MSME Award Can Be Challenged Without 75% Pre-Deposit if Nullity Is Prima Facie Shown: Delhi High Court

The Delhi High Court has held that a court hearing a challenge to an arbitral award under the Micro, Small, and Medium Enterprises Development Act, 2006 ("MSME Act") is not barred from examining a credible, ex facie plea that the award is a nullity merely because the buyer has not deposited 75% of the awarded amount under Section 19 of the Act.

Applying this same principle, a Division Bench of Justice V. Kameswar Rao and Justice Manmeet Pritam Singh Arora set aside an ex parte award directing public sector undertaking WAPCOS Limited to pay Virgo Aqua a principal sum of ₹48.64 crore, along with compound interest calculated at three times the Reserve Bank of India's bank rate.

The bench found that the Kerala Micro and Small Enterprises Facilitation Council had neither conducted conciliation with due notice to WAPCOS nor formally recorded the failure of conciliation before commencing arbitration. It consequently held that the award was a nullity.

Explaining why the pre-deposit requirement under Section 19 could not prevent scrutiny of such an award, the court observed:

"The requirement of pre-deposit under Section 19 of the MSMED Act necessarily presupposes the existence of a valid award, which is capable of legal recognition as an award under law. Section 19 of the MSMED Act is intended to regulate challenges to valid awards rendered under the statutory framework of the MSMED Act. The provision cannot be construed as compelling a party to first comply with the pre-deposit requirement before it is permitted to contend that the very instrument sought to be enforced is non-est and devoid of legal existence. Where a credible and ex-facie case of nullity is made out on the perusal of the face of the record of the Facilitation Council, the Court under Section 34 or Section 37 of the Act of 1996 is not denuded of its jurisdiction to examine the issue of nullity of the award merely because the requirement of pre-deposit has not been fulfilled."

The dispute arose from five work orders issued by WAPCOS to Virgo Aqua for consultancy services connected with the development and modernisation of fisheries infrastructure in Andhra Pradesh and Odisha.

Alleging non-payment of its dues, Virgo Aqua invoked Section 18 of the MSME Act before the Kerala Facilitation Council. By an award dated December 2, 2022, the Council directed WAPCOS to pay ₹5.33 crore under one reference and ₹43.31 crore under another. It also awarded statutory compound interest.

WAPCOS challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. The Single Judge directed it to deposit 75% of the awarded amount under Section 19 of the MSME Act before entertaining the petition. When WAPCOS failed to comply within the stipulated time, the petition was dismissed.

Then came the appeal before the division bench. During its pendency, WAPCOS deposited ₹36 crore, representing 75% of the principal amount awarded. Virgo Aqua argued that the deposit was insufficient because Section 19 required 75% of the principal along with accrued statutory interest.

Before the Division Bench, Senior Advocate Malvika Trivedi, appearing for WAPCOS, argued that Section 18 of the MSME Act prescribes two distinct stages.

According to her, disputes must first undergo conciliation under Section 18(2), and arbitration under Section 18(3) can commence only after conciliation has failed. She submitted that WAPCOS was never notified of the conciliation proceedings before the District Legal Services Authority, Thiruvananthapuram. Nor was it informed that the Facilitation Council had commenced arbitration. The award was therefore non est, and the statutory pre-deposit could not bar examination of that jurisdictional defect.

Opposing the appeal, counsel appearing for Virgo Aqua argued that conciliation had failed because of WAPCOS' non-cooperation and that the company had stopped appearing despite repeated opportunities. He also contended that the appeal under Section 37 was not maintainable because the single judge had not decided the Section 34 challenge on its merits.

Rejecting the objection, the High Court held that dismissal of the Section 34 petition had attached finality to the award and rendered it executable as a decree. The order therefore had "the effect of extinguishing" WAPCOS' remedy against the award. It was consequently appealable under Section 37(1)(c).

The court distinguished the Supreme Court's decision in BGS SGS Soma JV v. NHPC Ltd., where a Section 34 petition had merely been returned to the proper court without affecting the finality of the award. It relied on Chintels India Limited v. Bhayana Builders Private Limited to hold that an appeal lies where the impugned order effectively results in refusal to set aside the award.

Turning to the pre-deposit issue, the bench held that Section 19 presupposes the existence of a legally valid award. It said that where a credible, ex facie case of nullity is discernible from the Facilitation Council's record because of non-compliance with the mandatory procedure under Section 18, the court can examine that jurisdictional issue before insisting on the statutory pre-deposit.

The bench also observed that a plea of nullity can be raised even in execution or collateral proceedings because a null award has no legal existence from its inception. It distinguished such an award from one that is merely illegal.

While an illegal award remains enforceable unless set aside under Section 34, a null award "derives no legal force from its inception" and may therefore be questioned even at the execution stage.

Examining the Facilitation Council's record, the bench found no proof that WAPCOS had been notified of the conciliation proceedings before the DLSA.

It also found no formal order recording the failure of conciliation and no communication informing WAPCOS that arbitration under Section 18(3) had commenced. "Reference to conciliation without notice to the buyer cannot fulfil the mandate of Section 18(2)," the court observed.

The court held that the mandatory conciliation-arbitration sequence prescribed under Section 18 had not been followed. It also found that WAPCOS had been denied a fair opportunity of hearing.

Accordingly, it set aside the ex parte award as a nullity and remitted the dispute to the Facilitation Council for fresh arbitration under Section 18(3). The ₹36 crore deposited by WAPCOS, representing 75% of the principal awarded amount, will remain with the court and abide by the outcome of the fresh proceedings.

For WAPCOS: Senior Advocate Malvika Trivedi, with Tushar Sannu, Priyankar Tiwary, Mohit Bhardwaj, Shailendra Slaria and Fajallu Rehman.