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Conciliation and Arbitration under the MSME Act

Distinct and mandatory processes

 

Introduction

With the increasing burden on Civil Courts, the Legislature has, under various statutes, provided that disputing parties first undergo mandatory conciliation or mediation processes prior to initiating arbitration or approaching Civil Courts. The effect of such provisions is that they act as a mandatory pre-cursor to initiation of arbitration or court proceedings. The intent behind these provisions is to reduce the burden on the Civil Courts by filtering out disputes that can be resolved through conciliation or mediation.

MSME Act

One such provision can be found in the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”) whereby any reference to a Micro and Small Enterprises Facilitation Council (“MSME Council”) necessarily requires the MSME Council to initiate a mandatory conciliation process[1]. The provision provides that, in the event conciliation fails, arbitration can be commenced.

Recent Judgment of the Supreme Court

In a recent case[2], the Supreme Court was approached by a party aggrieved by a decision of the MSME Council. On being approached by a small-scale company, the MSME Council had issued notices and summons to one Jharkhand Urja Vikas Nigam Limited (“JUVNL”). On JUVNL’s failure to respond to the notices and summons, the MSME Council decided the reference against JUVNL, and directed JUVNL to make payments, as claimed, within a period of 30 days. The decision of the MSME Council was challenged before the Rajasthan High Court, which challenge came to be dismissed. Aggrieved by this dismissal a further Appeal was filed before the Supreme Court.

In deciding the controversy, the Supreme Court struck down the decisions of the MSME Council and held that the MSME Act provides for conciliation, and it is only when the same is not successful, the MSME Council is empowered to refer the dispute to arbitration on its own or through any other institution. Pertinently, the Supreme Court clarified, that the MSME Council cannot club the two processes of conciliation and arbitration and pass Order for payment, during conciliation. Applying mutatis mutandis, the settled position of law as applicable to private parties, the Court held that if a statute has provided for a dispute resolution mechanism to be followed, the same is to be construed as mandatory and cannot be circumvented by any Authority.

The Supreme Court further explained that there is a fundamental difference between conciliation and arbitration. That is, in conciliation proceedings, the conciliator assists parties to arrive at an amicable settlement. Whereas, in arbitration, an arbitral tribunal adjudicates disputes between the parties.

Further, while interpreting Section 18 of the MSME Act, the Supreme Court held, that the MSME Council was obliged to conduct conciliation for which the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) would apply. In the event conciliation fails and stands terminated, the dispute between the parties will be referred to arbitration. The Supreme Court also rejected the objection, that the remedy available to JUVNL was to apply for setting aside of the decision of the MSME Council, as if, it were an arbitral award. While rejecting this objection, the Supreme Court held that, the decision of the MSME Council was without recourse to arbitration and in disregard of the provisions of the Arbitration and Conciliation Act 1996. Consequently, the decision of the MSME Council was not an arbitral award on account of which, JUVNL was not required to institute proceedings for setting aside of the decision.

Concluding Remarks

The judgment of the Supreme Court is very clear and quite relevant in the alternate dispute resolution mechanism space. Today, India endeavours to champion the cause of start-ups. Thus, strength and clarity in the dispute resolution sphere for MSMEs is imperative. The manner in which the MSME Council had acted in this case was a clear collapse between the concepts of conciliation and arbitration and a gross abdication of the mandatory process contemplated under the MSME Act. If beneficial processes, such as conciliation followed by arbitration, are interpreted in a skewed manner by the MSME Council, the purpose of the MSME Act would stand defeated to the detriment of all concerned.

[1] Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006.

[2] Jharkhand Urja Vikas Nigam Limited vs. The State of Rajasthan, 2021 SCC OnLine SC 1257.

Smiti Tewari

Associate Partner

Satyasrikant Vutha

Senior Associate

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