19/non-compliance of order dated October 21, 2019, counsel
for the petitioner/non-applicant mislead the court in believing that it is
willing to deposit the interest amount as well, however only needed
clarification vis-à-vis the rate of interest. This Court had also recorded
in the above-mentioned order that the petitioner submitted that it
would deposit the interest amount as payable before the next date of
hearing and that it was only on the basis of this submission that this
Court issued date of hearing in the main petition.
OMP (COMM) 144/2019 Page 4
9. It is further stated by the applicant/respondent that the
malafide intent of the petitioner/non-applicant is clear from the
attempt by the petitioner by bringing on record 'Affidavit To Bring On
Record The Calculation Of The Amount To Be Deposited' filed on
June 29, 2020, after misleading the Court for more than seven months
of its intention to deposit the interest amount did a volte-face claiming
that it had already complied with the Order of this court dated
21.10.2019 by depositing 75% of just the principal amount awarded,
as interest did not form a part of the Awarded amount.
10. It is also the case of the applicant/respondent that the Sections
16-19 of the MSME Act are connected in terms of delivering the
object of the legislation, as the interest calculated while passing an
award pursuant to section 18(3) of the MSME Act is always as per
Section 16 of the Act, which prescribes date from which and rate at
which interest is payable. Section 16 also mandates that in the event of
default in clearing the amount payable to small enterprises as
warranted by Section 15, the buyer is made liable to pay compound
interest with monthly rests. The interest is to be calculated from
appointed day at three times the Bank rate notified by Reserve Bank
of India. This mandate operates in supersession of any agreement
OMP (COMM) 144/2019 Page 5
between the parties or in law in-force. Thus, in Section 16, the
legislature introduced a strong factor to compel the buyers to be extra
prompt in clearing the dues of such a Unit or Enterprise and Section
19 furthers this legislative objective by ensuring finality to the Arbitral
award. It creates a prerequisite for buyers such as the petitioners to
deposit 75% of the awarded amount before their application
challenging the arbitral award can be entertained.
11. It is averred, in terms of stay of the Award under Section 36(2)
of the Act, that law is well settled that unless a pre-deposit of 75% of
the award amount, which as enumerated above includes the principal
as well as the interest, is made in the Court, the Court cannot even
entertain any application against the Arbitral Award.
12. It is further stated by applicant/respondent that owing to the
lockdown and the non- payment of dues by petitioner/non-applicant
since 2016, which culminated in the Award, applicant's account is on
the verge of being declared as NPA. Moreover, the dilatory tactics of
non-deposit of entire amount even after 15 months after filing the
Section 34 petition defeats the object of the MSME Act.
13. Reply has been duly filed by the petitioner/non-applicant.
Vehemently objecting to the withdrawal of the principal amount
OMP (COMM) 144/2019 Page 6
deposited with the Court, it is stated by the petitioner/non-applicant
that the withdrawal of the pre-deposit is strictly governed by the
proviso to Section 19, which mandates that the court shall order such
percentage of the amount to be paid to the supplier as it considers
reasonable under the circumstances of the case and that in the present
application preferred by the applicant/respondent no case is made out
for granting such an order for withdrawal from the principle amount
deposited by the petitioner/non-applicant. Moreover, it is stated by the
petitioner that the admission of the applicant to its precarious financial
situation is all the more reason for the Court to not release any amount
in its favour, as it might eventually become irrecoverable, if
applicant's account is declared NPA.
14. It is also averred by the petitioner/non-applicant that it has
been more than 5 months since the principal amount was deposited
with this Court, and an application for withdrawal after such a lapse of
time is nothing but an afterthought to take advantage of the pandemic
situation.
15. On merits, it is stated that the petitioner awarded a Purchase
Order in favour of the applicant/respondent on March 16, 2016 for
Supply and Installation of 1000 KWP Solar Power Plant at petitioner's
OMP (COMM) 144/2019 Page 7
Gujarat Refinery. The Third Party Certificates (TPI) obtained for
checking the quality of the materials obtained by applicant/respondent
were found to be fake and due to the usage of sub-standard materials
two major incidents of fire happened at the plant of the petitioner.
Petitioner states to have revived the plant after the mis-happenings and
as soon as the petitioner issued a 'Holiday List' show-cause notice, the
respondent filed a petition before the MSME Council for adjudication
of various disputes and the Council set-up a panel of conciliators for
Conciliation of the disputes. It is stated that after supplying various
crucial documents behind petitioner's back, the conciliation process
was suddenly closed and the same panel went on to arbitrate the
dispute culminating in the impugned Award. It is stated by the
petitioner/non-applicant that the adjudication of the disputes by the
Council was in absolute disregard of the provisions of MSME Act
read with the provisions of the Act of 1996.
