When a Micro and Small Enterprises Facilitation Council (MSEFC) passes an award against a buyer under the MSME Samadhan mechanism, the buyer faces a steep hurdle. Specifically, Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) requires buyers to deposit 75% of the awarded amount upfront. No court will entertain their challenge without this deposit.
This mandatory pre-deposit requirement under the MSME Samadhan framework has become one of the most debated provisions in Indian commercial law. Indeed, recent judicial developments have made it virtually impossible for buyers to sidestep this obligation.
In this guide, we examine how the 75% pre-deposit rule operates in MSME Samadhan proceedings and why courts have reinforced its mandatory nature. Additionally, we explore what strategies buyers and suppliers should adopt after recent Supreme Court and High Court rulings.
Understanding the MSMED Act Framework: Sections 15 to 19
Before examining the 75% rule, it helps to understand the statutory framework that supports it. The MSMED Act creates a complete ecosystem for protecting small suppliers against delayed payments from larger buyers.
The Payment Timeline Under Section 15
Section 15 of the MSMED Act mandates that every buyer must pay the supplier on or before the agreed date. Importantly, this agreed date cannot exceed 45 days from the acceptance of goods or services. If no date has been agreed upon, the buyer must pay within 15 days. Essentially, Parliament designed this strict timeline to address the chronic cash-flow problems that small businesses face.
Compound Interest Under Section 16
When a buyer fails to pay within the prescribed period, Section 16 imposes compound interest at three times the bank rate notified by the Reserve Bank of India. Notably, this interest compounds monthly — not annually. For instance, if the RBI bank rate stands at 6.5%, the applicable interest rate becomes 19.5% per annum, compounding monthly. Consequently, even modest delays can generate substantial interest liability for buyers.
The Non-Obstante Clause Under Section 24
Section 24 of the MSMED Act contains a non-obstante clause. This clause gives the Act overriding effect over other laws. In Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2022), the Supreme Court confirmed that Chapter V overrides the Arbitration and Conciliation Act, 1996. Therefore, even if the buyer and supplier have a separate arbitration agreement, either party can still approach the MSEFC under Section 18.
How the MSEFC Dispute Resolution Process Works
The MSEFC serves as a specialised forum for resolving delayed payment disputes between suppliers and buyers. Understanding this process clarifies why the 75% rule carries such significance.
Stage 1: Conciliation Under Section 18(2)
When a supplier files a reference before the MSEFC, the Council first attempts conciliation under Sections 65 to 81 of the Arbitration and Conciliation Act, 1996. If both parties reach a settlement, the Council records it. Subsequently, that settlement becomes binding on both parties.
Stage 2: Arbitration Under Section 18(3)
If conciliation fails, the MSEFC itself takes on the role of arbitrator. Notably, in Gujarat State Civil Supplies Corporation (2022), the Supreme Court addressed the statutory bar under Section 80 of the Arbitration Act. This provision normally prevents a conciliator from acting as arbitrator. However, the Court held that Sections 18 and 24 of the MSMED Act supersede this bar. Accordingly, the Council can legitimately conduct both conciliation and arbitration proceedings.
Stage 3: The Award and Its Consequences
Once the MSEFC passes an award, the buyer faces immediate consequences. The award carries the force of a decree and becomes enforceable. Additionally, the compound interest under Section 16 continues to accrue until full payment. This creates powerful financial pressure on buyers to comply promptly.
Section 19: The 75% Pre-Deposit Rule Explained
Section 19 of the MSMED Act creates a clear statutory bar. No application for setting aside any decree, award, or order of the MSEFC shall be entertained by any court. The only exception arises when the appellant (not being a supplier) deposits 75% of the awarded amount.
Why Parliament Introduced This Provision
Parliament enacted Section 19 with a clear policy objective. Small businesses depend on timely payments for their survival. Without the pre-deposit requirement, buyers could file frivolous challenges to delay enforcement indefinitely. By requiring 75% upfront, the legislature ensured that suppliers receive substantial relief even while litigation continues. Furthermore, this provision deters buyers from using the judicial process merely as a delay tactic.
