Why Section 34 (A&C Act) Challenge is Not Efficacious for MSME Awards? Making a Case Exercise of Article 227

Introduction

Article 227 of the Constitution¹ provides original and supervisory jurisdiction to a High Court to exercise “superintendence over all courts and tribunals throughout the territories in relation to which it exercises jurisdiction (except a court formed under a law related to armed forces)”. The scope of the power of Article 227 of the Constitution is well established. As a matter of self-imposed rule, the Courts have not invoked the jurisdiction under Article 227 when there is an alternate remedy or to correct mere errors of fact or law or evidence but to keep the subordinate courts/forums within the bounds of their authority and to correct findings totally contrary to the evidence.²

Accordingly, it follows that the invocation of Article 227 of the elation to the disputes under the Arbitration and Conciliation Act, 1996³ (the A&C Act) cannot be done as a matter of routine. Even a challenge to award is based on limited grounds under Section 34 of the A&C Act⁴, the A&C Act being a special law, and a self-contained Code in itself in relation to arbitration. More importantly, the statute is tailored for expeditious disposal, and any interference by the Court outside the realm of the A&C Act, is loathed. However, being a constitutional provision, there can be no absolute bar to use Article 227 in all situations, including under the A&C Act. The observations of the Supreme Court in Deep Industries Ltd. v. ONGC⁵ are apposite in this regard and quoted below:

17. … there is no doubt whatsoever that if petitions were to be filed under Articles 226⁶/227 of the Constitution against orders passed in appeals under Section 37⁷, the entire arbitral process would be derailed and would not come to fruition for many years….

However, the Supreme Court clearly held that despite the above restriction, there cannot be an absolute bar on constitutional remedies and further observed as under:

17. … At the same time, we cannot forget that Article 227 is a constitutional provision which remains untouched by the non obstante clause of Section 5 of the Act⁸. In these circumstances, what is important to note is that though petitions can be filed under Article 227 against judgments allowing or dismissing first appeals under Section 37 of the Act, yet the High Court would be extremely circumspect in interfering with the same, taking into account the statutory policy as adumbrated by us hereinabove so that interference is restricted to orders that are passed which are patently lacking in inherent jurisdiction.⁹

Relying on Deep Industries¹⁰, the Supreme Court in Bhaven Construction v. Sardar Sarovar Narmada Nigam Ltd.¹¹held that:

18. … It is, therefore, prudent for a Judge to not exercise discretion to allow judicial interference beyond the procedure established under the enactment. This power needs to be exercised in exceptional rarity, wherein one party is left remediless under the statute, or a clear “bad faith” shown by one of the parties. This high standard set by this Court is in terms of the legislative intention to make the arbitration fair and efficient.

Thus, it is important to understand the restrictions on Article 227 are self-imposed and as a means to not stultify the statutory processes or speedy disposal where alternate efficacious remedies lie.

Given the aforesaid scope, we endeavour to examine whether the standard of interference under Article 227 remains the same under Section 34 of the A&C Act, even when an arbitration is concocted under the Micro, Small and Medium Enterprises Development Act, 2006 (the MSME Act)¹².

Dispute resolution scheme of MSME Act: Link with the A&C Act

Under Section 18(3) of the MSME Act¹³, in case of failure of conciliation, a Micro and Small Enterprises Facilitation Council (MSEFC) can take up the dispute for arbitration or refer it to any institution or centre for arbitration and the provisions of A&C Act apply as if the arbitration was in pursuance of an arbitration agreement under Section 7(1) of the A&C Act.¹⁴

Precondition of deposit to maintain Section 34 challenge for MSME Act: Challenges

Section 19 of the MSME Act¹⁵, inter alia, provides that an award rendered subsequent to the said reference under Section 18(3) cannot be challenged by a supplier without a prior deposit of 75 per cent of the decretal amount. The decretal amount may also include the interest awarded at three times the bank rate compounded monthly calculated after 45 days from the acceptance of the services under Sections 15¹⁶ and 16¹⁷ of the MSME Act.

Under these circumstances, a Section 34 Court has different powers in a MSME award case. In a challenge to an arbitration simpliciter, if a Section 34 Court is convinced that the award is perverse, prima facie or causes hardship to the applicant petitioner, it can grant absolute stay, without any condition for deposit. However, since Section 19 imposes a precondition for deposit of 75 per cent for maintainability of the objection under Section 34 itself, the court cannot go into the merits of the case in a challenge to MSME award before such deposit is made.

Judicial interpretation of the mandatory deposit

A similar precondition for deposit of 75 per cent of the claim raised in the notice of demand under Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002¹⁸ was struck down as unconstitutional by the Supreme Court in Mardia Chemicals Ltd. v. Union of India¹⁹. While doing so, the Court had observed as under:

80. … the requirement of deposit of 75% of the amount claimed before entertaining an appeal (petition) under Section 17 of the Act is an oppressive, onerous and arbitrary condition against all the canons of reasonableness. Such a condition is invalid, and it is liable to be struck down….

However, the constitutionality of the mandatory deposit under Section 19 of the Act was upheld by the Kerala High Court in KSRTC v. Union of India²⁰, which distinguished Mardia Chemicals²¹.