16. Without prejudice, it is stated by the petitioner/non-applicant,
even if interest is payable, pre-deposit of the same should not be
insisted, considering the fact that the Council has passed the Award,
without any jurisdiction since the Council acted both as the
Conciliator and Arbitrator and the same is an error on face of record
OMP (COMM) 144/2019 Page 8
and is also an admitted fact, in light of Section 18 (2) and (3) of the
MSME Act and further the Award is a non-reasoned one. It is also
stated that Petitioner has never stopped payment to the
applicant/respondent. In fact, during the proceedings before the
Council, the Petitioner made payment of Rs. 44,50,000/- (Rupees
Forty-Four Lakhs Fifty Thousand Only), with the bonafide object to
facilitate the Respondent to complete the incomplete/left over job.
17. It is stated that this Court, vide Order dated October 21, 2019
had directed to make the pre-deposit of 75% of the 'awarded amount'
only, and it did not direct to pre-deposit 'principal + interest'. It is
submitted that the petitioner in compliance of the Order dated October
21, 2019, has rightly and within time, as directed, deposited 75% of
the 'awarded amount' before this Court on December 02, 2019.
Section 19 of the MSME Act requires a deposit of 75% of the
'amount' in terms of the decree, award or, as the case may be, or other
order in the manner directed by such court". It is stated, from a plain
reading of the provision in conjunction with other provisions of the
Act that the word, 'amount' does not include interest. Even otherwise
it is the case of the petitioner that the MSME Act does not indicate,
the rate of interest payable and for which period and as such is not
OMP (COMM) 144/2019 Page 9
quantifiable. That the Award is restricted to a principal amount with
the liability to pay interest. The provision is vague and unenforceable.
18. It is also submitted that Order of this Court dated February 26,
2020 states that 'whatever amount is payable, will be deposited in
Court' and therefore, upon due consideration of the provisions of the
MSME Act and upon being advised, the petitioner brought on record
the rational and basis of the amount already deposited in Court in its
Affidavit dated June 29, 2020. Therefore, the contention of the
applicant/respondent that the petitioner is misleading this Court on the
amount to be deposited is absolutely false and incorrect.
19. Rejoinder to the reply has been filed by the applicant. In
addition to contesting the averments made by the petitioner/non-
applicant on merits, it is stated by applicant/respondent that it is a
settled position of law that no discretion can be exercised by the Court
to reduce the amount of pre-deposit and that the interest is part of the
Awarded amount under Section 19 of the MSME Act.
20. Mr. Mahesh Jethmalani, learned Senior Counsel appearing on
behalf of the applicant/respondent, primarily submitted that 'amount
in terms of the decree, award' under Section 19 of the MSME Act has
been used to refer to both principal amount as well as interest. While
OMP (COMM) 144/2019 Page 10
strongly refuting the stand taken by the petitioner/non-applicant, that
the amount in terms of Section 19 corresponds only to principal
amount, Mr. Jethmalani has drawn the attention of this Court to the
genesis of the term 'amount' as envisaged in Chapter V of the MSME
Act by referring to the same. He submitted that Section 15 states, a
buyer shall make payment to a supplier on supply of goods/services
within a period not exceeding 45 days. Section 16 contemplates a
situation where the buyer fails to make payments of the amount as
envisaged under Section 15 and legislature imposed a stringent
interest rate on default on such failure. Section17 titled as 'Recovery
of amount due' proceeds to state the buyer shall be liable for the
amount due under Section 15 with interest thereon as per Section 16.
On reaching Section 18 which deals with Reference to Micro and
Small Enterprises Facilitation Council, the 'amount' is envisaged as
whatever is as per Section 17 i.e. both the principal and interest due.
Therefore, it is submitted by the Mr. Jethmalani, the 'amount' as
envisaged by the legislature under Section 19 surely comprises of both
the principal and interest component and that in no way 75% of
amount as pre-deposit in terms of decree/award/order can be meant to
mean 75 % deposit of principal amount alone.
OMP (COMM) 144/2019 Page 11
21. It is also submitted by Mr. Jethmalani that the Award also has
indeed categorically stipulated that the petitioner/non-applicant shall
pay the principal along with interest within a period of one month and
that if the interpretation of the petitioner/non-applicant in terms of the
term amount under Section 19 of the MSME Act is accepted then no
dispute can ever be raised regarding interest payable on the price, is
clearly fallacious.
22. On the construction of Section 19, Mr. Jethmalani, in support
of to his contention that the amount in the said section includes both
principal and interest due, has relied upon the following judgments:
1. Snehadeep Structures v. Maharashtra Small-Scale
Industries Development Corpn., (2010) 3 SCC 34.
2. Goodyear India Ltd v Norton Intech Rubbers, 2011 SCC
OnLine Mad 712
3. Eden Exports v. Union of India, 2012 SCC OnLine Mad
4570.
4. Goodyear India Ltd v Norton Intech Rubbers, 2012 6 SCC
5. GE T&D Ltd v Reliable Engineering Projects & Marketing,
2017 SCCOnLine Del 6978
6. United Electrical Industries v. Eppleton Engineers Pvt Ltd
2018 SCC OnLine Del 9983
23. Mr. Jethmalani, referring to the order dated October 21, 2019
stated that the Court had indeed held that the challenge to the Award
under Section 34 of the Act was with a caveat that the petition was
OMP (COMM) 144/2019 Page 12
maintainable, on the petitioner making the pre-deposit and more over it
is well-settled law that this court will not entertain on merits, a Section
34 petition under the Act challenging an award passed under the
MSMED Act unless 75% of the awarded amount is deposited with it.
