MSME Award Appeal here we mean and discuss Appeal against the order, decree or Award arising out of the statutory arbitration proceeding under MSME Act. There have been challenges to this provision in courts, where the contentions were raised that this provision is not mandatory and there can be deviation by the Appellate court. Thus, the Supreme Court has made it clear that the provision of section 19 of the MSME Act is mandatory in nature..    

Can Bank guarantee be accepted as 75% pre deposit u/s 19 MSME Act?

Author- admin
Date:October 5, 2022

We will discuss here can Bank guarantee or other security be accepted as 75% pre-deposit under section 19 MSME Act?

The question as to whether the court can accept a bank guarantee or other security as the fulfilment of a condition of pre-deposit under section 19 of the MSME Act came before the Uttarakhand High Court in the case of Uttarakhand Power Corporation Limited versus Mahavir Transmission Udyog Private Limited (Civil Writ number 721 of 2018 and Civil Writ number 723 of 2018).

Section 19 of the MSME Act provides that an application for setting aside of any decree, award or order passed in an arbitration proceeding can be filed. However, section 19 prescribes that the applicant/appellant has to pre-deposit 75% of the amount under decree, award or order.

The aforesaid condition is mandatory for entertaining an application under section 19 challenging decree, award or order as has been held by various judgements including those by the honourable Supreme Court.

Related : Whether the condition of a 75% deposit under sec 19 MSME act is mandatory?

This situation brings out the issue as to whether this 75% deposit is to be mandatorily deposited in cash or this can be in form of a bank guarantee or any other security.

In the case of Uttarakhand Power Corporation Limited versus Mahavir transmission Udyog Private Limited, the petitioner argued that it is the discretion of the court acting under section 19 and it is not mandatory that the party should deposit the amount of 75% cash. The petitioner further argued that it can be done also by way of a Bank guarantee or security.

The respondent however contended that section 19 is clear as it mandates the deposit of the amount in cash. The respondent cited the judgement of the honourable apex court in the matter of Gujrat India Ltd versus Norton Intech Rubbers Private Limited and another.

In that case, the court reached the following conclusions:

Under section 19 the court has no discretion in the matter of ordering a deposit of 75% of the amount, except by way of cash.

The court observed that :

1. This result is inevitable on a reading of section 19 itself.

2. It is settled law that the duty of the court is to give effect to the intention of the Legislature. The intention of the legislature is to be gathered from the words which are used in the provision. If the words used in the statutory provisions on a plain interpretation can be given effect, even if it may result in some injustice, it must be implemented. It is another matter that if the provisions of a statute are capable of two or more interpretations, the court may choose the interpretation which does not result in absurdity or injustice.

The court further observed that

1.         this question is essentially not res Integra, as it has, in fact, been considered by the honourable apex court in the decision of Goodyear India Limited vs Norton Intech Rubbers Private Limited.

2. The object, which is sought to be achieved by the Act, cannot be overlooked.

The court further observed that:

1.         this court cannot be oblivious to the object and purpose which is sought to be achieved, which is the promotion, development and enhancing the competitiveness of micro, small and medium enterprises.

2.         Dissecting section 19 itself, the plain word used in section 19 is that 75% of the amounts in terms of the decree, award or orders as the case may be, has to be deposited.

3.       From a plain reading of the words, it cannot admit of any dispute that the legislature had intended that it has to deposit the amount in terms of cash.

4.         Quite clearly section 19 does not contemplate any power with the court to permit deposit of the amount by way of the bank guarantee or any other form of security.

5.         Had the intention of the legislature been that the courts have freedom and discretion in the matter and can permit deposit of the amount by way of security or bank guarantee, nothing stopped the legislature from indicating its mind in the said direction.

6.         This above view receives clear fortification from the words used in the proviso. The proviso clearly contemplates that the pending disposal of the application for setting aside decree, order or award, the court can order such percentage of the amount deposited to be paid to the supplier, as it considers it reasonable under the circumstances of the case subject to such conditions as it deems necessary to impose. The percentage of the amount which is deposited can only be consistent with the reasoning that, under the main provision of section 19, the amount is available in cash.

7.         If the argument is accepted that it can be by way of security, it would only not be contrary to the plain words used in the proviso; but, it would also defy the clear object of the act, which is to ensure that the unit in question, which is micro, small or medium enterprises, survives.

Thus, it is clear that the pre-deposit under section 19 of the act has to be in the form of cash and not in the form of a bank guarantee or any other security.


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Please note:

This Article is written by Managing Partner Naveen Bhardwaj with assistance and research from the NB Associates team.

The content(s) of this Article cannot be copied or reproduced without the express written consent of NB Associates.

NB Associates, Advocates & Solicitors provides comprehensive legal services related to MSME claims or recovery of dues or debt.