Supreme Court Clarifies Maintainability of Writ Petitions Against MSEFC Orders in MSME Disputes: Tamil Nadu Cements vs. MSEFC (January 22, 2025)

Introduction

Date of the Judgment: January 22, 2025

The Supreme Court of India is examining whether High Courts can intervene using writ petitions against orders from the Micro and Small Enterprises Facilitation Council (MSEFC). This council handles disputes under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The core issue is whether businesses can bypass the usual appeal process and directly challenge MSEFC orders in High Courts. The decision impacts how disputes involving micro, small, and medium enterprises are resolved.

The bench comprises Chief Justice of India Sanjiv Khanna, Justice Sanjay Kumar, and Justice Manmohan.

Case Background

Tamil Nadu Cements Corporation Limited (TANCEM), a state-owned entity, contracted M/s Unicon Engineers to design, supply, erect, and commission two Electrostatic Precipitators (ESPs) for its Ariyalur cement plant. The contract, valued at Rs. 7.50 crores, was awarded on April 16, 2010.

TANCEM alleges that M/s Unicon Engineers failed to fulfill its obligations, leading to delays and substandard work. Warning letters were issued starting May 16, 2012, and continuing until October 8, 2012. A final request to complete the work was sent on November 16, 2013.

On January 17, 2014, M/s Unicon Engineers filed a petition under Section 18 of the MSMED Act before the MSEFC, claiming Rs. 2,66,80,157 with interest.

Timeline

Legal Framework

Section 18 of the MSMED Act outlines the process for resolving disputes involving amounts due under Section 17. It allows any party to refer the matter to the Micro and Small Enterprises Facilitation Council (MSEFC).

Section 18(1) states:

“Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.”

The Council can either conduct conciliation itself or seek assistance from an institution providing alternate dispute resolution services. The provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 apply to such conciliation.

If conciliation fails, the Council can take up the dispute for arbitration or refer it to an institution for arbitration. The Arbitration and Conciliation Act, 1996 then applies as if the arbitration was in pursuance of an arbitration agreement.

Section 18(4) further clarifies the jurisdiction of the MSEFC:

“Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.”

Every reference made under this section must be decided within ninety days from the date of making such a reference, as per Section 18(5).

Arguments

Appellant’s Arguments (Tamil Nadu Cements Corporation Limited)

• Maintainability of Writ Petition:
  • The appellant contended that the High Court erred in dismissing the writ petition, arguing that the order passed by the MSEFC was without jurisdiction and in violation of the principles of natural justice.
  • They argued that the stringent conditions for challenging an award under the MSMED Act (such as the pre-deposit of 75% of the awarded amount) should not bar the High Court from exercising its writ jurisdiction in exceptional cases where fairness and justice warrant intervention.
  • The appellant emphasized that access to the High Courts via writ petitions under Article 226 is a basic structure of the Constitution and cannot be completely barred by statute.
• Interpretation of MSMED Act and A&C Act:
  • The appellant argued that the MSEFC’s order was not a valid award under the Arbitration and Conciliation Act, 1996, and thus, recourse to Section 34 of the A&C Act was not required.
  • They highlighted the conflict between the judgments in Jharkhand Urja Vikas Nigam Limited v. State of Rajasthan and Others and Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited (Unit 2) and Another, particularly regarding the powers of the MSEFC to act as both conciliator and arbitrator.
• Specific Grievances:
  • The appellant cited the poor performance of the ESPs commissioned by M/s Unicon Engineers and the subsequent costs incurred to rectify the issues.
  • They argued that the MSEFC failed to properly consider the appellant’s objections and concerns regarding the quality of work and delays caused by M/s Unicon Engineers.

Respondent’s Arguments (Micro and Small Enterprises Facilitation Council and Another)

• Statutory Remedy:
  • The respondents likely argued that Section 18 of the MSMED Act provides a statutory remedy for challenging an award under Section 34 of the A&C Act, and therefore, a writ petition is not maintainable.
  • They may have relied on the judgment in M/s India Glycols Limited and Another v. Micro and Small Enterprises Facilitation Council, Medchal – Malkajgiri and Others, which held that a writ petition is not maintainable and recourse must be taken under Section 34 of the A&C Act, requiring a pre-deposit under Section 19 of the MSMED Act.
• Overriding Effect of MSMED Act:
  • The respondents might have contended that the non-obstante clauses in Section 18 of the MSMED Act override any other law, including the A&C Act, allowing the MSEFC to act as both conciliator and arbitrator.
  • They may have cited Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited (Unit 2) and Another to support the argument that the MSMED Act’s provisions override any arbitration agreement between the parties.
• Compliance with MSMED Act:
  • The respondents likely emphasized that the appellant failed to comply with the mandatory deposit requirement under Section 19 of the MSMED Act, which is a prerequisite for challenging the award.

