Scope Of Discretion To Stay Award U/S 19 MSME Act Wider Than U/S 36(3) Arbitration Act: Calcutta High Court

The Calcutta High Court has recently observed that the discretion conferred upon a Court to stay an award or a decree under Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) is broader in scope compared to Section 36(3) of the Arbitration and Conciliation Act, 1996 (Arbitration Act) where the discretion is limited to granting stay of an award subject to appropriate conditions.

Justice Moushumi Bhattacharya noted that the rights of an award holder are enhanced under Section 19 of the MSME Act compared to Section 36(3) of the Arbitration Act with the object to not hasten the death of the enterprise under the weight of financial pressures aggravated by initiation of proceedings for realization of its dues from supply of materials to a buyer.

"The object is to ensure that the small or medium scale enterprise survives; the object is not to hasten the death of the enterprise under the weight of financial pressures aggravated by initiation of proceedings for realization of its dues from supply of materials to a buyer. Section 19 of the MSME Act matches the object of the Act and strengthens its core by broadening the contours for stay of an award / decree compared to section 36(3) of The Arbitration and Conciliation Act, 1996 where the discretion is limited to granting stay of an award subject to appropriate conditions. There is no mandate to allow withdrawal of the amount deposited by the Award-holder", the Court observed. 

Reliance was also placed on the Delhi High Court decision in Indian Oil Corporation Ltd. v. FEPL Engineering (P) Ltd in this regard wherein the Court had recognised the  2-step discretion under section 19 of the MSME Act. 

Background 

In the instant case, the Court was considering three applications filed by the concerned parties. The first application was for setting aside of an Award dated September, 24 2019 passed by the Facilitation Council under the provisions of MSME Act wherein Optimal Power Synergy emerged as the Award-holder. The second application was for stay of the Award under section 36 of the Arbitration Act. Both these applications had been filed by Bharat Heavy Electricals Limited (BHEL), the Award-debtor. The third was an Execution Petition filed by Optimal for execution of the Award.

Optimal was awarded a sum of Rs 61,08,654 by an Award dated September 24, 2019. The Award-debtor, BHEL was directed to pay this amount along with interest computed under Section 16 of the MSME Act within 30 days from the date of submission of claim by Optimal.

Optimal was thereafter forced to contest proceedings filed by BHEL in this regard for setting aside and stay of the Award. By a judgment dated September 1, 2021, BHEL was directed to deposit a portion of the awarded amount which was put in towards the end of 2021. Moreover, Optimal's claim in the arbitration arose from supplies made by it to BHEL from 2011 onwards.

It was also contended that Optimal has just revived from a financial crisis suffered in the aftermath of the pandemic and that it requires urgent funds for meeting the operational costs of its business and for the survival of its workmen. 

Observations

The Court noted that the discretion conferred upon the Court to stay an award or a decree under Section 36(3) of the Arbitration Act is subject to the impositions of conditions provided for in the statutory provision. Elucidating further, the Court observed, 

"The discretion of the Court in the matter of grant of stay of an award becomes evident from the construction of the provision – the imposition of conditions unobtrusively nestled in the sentence. The discretion, which is also spelt out in the proviso for conditions for grant of stay, is extended to the next level of decision-making, as it were, for stay of the award. The free- hand given to the Court is in fact continued from the preceding provision – 36(2) – where the enforcement of an Award is deemed to continue unfettered and regardless of an application for setting aside of the Award. Further, the 'may' in 36(3) set against the 'shall' in the proviso placed thereafter also serves to lay stress on the element of discretion in the matter of stay of an award."

On the other hand, the Court observed that the discretion conferred under section 19 of the MSME Act is wider and is subject to the mandate imposed upon the Court to order payment of a part of the deposit (by the award-debtor for stay of the award) to the supplier award-holder "as it considers reasonable...subject to such conditions as it deems necessary to impose". It was further noted that the Court under section 19 of the MSME Act is statutorily-mandated to ensure that the supplier can withdraw a part of the amount deposited by the buyer and the amount which is to be released. The Court is also empowered to decide whether to impose terms for such withdrawal on an assessment of the attending circumstances as would be evident from the last line of the proviso, it was averred further. 

Justice Bhattacharya further observed that the leverage given to the supplier under Section 18 of the MSME Act complements the overall object of the legislation which was enacted with the object of facilitating the promotion and development of micro, small and medium enterprises and enhance their competitiveness. It was further noted that the right of an award- holder to withdraw a certain percentage of the amount deposited by the award-debtor pending an application for setting aside of the award is absent in section 36(3) of the Arbitration Act unlike the MSME Act. 

Opining further, the Court noted that the proviso to section 19 of the MSME Act contemplates exercise of discretion in considering stay of an award with regards to the following conditions-  (a) the percentage of the deposited amount which is to be paid to the supplier and (b) the conditions to be imposed for such payment.

"The thread of discretion runs through both (a) and (b) and weaves into imposition of conditions for withdrawal. The concluding part of the proviso is framed "as it deems necessary to impose." The court therefore is empowered to not only decide on the nature of conditions which may be imposed on the supplier for withdrawing the money but also whether imposition of conditions is at all necessary in the facts of the case. The background facts would be the guiding factor in the exercise of discretion, reinforced as it is, by repetition of "as it considers reasonable under the circumstances of the case" and "such conditions as it deems necessary to impose" two times over in the proviso", the Court elucidated further. 

The Court noted that facts would indicate that Optimal, despite supplying materials to BHEL from 2011 onwards, has not got a farthing from such supplies for the last 11 years despite having an Award in its favour. It was further noted that Optimal has stated on oath that furnishing a bank guarantee as security will not be possible as Optimal is presently facing a severe financial crunch.

Opining that Section 19 of the MSME Act allows the Court to exercise its discretion in favour of a beleaguered supplier, the Court directed, 

"The facts in the present case provide the quintessential framework where discretion should be exercised in consonance with the underlying intent of section 19 of the MSME Act for a financial leg-up to a beleaguered supplier. In essence, the facts warrant that Optimal should be permitted to withdraw 75% of the principal amount awarded to Optimal in the arbitration − Rs. 61,08,654/- − without requiring to furnish security for withdrawing the said amount."

 Optimal was therefore permitted to withdraw the said amount within a period of two weeks from date. The Court further averred that since BHEL has already deposited 50% of Rs. 2,09,16,171 with the Registrar, Original Side of this Court, Optimal shall withdraw the amount as directed from this amount. The balance amount of Rs. 58,76,595/- shall remain with the Registrar and be treated as security for the purpose of the pending application under Section 34 of the 1996 Act, it was ordered further. 

The Court further stayed the Award dated September 24, 2019 until disposal of the pending proceedings.

Case Title: Bharat Heavy Electricals Limited v. Optimal Power Synergy Ltd 

Case Citation: 2022 LiveLaw (Cal) 95

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