The special leave petitions filed before the Supreme Court against the aforesaid Kerala High Court judgment were dismissed and the said decision was also quoted approvingly by the Supreme Court in Goodyear (India) Ltd. v. Norton Intech Rubbers (P) Ltd.²² and the mandatory nature of the deposit and lack of any discretion under Section 19 of the MSME Act for maintaining a challenge to the award was upheld. The Supreme Court further approved Goodyear²³ in Gujarat State DisasterManagement Authority v. Aska Equipments Ltd.²⁴ and Tirupati Steels v. Shubh Industrial Component²⁵. The observations of the Supreme Court in Tirupati Steels²⁶ are determinative and reproduced below:

8. The question which is posed for consideration of this Court is, whether, the predeposit of 75% of the awarded amount as per Section 19 of the MSMED Act, 2006, while challenge to the award under Section 34 of the Arbitration and Conciliation Act, 1996, is made mandatory or not, is now no longer res integra in view of the decision of this Court in Gujarat State Disaster Management Authority v. Aska Equipments Ltd.²⁷ While interpreting Section 19 of the MSMED Act, 2006 and after taking into consideration the earlier decision of this Court in Goodyear (India) Ltd. v. Norton Intech Rubbers (P) Ltd.²⁸, it is observed and held that the requirement of deposit of 75% of the amount in terms of the award as a predeposit as per Section 19 of the MSMED Act, is mandatory. It is also observed that however, at the same time, considering the hardship which may be projected before the appellate court and if the appellate court is satisfied that there shall be undue hardship caused to the appellant applicant to deposit 75% of the awarded amount as a predeposit at a time, the court may allow the predeposit to be made in instalments.

Scope of Section 34 A&C in relation to MSME and non-MSME award: Difference

If an award simpliciter is passed, where there is patent lack of jurisdiction or complete denial of principles of natural justice, or the tribunal is coram non judice, and a Section 34 the Court, if it is prima facie satisfied about the merits of any of the aforesaid grounds, is able to grant relief and stay the operation of the award and no recourse to any other remedy including Article 227 is justified.

However, given the position of law, in MSME award cases, the Court has been denuded of the judicial power to even hear the appeal without a primary deposit of 75 per cent of the amount due (which includes principal and pre-award, pendente lite and post-award interest at three times the bank rate). This may be deleterious in cases where the purchaser of services is also a small corporation of MSME itself. In such cases, the process of predeposit may itself become a punishment on MSME and the petitioner may be required to take a loan or get wound up in case, it cannot arrange the funds for maintaining an application under Section 34 of the A&C Act.

Analysis: Making a case for exercise of Article 227 in MSME awards in appropriate facts

There is no gainsaying in stating that a High Court under Article 227 can exercise power wherein a subordinate court/tribunal below has exercised its jurisdiction in a palpably erroneous manner or there has been an inadvertent failure on behalf of subordinate courts which results into serious and irreparable prejudice to one of the parties. A Section 34 court cannot go into question without a 75 per cent deposit since the predeposit is a prerequisite for maintaining the objection itself. Whether irreparable prejudice is caused to a party, is a question of fact for the purposes of exercise of jurisdiction under Article 227, which can be done only basis the pleadings, as to why the statutory remedy is not efficacious. To persuade the court to exercise its discretionary jurisdiction under Article 227, a petitioner, by way of cogent pleadings, should be able to demonstrate, as to why the statutory forum is not equally efficacious.²⁹

Section 34 of the A&C Act is not efficacious for awards passed under the MSME Act in view of pre-deposit clause. In a non-MSME award, a Section 34 court can grant absolute interim relief to the aggrieved, and there is no justifiable reason to approach the High Court since the remedy under Section 34 is equally efficacious. However, by requiring a condition for a predeposit of 75 per cent in all cases, the remedy is not efficacious when the MSME award is challenged on jurisdictional errors, such as lack of prerequisites for fair hearing or lack of jurisdiction, principles of natural justice, etc.

Whether, a mandatory imposition of 75 per cent causes irreparable prejudice and harm to the judgment-debtor is a question, which needs to be decided on a case-to-case basis, and if the petitioner under Article 227 is able to convince the court of its inability to pay and show palpable jurisdictional errors in the MSME award, there is no reason why the court should not exercise jurisdiction.

As stated above, Article 227 being a constitutional provision is plenary in nature and thus must be looked at, as an aid to correct the grave injustice, if any, which results from an award carried out by award borne out of reference made under Section 18 of the MSME Act, 2006. Although the High Courts under Article 227 are not vested with unlimited prerogative to correct however, the scope is wide to correct grave injustice and flagrant violation of principles of fundamental rights, which should not be perpetuated by insisting on a statutory remedy with a heavy predeposit. However, if no such grounds exist and the case is found meritless, a person challenging the MSME award can be relegated to avail the remedy under A&C Act, 1996 after paying the mandatory deposit.

As remedy under Section 34 of the A&C Act is not efficacious in such cases, such challenges to MSME award ought to be considered as “extreme situations” for the purposes of Article 227 of the Constitution, which otherwise may not be so for a non-MSME award otherwise. Under Article 227, a High Court should be open to look into the facts, prima facie, in all MSME award cases, which can be unsustainable and thus quash the award, if it finds so, without insisting for any deposit.

Such exercise of Article 227 is also necessary, as Section 34 court being creature of a statute, through a mandatory deposit requirement of 75 per cent, has been denuded by Parliament from exercising the judicial power of grant of stay (without insisting for a deposit in case of MSME award), even though, it may be prima facie, convinced with the merits of the objections. Since Section 34 Court cannot grant interim relief even it is convinced that the award is liable to be set aside, the remedy cannot be said to efficacious by any means. In such cases, Article 227, being summary in nature, can come to the rescue of the person aggrieved by the MSME award.

Thus, for the reasons stated above, we conclude that a High Court should have a more liberal view in considering challenge under Article 227 of the Constitution in relation to MSME awards in contradistinction to an award rendered under an arbitration agreement simpliciter.