24. It was also pointed out by Mr. Jethmalani that the
petitioner/non-applicants, till the applicant/respondent pointed out on
February 26, 2020 after the entering appearance after reissuance of
notice, had stated before the Court that it has complied with the October
21, 2019 of 75% pre-deposit of amount by depositing only 75 % of the
principal. When the issue surfaced before the Court, assurance was
made again that whatever amount was due would be deposited in the
Court before the next date of hearing and that initial non-deposit of the
entire amount was owing to lack of clarity with regard to rates on
interest. Again, the stand has reverted by the petitioners/non-applicants
which is clearly indicative of its dilatory tactics.
25. By relying upon Goodyear India Ltd v. Norton Intech Rubbers
Pvt Ltd & Anr 2012 6 SCC 345, it is submitted that in terms of Section
19 no discretion vests with the Court either to waive or reduce the
amount of 75 % pre-deposit, however has discretion for allowing the
pre-deposit of 75% to be paid in instalments if required, which has not
OMP (COMM) 144/2019 Page 13
been pleaded or sought by the petitioner/non-applicant. In other words,
it is his submission that Court should direct the remaining 75% of
interest amount as calculated in terms of Section 16 (Document B
annexed to the present application) to be deposited within a week's time
before entertaining the petitioner's challenge to the Award under
Section 34 of the Act.
26. He also vehemently contested that the going by the proviso to
Section 19 of the MSME Act and comparing it with the provision of law
in predecessor statute, Interest on Delayed Payments Small Scale and
Ancillary Industrial Undertakings Act, 1993 ('Interest on Delayed
Payments Act', for short), dealing with release of pre-deposit to an
MSME, it can be very well seen, proviso to Section 19 is mandatory in
nature. He submitted that going by the provision of law, it is clear that
the Court has discretion to decide on the percentage of amount of pre-
deposit to be released based on circumstances, but it does not have
discretion to disallow release of pre-deposit.
27. Ms. Madhavi Divan, learned ASG, appearing for the
petitioner/non-applicant submitted that, the petitioner has already
deposited Rs. 1,15,03,459/- amounting to 75% of the principal amount
of Rs. 1,53,37,945/- awarded by the Arbitral Tribunal. It is submitted by
OMP (COMM) 144/2019 Page 14
Ms. Divan that from a reading of the Sections 16,17 and 18 of the
MSME Act, it is clear that the 'amount' as referred to in the said
Sections is de hors the interest component, owing to specific mention of
'interest' in the said provision along with 'amount'. And what logically
follows is that the 'amount' as referred to in Section 19 also does not
include interest.
28. Ms. Divan relied upon Mardia Chemicals v. Union of India,
(2004) 4 SCC 311, wherein Section 17 of the SARFAESI Act, 2002,
which mandated a pre-deposit of 75 % of the amount by the party
approaching under the said Section, was struck down by the Supreme
Court, even though there existed discretion for waiver or reduction of
amount the Court, inter-alia giving reason that it was an unreasonable
condition on the basis of a one-sided claim. Drawing inference from said
judgment it was submitted by Ms. Divan that since the constitutional
validity of Section 19 was upheld (Ref- Kerala SRTC vs. Union of
India, 2009 SCC OnLine Ker 6621), the same needs to be interpreted in
reasonable manner as against the interpretation canvassed on behalf of
the applicant/respondent that 'amount' under Section 19 of the MSME
Act includes 'interest', as the same is extremely one-sided and causes
OMP (COMM) 144/2019 Page 15
enormous injustice, hardship and prejudice on the petitioner which is a
public sector undertaking.
29. Ms. Divan also relied upon Kerala High Court judgment in
Kerala SRTC (supra), to contend that although the constitutional
validity of Section 19 MSME Act was upheld by the Court while
dismissing an argument made by one of the parties relying upon Mardia
Chemicals(supra) drawing similarity between the struck down Section
17 of the SARFAESI Act, 2002 with Section 19 of the MSME Act, the
question of the interest component was never gone into.
30. It is admitted by Ms. Divan that rate of interest applicable has
been prescribed in the MSME, Act, but it is her submission that the
same is not applicable for pre-deposit at the stage of challenge to the
Award.
31. Ms. Divan further submitted that the principle of noscitur a
sociis, an expression must take colour from the company it keeps must
be pressed into the service to support the interpretation that the
expression 'amount' is different from and stands separately from the
expression 'interest' (Ref- Excel Corp Care vs. CCI, (2017) 8 SCC).
She also submitted that if the words in the statute are plain and
unambiguous it becomes necessary to expound those words in their
OMP (COMM) 144/2019 Page 16
natural and ordinary sense (Ref-Commissioner of Customs vs. Dilip
Kumar & Co., (2018) 9 SCC).
32. Without prejudice to her contention of literal interpretation of
Section 19 of the MSME Act, it was submitted by Ms. Divan, discretion
ought to be exercised by the Court under Section 19 on the merits of the
matter.