Table of Submissions

Issues Framed by the Supreme Court

1. Whether the ratio in M/s India Glycols Limited that a writ petition could never be entertained against any order/award of the MSEFC, completely bars or prohibits maintainability of the writ petition before the High Court?
2. If the bar/prohibition is not absolute, when and under what circumstances will the principle/restriction of adequate alternative remedy not apply?
3. Whether the members of MSEFC who undertake conciliation proceedings, upon failure, can themselves act as arbitrators of the arbitral tribunal in terms of Section 18 of the MSMED Act read with Section 80 of the A&C Act?

Treatment of the Issue by the Court: “The following table demonstrates as to how the Court decided the issues”

Authorities

The Supreme Court considered the following authorities:

• Jharkhand Urja Vikas Nigam Limited v. State of Rajasthan and Others, (2021) 19 SCC 206 (Supreme Court of India):
  • Legal Point: Interpretation of Section 18(2) and 18(3) of the MSMED Act regarding the powers of the MSEFC.
  • Relevance: The Court had observed that the MSEFC is obliged to conduct conciliation and, upon failure, can initiate arbitration proceedings. It highlighted the fundamental difference between conciliation and arbitration.
  • How Used: The current bench noted a direct confrontation between this judgment and Gujarat State Civil Supplies Corporation Limited.
• Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited (Unit 2) and Another, (2023) 6 SCC 401 (Supreme Court of India):
  • Legal Point: The effect of non-obstante clauses in Section 18(1) and 18(4) of the MSMED Act, and the competence of the MSEFC to act as both conciliator and arbitrator.
  • Relevance: This judgment stated that the MSEFC can act as a conciliator and then as an arbitrator, overriding any other law, including the A&C Act.
  • How Used: The current bench highlighted the conflict between this judgment and Jharkhand Urja Vikas Nigam Limited.
• M/s India Glycols Limited and Another v. Micro and Small Enterprises Facilitation Council, Medchal – Malkajgiri and Others, 2023 SCC OnLine SC 1852 (Supreme Court of India):
  • Legal Point: Maintainability of writ petitions under Articles 226/227 of the Constitution against orders of the MSEFC, and the recourse to Section 34 of the A&C Act.
  • Relevance: This judgment held that a writ petition is not maintainable and the only recourse is under Section 34 of the A&C Act, requiring a deposit under Section 19 of the MSMED Act.
  • How Used: The current bench expressed reservations on the dictum in this judgment.
• Whirlpool Corporation v. Registrar of Trade Marks, Mumbai and Others, (1998) 8 SCC 1 (Supreme Court of India):
  • Legal Point: Exceptions to the rule of alternative remedy in writ jurisdiction.
  • Relevance: Established that the existence of an alternative remedy does not affect the High Court’s jurisdiction to issue a writ, especially in cases of violation of natural justice, lack of jurisdiction, or challenge to the vires of an Act.
  • How Used: Cited to support the argument that writ jurisdiction can be exercised in exceptional cases.
• Harbanslal Sahnia and Another v. Indian Oil Corporation and Others, (2003) 2 SCC 107 (Supreme Court of India):
  • Legal Point: The rule of exclusion of writ jurisdiction is a rule of discretion, not of compulsion.
  • Relevance: Reiterated that in appropriate cases, writ courts can exercise jurisdiction despite the availability of an alternative remedy, particularly when there are peculiar circumstances.
  • How Used: Cited to reinforce the principle that writ jurisdiction can be invoked in exceptional circumstances.
• Radha Krishan Industries v. State of Himachal Pradesh and Others, (2021) 6 SCC 771 (Supreme Court of India):
  • Legal Point: Principles governing the exercise of writ jurisdiction under Article 226 of the Constitution.
  • Relevance: Summarized the key principles, including the discretion of the High Court, exceptions to the rule of alternative remedy, and the rule of exhaustion of statutory remedies.
  • How Used: Cited to provide a comprehensive overview of the principles governing writ jurisdiction.
• Himmatlal Harilal Mehta v. State of Madhya Pradesh and Others, (1954) 1 SCC 405 (Supreme Court of India):
  • Legal Point: The principle that the High Court should not issue a prerogative writ when an alternative remedy is available may not apply when the remedy is onerous and burdensome.
  • Relevance: Established that an alternative remedy must be equally efficacious and adequate.
  • How Used: Cited to support the argument that stringent pre-deposit conditions can make an alternative remedy onerous.
• Shyam Kishore and Others v. Municipal Corporation of Delhi and Another, (1993) 1 SCC 22 (Supreme Court of India):
  • Legal Point: Validity of provisions banning entertainment of appeal when taxes are not paid, and the scope of the right to file a writ petition.
  • Relevance: Discussed the balance between compelling payment of taxes and avoiding unreasonable restrictions on the right to appeal.
  • How Used: Cited to analyze the impact of pre-deposit requirements on the right to appeal and the availability of writ jurisdiction.
• Govind Parameswar Nair and Others v. Municipal Corporation of Greater Bombay and Others, (2001) 9 SCC 166 (Supreme Court of India):
  • Legal Point: Interpretation of provisions related to pre-deposit requirements for appeals.
  • Relevance: Agreed with the interpretation given in Shyam Kishore.
  • How Used: Cited to reinforce the principles established in Shyam Kishore.
• Tecnimont Private Limited v. State of Punjab and Others, (2021) 12 SCC 477 (Supreme Court of India):
  • Legal Point: Alternative remedy where the disputed amount is required to be deposited to avail the statutory remedy.
  • Relevance: Acknowledged the divergence of opinion and the efforts to provide support in cases involving extreme hardship.
  • How Used: Cited to highlight the ongoing debate regarding alternative remedies and pre-deposit requirements.