The Mandatory Nature: Silpi Industries (2021)
The Supreme Court in M/s Silpi Industries v. Kerala State Road Transport Corporation (2021) examined the interplay between the MSMED Act’s protective provisions and the Arbitration Act. Specifically, the Court emphasised that the 75% pre-deposit requirement serves as a crucial safeguard for MSME sellers. It observed that allowing buyers to circumvent this requirement would undermine the beneficial provisions that Parliament specifically designed to protect small enterprises.
Can Courts Waive the 75% Requirement?
The Supreme Court has addressed this question directly. Courts cannot waive the 75% deposit because Section 19 uses mandatory language. However, one limited concession exists.
If the court finds that depositing 75% at once would cause undue hardship, it may permit instalments. Importantly, this does not reduce the total amount — it merely allows staged payment. The buyer must still complete the full 75% before the court hears the challenge.
Recent Judicial Developments That Have Tightened the Rule
Several landmark rulings between 2022 and 2025 have progressively strengthened the 75% pre-deposit requirement. These decisions have eliminated most avenues that buyers previously used to bypass the rule.
India Glycols Ltd. v. MSEFC (2024 AIR SC 285)
In this three-judge bench decision, the Supreme Court categorically barred writ petitions under Articles 226 and 227 against MSEFC awards. The Court held that entertaining writ petitions would allow buyers to circumvent the mandatory 75% pre-deposit. Specifically, it observed that permitting buyers to challenge MSEFC orders through writ jurisdiction — without making the pre-deposit — would defeat the object and purpose of the MSMED Act.
This ruling effectively closed the most popular escape route that buyers had relied upon. Before India Glycols, many buyers filed writ petitions directly in High Courts to avoid the 75% deposit. After this decision, the only remedy available to a buyer lies under Section 34 of the Arbitration Act. Naturally, the mandatory 75% pre-deposit still applies.
The Conflicting View: Jharkhand Urja Vikas Nigam v. MSEFC
However, a two-judge Supreme Court bench in Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan took a different approach. In that case, the MSEFC had bypassed the mandatory conciliation-arbitration procedure under Section 18. The buyer received no opportunity to participate in arbitration. Consequently, the Court held that the impugned order was not a valid arbitral award. Therefore, recourse to Section 34 was not required, and the writ petition was maintainable.
This created a narrow exception. When the MSEFC passes an order without following proper procedure under Section 18, the resulting order may not qualify as an arbitral award. Accordingly, a writ petition may lie without the 75% deposit requirement in such situations.
Tamil Nadu Cements Corporation v. MSEFC (2025 INSC 91)
Recognising this conflict, a three-judge bench of the Supreme Court referred the matter to a five-judge Constitution Bench on 22 January 2025. The Court framed four critical questions for the larger bench to resolve.
First, whether a writ petition under Article 226 is maintainable against an MSEFC order. Second, whether India Glycols operates as an absolute bar on writ jurisdiction. Third, whether an exception applies when the statutory remedy imposes an onerous financial burden. Fourth, whether the Council’s dual role as conciliator and arbitrator violates natural justice principles.
Currently, this reference remains pending before the Constitution Bench. Until the five-judge bench delivers its verdict, the law remains in a state of flux. Nevertheless, the 75% pre-deposit under Section 19 continues to apply for all Section 34 challenges.
Madras High Court: Deposit Timing and Limitation (November 2025)
The Madras High Court delivered a particularly significant ruling in Solar Design Pvt. Ltd. (November 2025). This case examined the interplay between Section 19 of the MSMED Act and Section 34(3) of the Arbitration Act. Crucially, the Court held that a Section 34 petition is deemed filed only on the date the buyer actually makes the 75% deposit — not on the physical filing date.
This ruling carries enormous practical consequences. Section 34(3) prescribes a strict three-month limitation period (plus a maximum 30-day extension) for challenging arbitral awards. Previously, buyers would file the petition within the limitation period and arrange the deposit later. The Madras High Court firmly rejected this strategy. Accordingly, buyers must now arrange the 75% deposit before or simultaneously with filing.