33. On merits, it is contended by Ms. Divan that on the failure of the
conciliation process under Section 18(2) of the MSME Act, the Council
could not have initiated arbitration under Section 18 (3) nor could have
acted as an Arbitrator, which strikes at the teeth of Section 80 of the Act
of 1996 and the basic norms of confidentiality regarding the
proceedings. Ms. Divan also pointed out to various infirmities in the
proceedings, although disputed by the Mr. Jethmalani. In other words, it
is her submission that there has been no independent adjudication at all
in the arbitration proceedings. Reliance has been placed on the Apex
Court judgment in Govind Prasad Sharma vs. Doon Valley Officers
Cooperative Housing Society Limited, (2018) 11 SCC 501.
34. It is also contended by Ms. Divan that the withdrawal by the
applicant/respondent from the 75% pre-deposit of the principal amount
should not be allowed since the applicant/respondent has itself admitted
OMP (COMM) 144/2019 Page 17
to its precarious financial state, chances of recovery at a further stage by
the petitioner would be very bleak.
35. Ms. Divan also distinguished the judgments relied upon by Mr.
Jethmalani. It is contended by Ms. Divan that in the judgment of the
Supreme Court in Snehadeep (supra), the statute under consideration
was Interest on Delayed Payments Act which soley dealt with interest
on delayed payments and that the Award under challenge in the case
was confined to claims of interest alone and it was owing to these
reasons that the terms 'amount' and 'interest' were interchangeably
used. It is further submitted by Ms. Divan that, even though Interest on
Delayed Payments Act was replaced by the MSME Act, there was no
deliberation or interpretation on Section 19 of the MSME Act in the said
judgment, making it clearly inapplicable to the present issue under
consideration.
36. Further, on Goodyear India Ltd v. Norton Intech Rubbers, 2011
SCC OnLine Mad 712, also it is submitted by Ms. Divan that the there
was no deliberation on Section 19 of the MSME Act and the Court by
relying upon Snehadeep (supra) arrived at the conclusion that interest
must also be deposited along with the principal amount, which
according to her is not the ratio of the judgment in Snehadeep (supra).
OMP (COMM) 144/2019 Page 18
She also submitted that even though Supreme Court in Goodyear India
Ltd. vs. Norton Intech Rubbers (P) Ltd. (2012) 6 SCC 345, affirmed
Goodyear India Ltd v Norton Intech Rubbers, 2011 SCC OnLine Mad
712, the Supreme Court did not delve into the interpretation of Section
19 of the MSME Act but merely referred to the judgment of Kerala
High Court in the Kerala SRTC(supra), where the constitutional
validity of section 19 was upheld. Placing reliance upon on an
observation, 'in the manner directed by such Court' made by the Apex
Court in Goodyear India Ltd. vs. Norton Intech Rubbers (P) Ltd.
(2012) 6 SCC 345, it was vehemently argued, without prejudice to her
argument that the 'interest' is not included in the expression 'amount' in
Section 19 and in terms of the proviso to Section 19 of the MSME Act,
there is discretion vested in the court to allow pre-deposit of interest to
be made and that discretion is not confined to the facility of instalments
in depositing but can amount to a waiver of deposit in a given case.
37. Ms. Divan, also submitted that reliance placed on United
Electrical Industries Ltd. (supra) by Mr. Jethmalani is misplaced, as
this Court did not consider Section 19 of the MSME Act independently
and rather allowed interim-stay on Award upon deposit 75% of the
amount including interest on the merits of the matter. Similarly, on
OMP (COMM) 144/2019 Page 19
applicant/respondent deriving support from GE T&D India Limited
(supra), Ms. Divan submitted that this Court did not consider Section 19
of the MSME Act independently and nor was the question of whether
interest must be deposited in addition to the amount was delved into,
wherein, while dismissing an application seeking waiver on deposit of
amount this Court held that the question of waiver of deposit does not
arise under Section 19 of the MSME Act.
38. Having heard the ld. counsels for the parties, I may state here
that two issues arise for consideration in this present application, the
primary one being whether the 75 % of decretal/awarded amount
mandated for pre-deposit under Section 19 of the MSME Act includes
within its scope the component of interest payable and secondly, in what
manner can the Court exercise its discretion for release of pre-deposit
under proviso to Section 19.
39. It is an admitted position of the petitioner/non-applicant as well
as a settled position of law that the party challenging an Award passed
in terms of the MSME Act, is mandated to make a pre-deposit for the
Court to entertain a challenge against an arbitral award. In fact, the
petitioner/non-applicant has made deposit of 75 % of the principal
amount.
OMP (COMM) 144/2019 Page 20
40. On the primary issue, Mr. Jethmalani contended Section 19 of
MSME Act, envisages the 'amount' to include both the principal
amount as well as the interest component. He has drawn the attention of
the Court to various Sections (15-19) of Chapter V of the MSME Act, to
point out that the object of legislature was to include interest component
also in the term of 'amount' under Section 19. I deem it appropriate to
reproduce Sections 15- 19 of the MSME Act, which read as under:
"15. Liability of buyer to make payment.--Where any supplier
supplies any goods or renders any services to any buyer, the
buyer shall make payment therefor on or before the date agreed
upon between him and the supplier in writing or, where there is
no agreement in this behalf, before the appointed day: Provided
that in no case the period agreed upon between the supplier and
the buyer in writing shall exceed forty-five days from the day of
acceptance or the day of deemed acceptance.
