Court Must Assign Reasons When Releasing Amount Under Section 19 of MSME Act: Telangana High Court

Section 19 of the MSME Act provides that the court may permit the release of a portion of the deposited amount to the supplier pending the decision on the application to set aside the decree, award, or order, contingent upon the circumstances and conditions it deems fit to impose.

Brief Facts:

National Small Industries Corporation (“Petitioner”), a Government of India Enterprise mandated to support Micro, Small and Medium Enterprises (MSMEs), entered into an agreement with Brahma Teja Paper Products (“Respondent No.1”) under a tender marketing scheme. Subsequently, a dispute arose between the parties, which was referred to the Facilitation Council under the Micro, Small and Medium Enterprises Development Act, 2006. The Facilitation Council rendered an award in favour of Respondent No.1. The Petitioner contested this award under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

During the Section 34 proceedings, the Petitioner deposited Rs.50,23,828.00/- into a fixed deposit account. Following an ex parte order from the Commercial Court, the fixed deposit along with interest was called by the court. Subsequently, the Commercial Court permitted Respondent No.1 to withdraw the deposited amount under Section 19 of the MSME Act. Feeling aggrieved, the Petitioner approached the High Court challenging the order of the Commercial Court.

The Petitioner contended that the Commercial Court erred significantly by not deciding the petition under Section 36 of the Arbitration Act seeking a stay of the award. It further argued that Respondent No.1, who is now a non-performing asset and no longer exists, would make recovery of the amount challenging even if the Petitioner succeeds in setting aside the award. The Petitioner also highlighted an earlier order from the Commercial Court which mandated the deposit of 75% of the amount before the main original petition would be entertained. Despite this, the later decision of the Commercial Court allowed Respondent No.1 to withdraw the amount.

Observations by the High Court:

The High Court referred to Section 19 of the MSME Act, 2006 and held that the provision mandates strict conditions for entertaining applications to set aside decrees, awards, or orders issued by dispute resolution bodies. It held that it requires the appellant to deposit seventy-five per cent of the awarded amount with the court. Furthermore, the proviso empowers the court to release a reasonable percentage of this deposited amount to the supplier, pending the outcome of the application to set aside, subject to conditions deemed necessary by the court.

The High Court held that the Commercial Court, where the matter was initially adjudicated, did not provide any rationale for releasing the entire deposited amount in favour of Respondent No.1. It held that this lack of reasoning was improper, especially considering that a petition under Section 36 of the Arbitration Act, seeking a stay of the award, was concurrently pending. Therefore, the High Court held it appropriate that both applications should have been considered together by the Commercial Court.

Accordingly, the High Court sets aside the impugned order of the Commercial Court. The Commercial Court was directed to reconsider both the application under Section 19 of the MSME Act and the petition under Section 36 of the Arbitration Act in conjunction.

Case Title: National Small Industries Corporation vs Brahma Teja Paper Products

Citation: 2024 LiveLaw (TS)104

Case Number: CIVIL REVISION PETITION No.1543 of 2024

Advocate for the Petitioner: Mr. J.Prabhakar, learned Senior Counsel representing Ms. D.Venkata Padmaja

Advocate for the Respondent: Mr. Dida Vijaya Kumar

Date of Judgment: 19 June, 2024

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