Without Pre-Deposit U/S 19 MSMED Act, Application U/S 34 Arbitration Act Remains 'Stillborn’ For Purpose Of Stay: Calcutta High Court

In refuting the petitioners contention that filing an application u/s 34 of the Arbitration & Conciliation Act, 1996 (“1996 Act”) would be sufficient for the Court to deliberate on the question of stay, a single bench of Justice Moushumi Bhattacharya held, that in the absence of a pre-deposit of 75% of the award, in compliance with Section 19 of the MSMED Act, the application u/s 34 of the 1996 Act would remain “stillborn” for the purpose of stay of the award. It said:

The application under section 34 must be a valid application in terms of section 19 of the MSMED Act for the Court to consider stay of the arbitral award under section 36(2). Since the petitioner has admittedly not made the pre-deposit under section 19 of the MSMED Act, the section 34 application filed by the petitioner remains eclipsed in the eye of law as the foundation for a prayer for stay of the arbitral award under section 36(2) of the 1996 Act. Therefore, the present application for stay of the impugned award filed under section 36(2) of the 1996 Act cannot be entertained as the said application is foisted on a stillborn section 34 application. The petitioner must first comply with section 19 of the MSMED Act to breathe life into the application. AP 252 of 2023 is accordingly dismissed as not maintainable for the above reasons.

Facts of the case

The present application was filed the petitioners for staying an award passed by the MSME Council u/s 18(3) of the MSMED Act. The petitioners also sought an unconditional stay of the award u/s 36(3) of the 1996 Act on the ground taken that “the Council became de jure unable to perform its functions and consequently the award is without jurisdiction and void.”

It was submitted by the petitioners that the mandate of the Council would stand terminated on the expiry of the period specified under Section 18(5) of the MSMED Act, which specifies that a reference made under it shall be decided within 90 days from the date of making the reference.

According to petitioners, the reference in this case was made on 4th December, 2017 while the impugned award was passed on 28th April, 2022, and that even u/s 29-A(1) of the 1996 Act, arbitral tribunals were mandated to make an award within 12 months from the date of completion of pleadings in case of domestic arbitrations.

The petitioners further attempted to distinguish the words “filed” in s.36(2) of the 1996 Act and “entertained” in s. 19 of the MSMED Act to submit that filing of the s. 34 application would be sufficient for a Court to consider stay of an award u/s 36(2) of the 1996 Act.

The respondents on the other hand objected to the maintainability of the present application. It was argued that to successfully move an application for stay u/s 36(2), the petitioner would have to first comply with Section 19 of the MSMED Act and deposit 75% of the award, before applying for setting aside of the award, and that such a requirement would have an “overriding effect over all existing laws under section 24 of the MSMED Act.”

Findings of the Court

For adjudication, the Court framed two issues: first, whether compliance with section 19 of the MSMED Act is mandatory for seeking stay of an award; and second, whether filing of an application under section 34 of the 1996 Act, without the pre-deposit under section 19 of the MSMED Act, “makes the application for seeking stay of the award under section 36(2) of the 1996 Act, imperfect in the eye of law.”

In examining section 19 of the MSMED Act, the Court opined:

“Section 19 of the MSMED Act, 2006, contains a mandate on a "Buyer" to deposit 75% of the amount of the decree or award or an order or such other percentage as may be directed by a Court, for setting aside any award made by the Facilitation Council.” The framing of the section also makes it clear that the 75% deposit is a condition precedent for a buyer for seeking setting aside of the award of the Council.

Section 24 of the MSMED Act seals the mandate of section 19 by declaring that sections 15-23 shall have overriding effect over any other law for the time being in force. Section 19 read with 24 thus leaves little doubt that a buyer cannot seek setting aside of an award made by the Council unless the buyer first deposits 75% of the awarded amount. Only upon fulfilment of the condition will a Court “entertain” the application for setting aside of the award.”

The Court further looked into its powers to stay an arbitral award u/s 36(2) of the 1996 Act and clarified that upon a joint reading of the aforesaid provision with section 19 of the MSMED Act, it became clear that the correct sequence would be a valid application for setting aside u/s 34, followed by an application for stay u/s 36(2) of the 1996 Act, while the former is pending.

In holding that mere “filing” of a section 34 application, without complying with any of the pre-requisites under its various subsections would not enable the court to grant an order of stay u/s 36(2), the Bench dismissed the application and opined:

The inescapable conclusion is that a Court cannot “entertain” an application under section 36(2) unless a buyer puts in 75% of the awarded amount before seeking setting aside of an award under section 19 of the MSMED Act. Until that is done, the section 34 application is stillborn. The 'filing' of a section 34 application for the purpose of stay of an award under section 36(2) cannot be construed to imply the mere ministerial act of filing an application for setting aside of an award under section 34 of the said Act. The only possible construction of the “filing” of a section 34 application for the purpose of stay of an award under section 36(2) would be an effective and valid section 34 application which has been filed within the limitation period under section 34(3). Naturally therefore, an application filed under section 34 after 120 days or contrary to the requirement of section 34(3) would cease to be an application at all under section 34 for fulfilling the condition precedent for a section 36(2), namely, for the Court to entertain or consider grant of stay of the award.”

Case: The Board of Major Port Authority for the Shyama Prasad Mookerjee Port, Kolkata. v Marine Craft Engineers Private Limited.

Coram: Justice Moushumi Bhattacharya

Citation: 2023 LiveLaw (Cal) 209

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