16. Date from which and rate at which interest is payable.--
Where any buyer fails to make payment of the amount to the
supplier, as required under section 15, the buyer shall,
notwithstanding anything contained in any agreement between the
buyer and the supplier or in any law for the time being in force,
be liable to pay compound interest with monthly rests to the
supplier on that amount from the appointed day or, as the case
may be, from the date immediately following the date agreed
upon, at three times of the bank rate notified by the Reserve Bank.
17. Recovery of amount due.--For any goods supplied or
services rendered by the supplier, the buyer shall be liable to pay
the amount with interest thereon as provided under section 16.
OMP (COMM) 144/2019 Page 21
18. Reference to Micro and Small Enterprises Facilitation
Council.--(1) Notwithstanding anything contained in any other
law for the time being in force, any party to a dispute may, with
regard to any amount due under section 17, make a reference to
the Micro and Small Enterprises Facilitation Council.
(2) On receipt of a reference under sub-section (1), the Council
shall either itself conduct conciliation in the matter or seek the
assistance of any institution or centre providing alternate dispute
resolution services by making a reference to such an institution or
centre, for conducting conciliation and the provisions of sections
65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of
1996) shall apply to such a dispute as if the conciliation was
initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not
successful and stands terminated without any settlement between
the parties, the Council shall either itself take up the dispute for
arbitration or refer it to any institution or centre providing
alternate dispute resolution services for such arbitration and the
provisions of the Arbitration and Conciliation Act, 1996 (26 of
1996) shall then apply to the dispute as if the arbitration was in
pursuance of an arbitration agreement referred to in sub-section
(1) of section 7 of that Act.
(4) Notwithstanding anything contained in any other law for the
time being in force, the Micro and Small Enterprises Facilitation
Council or the centre providing alternate dispute resolution
services shall have jurisdiction to act as an Arbitrator or
Conciliator under this section in a dispute between the supplier
located within its jurisdiction and a buyer located anywhere in
India.
(5) Every reference made under this section shall be decided
within a period of ninety days from the date of making such a
reference
19. Application for setting aside decree, award or order.--No
application for setting aside any decree, award or other order
OMP (COMM) 144/2019 Page 22
made either by the Council itself or by any institution or centre
providing alternate dispute resolution services to which a
reference is made by the Council, 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, as the case may be, the other order in the manner
directed by such court:
Provided that pending disposal of the application to set aside the
decree, award or order, the court shall order that such
percentage of the amount deposited shall be paid to the supplier,
as it considers reasonable under the circumstances of the case,
subject to such conditions as it deems necessary to impose."
41. In support of his contention he has relied on Goodyear India Ltd
v Norton Intech Rubbers, 2011 SCC OnLine Mad 712, wherein a
Division Bench of Madras High Court, while dealing with the same
issue of whether pre-deposit under Section 19 includes interest or not,
has held as under:
"17. All these principles laid down would categorically go to
show that the award amount as mentioned in Section 19
comprises both principal as well as interest and not the
principal alone. Further, it was ordered at the time of admitting
the O.P. No. 888 of 2010 that the 75% of the principal amount
was
directed to be deposited as condition precedent in accordance
with Section 19 of the Act. As rightly argued by the First
Respondent/party-in-person that the legislative intention to
impose certain conditions for preferring the Appeal cannot be
OMP (COMM) 144/2019 Page 23
waived by the Court by showing concession. This has been very
strictly laid down in the judgment of the Hon'ble Apex Court
reported in 1999 SC 2213 cited supra and various plenthero of
judgments reported in Anant Mills Co. Ltd. v. State of Gujarat,
AIR 1975 SC 1234; Shyam Kishore v. Municipal Corporation of
Delhi, AIR 1992 SC 2279. The aforesaid judgments of Hon'ble
Apex Court would clearly and categorically show that the right
of Appeal if put to certain conditions, such conditions must be
strictly adhered to."
42. He has also relied upon the Apex Court judgment in
Snehadeep (supra), on the concept of pre-deposit under the Interest
on Delay Payments Act, wherein the Court inter-alia held that pre-
deposit was a rep-requisite for entertaining an appeal against
award/decree/order as per the said Act. He vehemently submitted
that the Interest on Delayed Payments Act was the predecessor
statute to the MSME Act and that the provision under Section 19 of
the MSME Act was similar to Section 7 of the Interest on Delayed
Payments Act, with an additional proviso. The relevant paragraph of
the judgment reads as under:
"47. The requirement of pre-deposit of interest is
introduced as a disincentive to prevent dilatory tactics
employed by the buyers against whom the small-scale
industry might have procured an award, just as in cases of a
decree or order. Presumably, the legislative intent behind
Section 7 was to target buyers, who, only with the end of
OMP (COMM) 144/2019 Page 24
pushing off the ultimate event of payment to the small-scale
industry undertaking, institute challenges against the
award/decree/order passed against them. Such buyers
cannot be allowed to challenge arbitral awards
indiscriminately, especially when the section requires
predeposit of 75% interest even when appeal is preferred
against an award, as distinguished from an order or
decree."
