Jharkhand High Court Clarifies: Writ Petition Bypassing MSMED Act's Pre-Deposit Rule Impermissible for Award Challenges Post-Conciliation

Ranchi, Jharkhand – The High Court of Jharkhand, in a significant ruling on June 10, 2025, reinforced the mandatory nature of the pre-deposit requirement under Section 19 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. A Division Bench comprising Justice Sujit Narayan Prasad and Justice Rajesh Kumar held that a writ petition challenging an award by the MSME Facilitation Council on grounds of procedural irregularities during arbitration is not maintainable if the conciliation process under Section 18(2) of the Act was duly conducted. The Court set aside a Single Judge's order that had entertained such a writ petition.

Case Overview

The matter, L.P.A. No. 28 of 2024 and connected appeals, arose from a dispute between M/s Jagapati Engineers Pvt. Ltd. ( JEPL ), a micro/small enterprise, and M/s TRF Limited. JEPL had approached the Jharkhand Micro and Small Enterprises Facilitation Council (JHMSEFC) seeking recovery of outstanding dues amounting to Rs. 62,14,082.38 plus interest from TRF Limited for fabrication and erection work.

The Council, after an unsuccessful conciliation attempt facilitated by JHALSA (Jharkhand State Legal Services Authority), proceeded to arbitration and passed an award dated September 12, 2022 (communicated January 5, 2023), directing TRF Limited to pay the claimed amount.

TRF Limited challenged this award through writ petitions, arguing procedural violations under the Arbitration and Conciliation Act, 1996, and claiming the award was not a formal arbitral award. A learned Single Judge, by an order dated December 22, 2023, set aside the Council's award and remitted the matter for a fresh decision, primarily on the ground that a formal arbitral award was a prerequisite for invoking the appeal mechanism under Section 19 of the MSMED Act, which mandates a 75% pre-deposit of the awarded amount. JEPL appealed this decision of the Single Judge.

Arguments Presented

M/s Jagapati Engineers Pvt. Ltd. (Appellant in LPA): Represented by Senior Advocate Mr. Ajit Kumar, JEPL argued that the Single Judge erred in entertaining the writ petitions. They contended that: * The procedure under Section 18 of the MSMED Act (conciliation followed by arbitration) was strictly complied with. * The writ petition was not maintainable due to the availability of an alternative statutory remedy under Section 19 of the MSMED Act, read with Section 34 of the Arbitration and Conciliation Act, 1996, which requires a pre-deposit of 75% of the award amount. * TRF Limited had participated in the proceedings and filed written submissions before the Council. * The Single Judge failed to decide the specific interlocutory application on the maintainability of the writ.

M/s TRF Limited (Respondent in LPA): Represented by Advocate Mr. Indrajit Sinha, TRF Limited defended the Single Judge's order, submitting that: * The Council failed to follow the proper procedure under Section 18(3) of the MSMED Act after conciliation failed. * The award was purportedly passed on September 12, 2022, the same day parties were asked to submit written submissions within 15 days, indicating the Council did not consider their submissions (TRF filed its submission on September 27, 2022). * Given these procedural flaws, the award was not an "award in the eye of law," making the writ petition maintainable.

Court's Analysis and Legal Principles

The Division Bench meticulously examined the provisions of the MSMED Act, 2006, particularly Sections 18 (Reference to Council and dispute resolution mechanism) and 19 (Application for setting aside award, mandating 75% pre-deposit).

The Court emphasized the legislative intent behind the MSMED Act: to protect MSMEs and ensure expeditious resolution of their payment disputes. The pre-deposit under Section 19 was highlighted as a mandatory security measure for enterprises.

Key legal pronouncements cited and applied included:

* India Glycols Limited and Another Vs. Micro and Small Enterprises Facilitation Council & Ors. [(2023) SCC OnLine SC 1852]: The Supreme Court held that the remedy under Section 34 of the Arbitration Act, 1996, against a Facilitation Council's award is subject to Section 19 of the MSMED Act. Entertaining writ petitions to bypass this pre-deposit requirement would defeat the Act's purpose.

* Jharkhand Urja Vikas Nigam Limited Vs. State of Rajasthan & Ors. [(2021) 19 SCC 206]: The Supreme Court ruled that if a Council passes an order without recourse to conciliation and proper arbitration, such an order is a nullity, and a writ petition would be maintainable.

The Division Bench distinguished the JUVNL case, noting: > "The matter would have been different if the award would have been passed under Section 18(3) of the Act, 2006 without taking recourse of Section 18(2) then the award could not have been said to be arbitral award rather the same would have been said to be passed contrary to the statutory mandate under Section 18(2) of the Act, 2006, then certainly the writ petition is to be entertained but that is not the fact herein..." (Para 139)

The Court found that in the present case, conciliation under Section 18(2) was attempted through JHALSA, and upon its failure, the Council proceeded to arbitration under Section 18(3). TRF Limited was directed to file written submissions on September 12, 2022, which it did on September 27, 2022. The award, though dated September 12, 2022, was communicated on January 5, 2023, after the submissions were filed.

The Court reasoned that TRF's grievances pertained to alleged procedural irregularities during the arbitration stage (Section 18(3)), such as not being given an adequate opportunity to present its case. Such grounds, the Bench noted, are specifically covered under Section 34(2)(a)(iii) of the Arbitration and Conciliation Act, 1996.

The Bench observed: > "this Court, is of the view that when the award which is being passed under the Arbitration and Conciliation Act, 1996 by the arbitral tribunal and the same is being challenged by filing an application under Section 34 of the Act, 1996... then against the award passed by the Council under Section 18 (3) of the Act, 2006, how the writ petition will lie, even if there is a procedural lapses since in view of insertion of particular condition to challenge the award by filing an application before the court under Section 34, as per the ground available under Section 34(2) (a)(iii) of the Act, 1996." (Para 135)

The Court concluded that the Single Judge had erred by entertaining the writ petition, especially without first deciding the preliminary objection regarding its maintainability and by not fully appreciating the mandatory nature of Section 19 of the MSMED Act once the S.18(2) conciliation stage had been completed.

Final Decision

The Division Bench allowed the Letters Patent Appeals filed by M/s Jagapati Engineers Pvt. Ltd. The common order/judgment dated December 22, 2023, passed by the learned Single Judge was quashed and set aside. Consequently, the writ petitions filed by M/s TRF Limited were dismissed.

The Court, however, reserved liberty for TRF Limited to avail the statutory remedy available under Section 34 of the Arbitration and Conciliation Act, 1996, read with Section 19 of the MSMED Act, 2006, to challenge the Facilitation Council's award, if it so chooses, subject to compliance with the statutory pre-deposit.