In practical terms, this means that a buyer who receives an MSEFC award on 1 January must deposit 75% and file the Section 34 petition by 1 April at the latest. Mere filing without the deposit does not stop the limitation clock.
Calcutta High Court: “Stillborn” Petition Without Deposit
Similarly, the Calcutta High Court reinforced this position. It held that a Section 34 application filed without the 75% pre-deposit remains “stillborn” for obtaining a stay. In other words, the court will not even consider granting an interim stay until the buyer completes the deposit.
Practical Impact on Buyers
Overall, the cumulative effect of these judicial developments creates a formidable challenge for buyers who wish to contest MSEFC awards. Understanding these practical consequences helps buyers plan their response strategy effectively.
Financial Burden
Consider a typical scenario. The MSEFC passes an award of ₹1 crore against a buyer, including compound interest under Section 16. To challenge this award, the buyer must arrange ₹75 lakh as a pre-deposit. For many buyers, assembling this amount within three months poses a significant financial challenge.
Time Pressure
After the Madras High Court ruling in Solar Design, buyers face intense time pressure. They must simultaneously arrange funds, prepare the Section 34 petition on merits, and file everything within three months. Previously, buyers had the luxury of filing first and depositing later. That option no longer exists in jurisdictions following the Madras High Court’s reasoning.
Limited Grounds for Challenge
Even after making the 75% deposit, buyers face restricted grounds under Section 34 of the Arbitration Act. The court does not re-examine the merits. Instead, it only examines specific grounds: invalidity of the arbitration agreement, lack of proper notice, the award exceeding the scope of arbitration, or violation of Indian public policy.
Strategic Guidance for Suppliers
Suppliers who obtain favourable MSEFC awards should adopt proactive enforcement strategies to maximise their advantage under the current legal framework.
Immediate Execution
After the MSEFC passes an award, the supplier should promptly initiate execution proceedings. If the buyer fails to deposit 75% and challenge within the limitation period, the award becomes final. Indeed, every day of delay by the buyer works in the supplier’s favour because compound interest continues to accrue.
Monitoring Writ Petitions
Despite the India Glycols ruling, some buyers may still attempt writ petitions in High Courts. Suppliers should remain vigilant and raise the India Glycols bar at the earliest opportunity. By citing the three-judge bench ruling, suppliers can seek dismissal of such writ petitions at the threshold stage itself.
Registration on SAMADHAAN Portal
The MSME SAMADHAAN (Delayed Payment Monitoring System) portal allows suppliers to file delayed payment complaints online. Filing on SAMADHAAN creates an official record that strengthens the supplier’s position. Moreover, the government uses SAMADHAAN data to identify chronic defaulters and take administrative action.
Strategic Guidance for Buyers
Buyers facing MSEFC awards need a well-planned response strategy that accounts for the 75% deposit requirement from the outset.
Early Legal Assessment
Upon receiving an MSEFC award, the buyer should immediately assess whether viable grounds exist under Section 34. If the award suffers from procedural irregularities — such as the MSEFC failing to follow Section 18 procedure — the buyer may have stronger grounds. Conversely, if the award appears procedurally sound, the buyer should weigh the cost of the 75% deposit against the likelihood of success.
Arrange Funds Promptly
Given the Madras High Court’s ruling that limitation runs from the deposit date, buyers must treat fund arrangement as their first priority. Waiting until the last week to arrange funds is no longer viable. Furthermore, buyers should explore whether their court may permit instalment deposits, though this relief remains discretionary.
Consider Settlement
In many cases, negotiating a settlement proves more cost-effective than depositing 75% and pursuing a Section 34 challenge. The total litigation cost — including deposit, legal fees, compound interest, and failure risk — often exceeds the original award amount. Accordingly, early settlement discussions can save buyers significant time and money.
Monitor the Five-Judge Bench Decision
The pending Tamil Nadu Cements Corporation reference before the five-judge Constitution Bench could significantly alter the legal landscape. If the larger bench carves out exceptions to the India Glycols bar, buyers may gain an alternative avenue without the 75% deposit. Consequently, buyers should closely monitor this case for any developments.