43. Ms. Divan as on the other hand contented that since the Sections
of Chapter V, from Sections 15-18, mentions the amount de hors the
interest component, the logical conclusion in Section 19 would be a pre-
deposit without the interest component. Drawing inference from Mardia
Chemicals (supra), wherein the Court struck down the pre-deposit of 75
% of the amount by a party preferring an application Section 17 of the
SARFAESI Act, 2002, wherein the Court held the deposit mandated as
per said Section was in fact arbitrary and one-sided, Ms. Divan
contended that even though the constitutional validity of Section 19 of
the MSME Act has been upheld by the Kerala High Court in Kerala
SRTC(supra), a reasonable interpretation should be given to the term
'amount' under Section 19 limiting it to the principal component alone
as the said deposit is one-sided and causes enormous pre-judice and
hardship to the petitioner, which is a public sector undertaking. On
reliance placed by Mr. Jethmalani on Snehadeep (supra), it was
OMP (COMM) 144/2019 Page 25
contented by Ms. Divan that the said judgment was given under a statute
which soley dealt with interest and did not deal with Section 19 of the
MSME Act.
44. On the said submissions, it is important to note that a Division
Bench of Madras High Court in the judgment of Goodyear India Ltd v
Norton Intech Rubbers, 2011 SCC OnLine Mad 712, in paragraph 17
(as reproduced above), has clearly concluded that the awarded amount
in terms Section 19 of the MSME Act included both principal and
interest components. The said conclusion was in fact affirmed by the
Supreme Court in Goodyear India Ltd v Norton Intech Rubbers, (2012)
6 SCC 345. I may state here that the stand taken by the Ms. Divan by
relying upon Mardia Chemicals (supra) to contend that Section 19 of
MSME Act be read in reasonable manner not to include interest is
clearly misconceived. In Mardia Chemicals (supra) the challenge was
inter-alia against the vires of Section 17 of the SARFAESI Act, 2002
which mandated a pre-deposit. The Apex Court, struck down the said
Section stating that pre-deposit was mandated at the initial stage of
proceedings was oppressive in nature and unreasonable. However, under
Section 19 of the MSME Act, the pre-deposit is mandated at the stage of
OMP (COMM) 144/2019 Page 26
appeal. Relevant paragraph of the Mardia Chemicals (supra) reads as
under :
"64. The condition of pre-deposit in the present case is bad
rendering the remedy illusory on the grounds that (i) it is imposed
while approaching the adjudicating authority of the first instance,
not in appeal, (ii)there is no determination of the amount due as
yet (iii) the secured assets or its management with transferable
interest is already taken over and under control of the secured
creditor (iv) no special reason for double security in respect of an
amount yet to be determined and settled (v) 75% of the amount
claimed by no means would be a meager amount (vi) it will leave
the borrower in a position where it would not be possible for him
to raise any funds to make deposit of 75% of the undetermined
demand. Such conditions are not alone onerous and oppressive
but also unreasonable and arbitrary. Therefore, in our view, sub-
section (2) of Section 17 of the Act is unreasonable, arbitrary and
violative of Article 14 of the Constitution."
45. Ms. Divan's contention that the Kerala High Court in Kerala
SRTC (supra), while upholding the constitutional validity of Section
19 of the MSME Act, did not deal with issue of whether or not
OMP (COMM) 144/2019 Page 27
'amount' as prescribed will include interest is also devoid of merit as
the Apex Court in Goodyear India Ltd v Norton Intech Rubbers,
(2012) 6 SCC 345, has approved the judgment in KSRTC (supra) as
well as affirmed the conclusion of the Madras High Court in
Goodyear India Ltd v Norton Intech Rubbers, 2011 SCC OnLine
Mad 712, which held, that amount includes both principal and
interest.
46. On the primary issue I may state that the arguments advanced by
Mr. Jethmalani warrants merit. MSME Act is a beneficial legislation and
Chapter V is unambiguous with regard to the meaning of the term
'amount'. Section 15 of the MSME Act mandates payment to be made
to the supplier for products or services within 45 days from the date
agreed/appointed date. Section 16 imposes a stringent rate of interest in
case of default made by a party to make payments in terms of Section
15. Section 17 entitles the supplier to recover the amount due under
Section 15 with interest as computed in terms of Section 16. The forum
for reference (MSME Council) in case of any dispute in terms of amount
due under Section 17 is designated under Section 18. It is therefore
reasonable to presume that the what has been contemplated as 'amount'
in Section 18 is both inclusive of principal and interest as Section 17
OMP (COMM) 144/2019 Page 28
entitles for the recovery of not just the principal amount but also the
interest. Logical conclusion that follows is Section 19 which mandates a
pre-deposit of 75% of the awarded/decreed/ordered amount, for the
Court to entertain a challenge against the award/decree/order, includes
not only the principal amount but also the interest component.
