The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMEAct”), was enacted to facilitate the growth and development of micro, small and medium enterprises (“MSME”). Section 18 of the MSME Act provides for a recourse to an MSME to recover its dues in a seamless and expeditious manner by making a reference to the Micro and Small Enterprises Facilitation Council (“Council”). Section 18 has two distinct limbs, conciliation first and then if unsuccessful, arbitration. The Council is vested with the power to conduct the conciliation and arbitration proceedings on its own or through an external institution or centre. However, in both instances, the provisions of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) are applicable.
It is increasingly common now to observe disputes filed before the Council, commencing with a notice to participate in conciliation, soon followed by an Award being passed by the same person/authority assigned by the Council to conciliate the dispute. Often, the Award is passed on the day assigned for appearance of the opposing party in the conciliation proceedings, after two or three attempts to serve the summons. Owing to their failure to appear, a mechanical order is passed upholding the claim of the MSME. The conciliation proceedings are never formally terminated, no fresh notice of arbitration is intimated to the opposing party and no statement of claims or evidence is led to substantiate the claim.
This procedure is fundamentally flawed for three primary reasons.Firstly, a conciliator cannot act as an arbitrator in the same dispute. This is specifically barred under Section 80 of the Arbitration Act.Further, a conciliation proceeding must formally close and fresh notice must be issued to the parties, intimating the commencement of the arbitration. This is imperative, particularly from the point of view that participation in conciliation is entirely voluntary and consensual. In conciliation, the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the Arbitral Tribunal/ arbitrator adjudicates the disputes between the parties. If the proceedings are suddenly shifting from the nature of conciliation to arbitration, then the consequences that could flow to a party are diametrically opposite. Lastly, an arbitration must be conducted as contemplated under the Arbitration Act, by calling upon a party to file a statement of claim and defence and establish its claim by leading evidence.
A similar circumstance arose for the Supreme Court’s consideration in Jharkhand Urja Vikas Nigam Limited v State of Rajasthan & Ors, (2021) 19 SCC 206. In that case as well, owing to the non-appearance of the opposing party during the conciliation process, an award was passed directing the opposing party to make certain payments. The Supreme Court observed that the Council may arbitrate and pass an award, only after following the procedure under the relevant provisions of the Arbitration Act, particularly Sections 20, 23, 24, 25, which inter alia require the filing of a statement of claim and defence. The Court held that if a party fails to appear at the conciliation stage, the Council could at best record the failure of conciliation and proceed to initiate arbitration in accordance with the relevant provisions of the Arbitration Act. Proceedings for conciliation and arbitration cannot be clubbed.
The Supreme Court further observed that since the mandatory provisions of the MSME Act and the Arbitration Act were not followed, the order was a nullity and there was no arbitral award in the eyes of the law. Owing to the same, the Petitioner therein was exempted from challenging the order under Section 34 of the Arbitration Act and was permitted to directly assail the order under a writ petition.
Therefore, it is essential that the Council is cautious in disposing these disputes in line with the above legal requirements. A failure to observe these procedural requirements will invariably result in the proceedings/orders passed therefrom being stayed for lengthy periods by a High Court and ultimately being quashed. This causes harm to MSME’s for no fault of their own, in what is designed to be a beneficial legislation for them.
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