Though Mandatory, 75% Pre-Deposit To Challenge MSME Award Need Not Accompany Plea: Rajasthan High Court

The Rajasthan High Court at Jaipur has held that while a 75% pre-deposit under the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) is mandatory for challenging an arbitral award, courts can grant reasonable time to make the deposit instead of insisting that it accompany the challenge at the time of filing.

The court said the statutory requirement must be met before a petition under Section 34 of the Arbitration and Conciliation Act, 1996 is heard on merits, and, in appropriate cases, the deposit may also be made in instalments.

A Division Bench of Justice Arun Monga and Justice Ashutosh Kumar set aside a Commercial court order dismissing an objection petition filed by Purvanchal Vidyut Vitran Nigam Limited (PVVNL) against an arbitral award in favour of Anamika Conductors Pvt. Ltd.

“We accordingly hold that while the requirement of pre-deposit of 75% of the awarded amount under Section 19 of the MSME Act is mandatory and must be complied with before the Section 34 application is entertained on merits, the provision does not require the deposit to accompany the application at the time of its presentation, and the Court is empowered to grant reasonable time and, in an appropriate case of demonstrated hardship, to permit instalments for making the deposit.”, the court ruled.

Anamika Conductors had approached the Rajasthan Micro and Small Enterprises Facilitation Council to recover dues under two invoices. After conciliation failed, arbitration commenced.

Although the Facilitation Council later appointed a sole arbitrator, it took up the proceedings again and, on July 2, 2024, awarded the supplier ₹6.50 crore, inclusive of interest.

The power distribution company challenged the award before the commercial court under Section 34 of the Arbitration Act. However, the court dismissed the petition on November 16, 2024, for non-compliance with Section 19 of the MSME Act. The utility had sought a short extension to make the mandatory pre-deposit, but the request was rejected.

The utility argued that it had never sought exemption from the statutory deposit. It said it had only asked for a little more time because releasing such a large amount required administrative and financial approvals.

It also contended that the Facilitation Council lacked jurisdiction to resume the proceedings after appointing a sole arbitrator.

Counsel for the supplier argued that compliance with Section 19 is mandatory. It was submitted that the Commercial court rightly dismissed the petition after the statutory deposit was not made despite the utility being granted time to comply.

Examining Section 19, the Division Bench said the provision bars a court from entertaining a challenge without the statutory deposit. It does not require the amount to accompany the petition when it is filed.

The court noted that the phrase "in the manner directed by such court" gives courts discretion over the timing and mode of compliance.

“The statutory scheme thus mandates the pre-deposit as a condition precedent to the adjudication of the challenge, while leaving the manner and timing of compliance to the sound discretion of the Court.”, the court added.

The bench found the utility's request for additional time to be bona fide. It observed that the appellant is a state government entity and that releasing more than ₹6.50 crore from the public exchequer requires administrative and financial sanctions.

Describing the Commercial Court's approach as "over-pedantic and mechanical", the bench held that it had failed to exercise the discretion available under Section 19.

It accordingly allowed the appeal, restored the Section 34 petition to its original number, and directed the parties to appear before the Commercial Court on August 24, 2026, after which the petition will proceed in accordance with law.