47. Moreover, Mr. Jethmalani has relied Coordinate Bench
judgment of this Court in GE T&D Ltd (supra), wherein the Court
while dealing with an application seeking waiver for deposit under
Section 19 of the MSME Act, has clearly held that as per the said
Section, no discretion lies with the Court to reduce the amount of pre-
deposit. The relevant paragraphs reads as under :
"37. ............The following observations in Snehadeep
Structures Pvt. Ltd. v. Maharashtra Small Scale Industries
Development Corporation Ltd. (supra) which dealt with the
statute of 1993 preceding the MSMED Act equally applies to
the MSMED Act:
"47. The requirement of pre-deposit of interest is
introduced as a disincentive to prevent dilatory tactics
employed by the buyers against whom the small-scale
industry might have procured an award, just as in cases
of a decree or order. Presumably, the legislative intent
behind Section 7 was to target buyers, who, only with
the end of pushing off the ultimate event of payment to
the small-scale industry undertaking, institute
challenges against the award/decree/order passed
against them. Such buyers cannot be allowed to
challenge arbitral awards indiscriminately, especially
OMP (COMM) 144/2019 Page 29
when the section requires predeposit of 75% interest
even when appeal is preferred against an award, as
distinguished from an order or decree."
Xxx xxxx xxxx
42. For the above reasons, the Court negates the plea of the
Petitioner that the MSMED Act does not apply. Consequently,
the question of the Petitioner seeking a waiver of the
requirement of depositing 75% of the amount in terms of
Section 19 of the MSMED Act does not arise. As explained by
the Supreme Court in Goodyear India Ltd. v. Norton Intech
Rubbers Pvt. Ltd. (supra), there is no discretion in the Court to
reduce the amount of pre-deposit."
48. At this stage I may state that contention of Ms. Divan as to
the inapplicability of Apex Court judgment in Snehadeep (supra)
to the present issue is also not appealing as in GE T&D Ltd (supra),
the Court has held that the observations in Snehadeep (supra)
equally applies to the MSME Act.
49. Mr. Jethmalani has also relied on a Division Bench
judgment of this Court in United Electrical Industries (supra) in a
challenge to the Single Bench direction to deposit 75 % of the both
principal as well as interest component of the 'amount', the Court
directed payment of the interest component as well, upholding the
direction of the Single Bench. Ms. Divan went to on distinguish the
said judgment by stating that the direction to deposit the interest
component was de hors the applicability of Section 19 of MSME
OMP (COMM) 144/2019 Page 30
Act and on the merits of the matter. Relevant paragraphs reads as
under:
"3. It is stated that the appellant has deposited 75% of the
principal amount but is contesting direction to deposit
75% of the interest amount. The contention raised is that
the issue whether the Micro, Small and Medium
Enterprises Development Act, 2006 would be applicable is
a subject matter of the objections filed under Section 34 of
the Arbitration and Conciliation Act, 1996. It is also
submitted that this issue is not foreclosed and decided as
has been recorded in the arbitration award as the decision
in the writ petition filed in this Court had left the issue
open.
4. Learned counsel for the respondent has, however,
disputed the last contention and submitted the issue with
regard to applicability of the Micro, Small and Medium
Enterprises Development Act, 2006, was specifically
adjudicated in the Letters Patent Appeal and SLP was
dismissed.
5. Be that as it may, we would not like to enter into
detailed discussion on the said aspect as the contention is
pending before the single Judge and the next date of
hearing is fixed on 19th July, 2018.
6. On the question whether the appellant should be asked
to deposit 75% of the interest amount, we would notice
that the arbitration award itself records admission made
by the appellant that they had received goods of Rs.
19,82,15,096/-, but had made payment of Rs.
18,23,31,840/-. There was also a letter written by the
respondents dated 1st October, 2011 wherein they had
admitted shortfall of Rs. 86,29,281/-. The award also
refers to admissions made by the appellant on other
occasions as well.
OMP (COMM) 144/2019 Page 31
7. The supplies in question were admittedly made during
the period 14th December, 2006 till 2nd November, 2010.
It may be noted that till the award was pronounced, no
further payment was made.
8. In these circumstances looking at the prima facie case,
we do not think that the direction given by the single Judge
that the appellant should deposit 75% of the interest
amount in terms of the award can be treated as a harsh
and burdensome. The appellant de-hors the applicability of
Section 19 of the Micro, Small and Medium Enterprises
Development Act, 2006, does not deserve any indulgence
and leniency. The appellant would accordingly deposit the
said amount in terms of the order passed by the single
Judge."
