75% Pre-Deposit Under MSME Act Not Required Simultaneously With Challenge; Courts Can Grant Time For Compliance

The respondent (Supplier) initiated recovery proceedings against the appellant (Buyer/Public Sector Utility) under Section 18(1) of the MSME Act, 2006. After conciliation failed, the Facilitation Council initiated arbitration under Section 18(3), eventually passing an award on 02.07.2024 directing the appellant to pay ₹6,50,95,249

The appellant challenged this award under Section 34 of the Arbitration and Conciliation Act, 1996. While the appellant did not seek exemption from the mandatory 75% pre-deposit required under Section 19 of the MSME Act, it requested a 15-day extension to comply, citing administrative processes involved in releasing public funds

On 16.11.2024, the Commercial Court No. 1, Jaipur, dismissed the Section 34 application outright for non-compliance with the pre-deposit requirement

The appellant subsequently deposited the amount on 08.01.2025 during the pendency of this appeal

1. Whether Section 19 of the MSME Act requires the pre-deposit of 75% of the awarded amount to be made prior to or simultaneously with the filing of the Section 34 application

2. Whether the Commercial Court was justified in declining the request for additional time and dismissing the application for non-deposit

Section 19 of the MSME Act, 2006, which mandates that no application to set aside an award shall be "entertained" unless the appellant deposits 75% of the awarded amount "in the manner directed by such court"

The Court interpreted the term "entertained" based on the principle that it refers to the stage of consideration on merits rather than the initial presentation

The Court relied on the Supreme Court precedent in Gujarat State Disaster Management Authority v. Aska Equipments Limited, which held that while the 75% deposit is mandatory, Courts possess the discretion to allow deposits in installments in cases of undue hardship

The procedural requirements of Section 34 of the Act of 1996 regarding limitation are distinct from the "super-added" condition of pre-deposit under Section 19 of the MSME Act

The Court reasoned that the statutory language "in the manner directed by such court" in Section 19 implies that a judicial direction—prescribing the mode and timing of the deposit—is contemplated after the application is filed

The Court observed that "entertaining" an application is distinct from its "institution"; thus, a Section 34 petition is not "stillborn" if filed without the deposit

In the present case, the appellant, a State Government entity, demonstrated bona fides by requesting a short extension for financial sanctions rather than seeking an exemption

The Court found the Commercial Court’s approach "over-pedantic and mechanical," noting that dismissing a challenge involving over ₹6.50 crore due to a minor procedural delay was disproportionate. Since the interest of the MSME was protected by the proviso to Section 19 (regarding partial withdrawal), the refusal to grant a 15-day extension constituted a failure to exercise judicial discretion

The High Court set aside the Commercial Court's order dated 16.11.2024 and restored the Section 34 application, noting that the deposit had already been made on 08.01.2025. The parties were directed to appear before the Commercial Court on 24.08.2026 for proceedings on merits