Frequently Asked Questions
1. What is the 75% rule under Section 19 of the MSMED Act?
Section 19 of the MSMED Act requires that any buyer (not being a supplier) who wishes to challenge an MSEFC decree, award, or order must first deposit 75% of the awarded amount with the court. No court can entertain the challenge without this mandatory pre-deposit.
2. Can a court waive the 75% pre-deposit requirement?
No, courts cannot waive the 75% deposit because Section 19 uses mandatory language. However, if the buyer demonstrates undue hardship, the court may allow the deposit in instalments. The total amount remains 75% of the award.
3. What happens if a buyer files a Section 34 petition without making the 75% deposit?
Following the Madras High Court ruling in Solar Design (November 2025) and the Calcutta High Court’s “stillborn” observation, a Section 34 petition filed without the 75% deposit is not considered validly filed. The limitation period continues to run, and the court will not grant any interim stay.
4. What is the limitation period for challenging an MSEFC award?
Under Section 34(3) of the Arbitration and Conciliation Act, the buyer must file the challenge within three months from receiving the award. The court may extend this by a further 30 days if satisfied that sufficient cause prevented timely filing. No extension beyond this 30-day period is possible.
5. Can a buyer file a writ petition to avoid the 75% deposit?
The Supreme Court in India Glycols Ltd. v. MSEFC (2024 AIR SC 285) held that writ petitions under Articles 226/227 should not be entertained against MSEFC awards. However, the five-judge Constitution Bench reference in Tamil Nadu Cements Corporation (2025 INSC 91) may revisit this position. Until the larger bench decides, the India Glycols bar remains operative.
6. What interest rate applies to delayed MSME payments?
Section 16 of the MSMED Act prescribes compound interest at three times the RBI bank rate, compounding monthly. If the RBI bank rate is 6.5%, the applicable rate becomes 19.5% per annum with monthly compounding.
7. Can the MSEFC act as both conciliator and arbitrator?
Yes. In Gujarat State Civil Supplies Corporation v. Mahakali Foods (2022), the Supreme Court held that the bar under Section 80 of the Arbitration Act (preventing a conciliator from acting as arbitrator) stands superseded by Sections 18 and 24 of the MSMED Act.
8. What is the maximum payment period a buyer can agree to under the MSMED Act?
Under Section 15, the agreed payment period cannot exceed 45 days from the date of acceptance of goods or services. If no period has been agreed, the buyer must pay within 15 days.
9. What are the four questions referred to the five-judge Constitution Bench?
The Tamil Nadu Cements Corporation reference asks: (a) whether writs under Article 226 are maintainable against MSEFC orders; (b) whether India Glycols operates as an absolute bar; (c) whether alternative remedy exceptions apply when the statutory remedy is onerous; and (d) whether the Council’s dual role as conciliator and arbitrator violates natural justice.
10. Does the 75% rule apply if the MSEFC did not follow proper procedure?
This remains an open question. In Jharkhand Urja Vikas Nigam, the Supreme Court held that when the MSEFC bypasses Section 18 procedure, the resulting order is not a valid arbitral award. Accordingly, a writ petition may be maintainable without the 75% deposit. However, the five-judge bench may clarify this issue.
11. What is the SAMADHAAN portal and how does it help MSME suppliers?
SAMADHAAN is the government’s online Delayed Payment Monitoring System that allows MSME suppliers to file delayed payment complaints against buyers. Filing on this portal creates an official record that strengthens the supplier’s position in MSEFC proceedings and helps the government track chronic defaulters.
About the Author
Advocate Suresh Kumar is the founder of Aran Law Firm, a Chennai-based legal practice specialising in intellectual property, civil litigation, corporate advisory, and MSME dispute resolution. With over 15 years of experience at the Bar, he is enrolled with the Bar Council of Tamil Nadu and Puducherry. He regularly advises startups, MSMEs, and established businesses on commercial disputes, trademark protection, and regulatory compliance.
For legal consultations, reach out through Aran Law Firm.
Disclaimer
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