50. The plea of Ms. Divan that GE T&D Ltd (supra) is as non-
applicable owing to non-consideration Section 19 of the MSME Act
along with plea that the Court in United Electrical Industries (supra)
directed 75 % deposit of interest component was on merits and dehors
the applicability of Section 19, has no bearing on the basis of my
discussion above more particularly, when the judgment of the Madras
High Court in Goodyear India Ltd v Norton Intech Rubbers, 2011
SCC OnLine Mad 712, on the precise issue, as reproduced above, has
been upheld by the Supreme Court. Thus, it is clearly concluded that
not only does the term 'amount' in terms of Section of MSME Act
include the components of both principal and interest but also no
discretion lies with the Court to reduce the amount or quantum of the
OMP (COMM) 144/2019 Page 32
pre-deposit of 75 % awarded/decreed/ordered amount as mandated
under Section 19 of the MSME Act.
51. Insofar as the second issue that in what manner can the Court
exercise its discretion for release of pre-deposit under proviso to
Section 19 of MSME Act is concerned, Mr. Jethmalani, on
comparison made with the predecessor statute, Interest on Delayed
Payments Act, contended that the proviso to Section 19 is an addition,
compared to similar provision that existed in the predecessor statute
and the same is worded in mandatory manner with discretion on the
Court only to decide on the extent of percentage of release of amount
of pre-deposit based on the circumstances and not to disallow the
release of pre-deposit. As against this, Ms. Divan has only contended
that the release of any amount from the pre-deposit of principal lying
with the Court, owing to the admitted precarious financial situation of
the applicant/respondent shall make the recovery amount, if released,
at the relevant stage impossible. Without prejudice, it was also
contended by Ms. Divan that the discretion vested with the Court
under Section 19 should be exercised in favour of the petitioner on the
merits of the present case.
OMP (COMM) 144/2019 Page 33
52. In fact, Ms. Divan on merits, has taken the plea that
adjudication of the disputes by the MSME Council was in absolute
disregard of the provisions of MSME Act read with the provisions of
the Act of 1996 and in support has relied upon the Apex Court
Judgment in Govind Prasad (supra). I hold that the plea taken by Ms.
Divan on merits of the matter is clearly premature and cannot be
delved into at this stage of adjudication on an application for deposit
and withdrawal pre-deposit amount in terms of Section 19 of the
MSME Act.
53. I agree with the submission made by Mr. Jethmalani that the
proviso to Section 19 of the MSME Act, which contemplates that
pending disposal of the application to set aside the decree, award or
order, the Court shall order that such percentage of the amount
deposited shall be paid to the supplier, as it considers reasonable under
the circumstances of the case, subject to such conditions as it deems
necessary to impose, as mandatory. The legislature in its collective
wisdom has formulated such a proviso to keep the supplier
(applicant/respondent herein) financially viable pending the litigation
against an award in its favour being guided by the object of the
legislation, which is promotion, development as well as enhancing the
OMP (COMM) 144/2019 Page 34
competitiveness of MSMEs and, other incidental and connected
matters relating to MSMEs. However, the said proviso gives
discretion to the Court for imposing such reasonable conditions as it
deems necessary under the circumstances of the case. Therefore, a
purposeful interpretation of the proviso means, if no viable security is
provided by the supplier then the discretion can be exercised not to
release the amount pre-deposited.
54. No doubt the apprehension of Ms. Diwan that owing to
precarious financial situation of the respondent, the recovery of any
amount, if released, at a relevant stage may become impossible is
justified but such an eventuality can be taken care of, by the Court by
directing the release of money against bank guarantee as security.
55. Moreover, it is a settled position of law that an Arbitral Award
passed in favour of a party, for the purpose of execution and challenge
in terms of Act of 1996 shall be treated as money decree. (Ref-:
Hindustan Construction Company Limited and Ors. vs. Union of
India (UOI) and Ors. AIR 2020 SC 122; Indian Oil Corporation
Limited vs. Toyo Engineering Corporation and Ors.,
MANU/DE/0728/2020).
OMP (COMM) 144/2019 Page 35
56. In the light of above discussion, this Court is of the view that
the prayers made by the applicant/respondent are liable to be granted
and accordingly, the following directions are issued:
(i). the petitioner/non-applicant shall deposit with Registrar
General of this Court 75% of the interest awarded by the Arbitral
Tribunal computed till the date of deposit of the principal amount in
this Court within three weeks;
(ii). the Registry shall release an amount of 50% of the 75% of
the principal amount deposited in this Court, pursuant to Order dated
October 21, 2019, to the applicant/respondent on the
applicant/respondent furnishing a bank guarantee in favour of the
Registrar General of this Court for the amount to be released and
shall keep the bank guarantee alive till further orders.
57. The amount to be deposited by the petitioner/non-applicant in
terms of (i) above shall be kept in interest bearing FDRs with
periodical renewals till further orders.
58. It is made clear, the release of the amount in favour of the
applicant/respondent shall be subject to the final outcome of the
aforesaid petition filed by the petitioner under Section 34 of the Act of
1996.
OMP (COMM) 144/2019 Page 36
59. Application is disposed of.
60. The matter shall now be listed before the Registrar General for
verification of bank guarantee on August 17, 2020.
OMP(COMM) 144/2019, I.As. 5918/2020 &5919/2020
List on October 1, 2020.
V. KAMESWAR RAO, J
JULY 30, 2020/jg
OMP (COMM) 144/2019 Page 37