Decision

Given the conflicting precedents and the significant legal questions involved, the Supreme Court deemed it appropriate to refer the matter to a larger bench. The Court noted the direct confrontation between the judgments in Jharkhand Urja Vikas Nigam Limited and Gujarat State Civil Supplies Corporation Limited, as well as reservations on the dictum in M/s India Glycols Limited.

The Court framed three key issues for consideration by the larger bench:

1. Whether the ratio in M/s India Glycols Limited that a writ petition could never be entertained against any order/award of the MSEFC, completely bars or prohibits maintainability of the writ petition before the High Court?
2. If the bar/prohibition is not absolute, when and under what circumstances will the principle/restriction of adequate alternative remedy not apply?
3. Whether the members of MSEFC who undertake conciliation proceedings, upon failure, can themselves act as arbitrators of the arbitral tribunal in terms of Section 18 of the MSMED Act read with Section 80 of the A&C Act?

The decision to refer the matter to a larger bench underscores the importance of resolving the conflicting interpretations of the MSMED Act and the A&C Act, and of clarifying the scope of writ jurisdiction in the context of MSEFC orders.

Implications

The Supreme Court’s decision to refer the matter to a larger bench has significant implications for both Micro, Small, and Medium Enterprises (MSMEs) and larger corporations involved in disputes under the MSMED Act.

• For MSMEs:
  • Access to Justice: The decision will clarify whether MSMEs have direct access to High Courts via writ petitions or if they must strictly adhere to the statutory remedy under Section 34 of the A&C Act.
  • Expedited Resolution: If writ petitions are deemed maintainable in certain circumstances, MSMEs may have a faster route to resolving disputes compared to the lengthy arbitration and appeal processes.
  • Financial Burden: The clarification on pre-deposit requirements will impact the financial burden on MSMEs seeking to challenge MSEFC orders.
• For Larger Corporations:
  • Legal Certainty: The decision will provide greater legal certainty regarding the avenues for challenging MSEFC orders and the scope of High Court intervention.
  • Strategic Considerations: Corporations will need to reassess their dispute resolution strategies based on the clarified legal framework.
  • Compliance: The decision will impact compliance requirements, particularly regarding pre-deposit obligations and adherence to statutory remedies.

The larger bench’s ruling will shape the landscape of MSME dispute resolution, balancing the need for efficient and fair resolution mechanisms with the constitutional rights of parties involved.