Supreme Court Clarifies MSMED Act Procedure: Vijeta Construction vs. Indus Smelters Ltd. (2021)

Date of the Judgment: 23 September 2021
Citation: Civil Appeal No. 5934 of 2021
Judges: M. R. Shah, J. and A. S. Bopanna, J.
Can a Facilitation Council under the MSMED Act dismiss an application for lack of jurisdiction without following the mandated procedure for conciliation and arbitration? The Supreme Court addressed this critical question in a recent judgment, clarifying the steps required for dispute resolution under the MSMED Act. The Court emphasized the dual role of the Facilitation Council, first as a conciliator and then, if conciliation fails, as an arbitrator. This judgment clarifies the procedure to be followed under Section 18 of the MSMED Act. The bench comprised Justices M. R. Shah and A. S. Bopanna.

Case Background

M/s Indus Smelters Ltd. (the respondent), a supplier of TMT bars, claimed that M/s Vijeta Construction (the appellant) owed them Rs. 1,20,42,846 out of a total supply of Rs. 2,44,92,846. After failing to resolve the dispute, the respondent approached the Micro, Small and Medium Enterprises Facilitation Council (Facilitation Council) under the MSMED Act.

The Facilitation Council, on 10 January 2012, closed the proceedings, stating it lacked the jurisdiction to conduct a thorough inquiry or take evidence to decide the truth of the challenged documents. The Facilitation Council stated that the parties were free to approach a competent court.

Aggrieved, the respondent filed a writ petition before the High Court of Chhattisgarh at Bilaspur. The High Court dismissed the petition, holding that the Facilitation Council’s order was an “award” under Section 18 of the MSMED Act, and hence, appealable under Section 34 of the Arbitration and Conciliation Act, 1996 (Arbitration Act). The High Court stated that the order was amenable to appeal before the district court.

The appellant then appealed to the Supreme Court against the High Court’s decision.

Timeline

Course of Proceedings

The High Court of Chhattisgarh at Bilaspur dismissed the writ petition filed by the respondent, stating that the order passed by the Facilitation Council was an award under Section 18 of the MSMED Act. The High Court held that the order was appealable under Section 34 of the Arbitration Act before the district court. The High Court concluded that an alternate remedy was available and hence the writ petition was not maintainable.

Legal Framework

The Supreme Court examined the relevant provisions of the MSMED Act, specifically Sections 15 to 19, which deal with the liability of the buyer to make payments to micro, small, and medium enterprises, the interest payable on delayed payments, and the mechanisms for dispute resolution. The Court also referred to Section 24 of the MSMED Act, which gives overriding effect to Sections 15 to 23 of the MSMED Act.

Section 15 of the MSMED Act states:

“Liability of buyer to make payment.—Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

Section 18 of the MSMED Act, which deals with reference to the Facilitation Council, states:

“(1) 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.
(2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act.”

The Court also quoted Sections 65 to 81 of the Arbitration Act, which outline the procedure for conciliation. The Court observed that Section 18 of the MSMED Act has an overriding effect over any other law, including the Arbitration Act, to the extent of any inconsistency. The Court noted that the MSMED Act is a special act and the procedure under it has to be followed.

Arguments

Appellant’s Submissions (M/s Vijeta Construction):

• The appellant argued that the Facilitation Council’s order could not be considered an “award” because it did not conclusively settle the dispute.
• The Facilitation Council rejected the application based on a lack of jurisdiction and did not conduct a thorough inquiry or take evidence.
• Since the order was not an award, it was not appealable under Section 34 of the Arbitration Act.

Respondent’s Submissions (M/s Indus Smelters Ltd.):

• The respondent argued that the Facilitation Council’s order rejecting the application was indeed an “award” and could be challenged under Section 34 of the Arbitration Act.
• The Facilitation Council was wrong in stating that it lacked the jurisdiction to make a thorough inquiry or take evidence.
• The respondent relied on Section 27 of the Arbitration Act, arguing that the Facilitation Council has all the powers available to an arbitrator, including taking evidence.

Issues Framed by the Supreme Court

The Supreme Court did not explicitly frame issues in a separate section. However, the core issue before the court was:

1. Whether the order passed by the Facilitation Council, rejecting the application for lack of jurisdiction, can be considered an “award” under Section 18 of the MSMED Act, and thus, appealable under Section 34 of the Arbitration Act.

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court primarily relied on the provisions of the MSMED Act and the Arbitration Act. The Court specifically referred to Sections 15 to 19 and Section 24 of the MSMED Act and Sections 65 to 81 of the Arbitration Act. The Court also discussed the dual role of the Facilitation Council as a conciliator and an arbitrator.

Judgment

How each authority was viewed by the Court?

• The Court relied on the provisions of the MSMED Act*, specifically Sections 15 to 19 and Section 24, to outline the procedure for dispute resolution.
• The Court also relied on Sections 65 to 81 of the Arbitration Act* to outline the procedure for conciliation.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the procedural requirements outlined in Section 18 of the MSMED Act. The Court emphasized that the Facilitation Council has a dual role: first as a conciliator and then as an arbitrator if conciliation fails. The Court noted that the Facilitation Council did not follow the mandated procedure, which required it to attempt conciliation before moving to arbitration. The court’s reasoning was that the Facilitation Council had not followed the procedure as required by law and hence the order was not sustainable.

Logical Reasoning:

The Court’s reasoning was based on the fact that the Facilitation Council did not follow the procedure as required by law.

The Supreme Court held that the Facilitation Council’s order was not an award and that the High Court was wrong in holding that the order was appealable under Section 34 of the Arbitration Act. The Court emphasized that the Facilitation Council has a dual role, first as a conciliator and then as an arbitrator if conciliation fails. The Court observed that the Facilitation Council did not follow the mandated procedure.

The Court stated, “Therefore only after the procedure under Sub-Section (2) of Section 18 is followed and the conciliation fails and then and then only the arbitration proceedings commences and thereafter the provisions of the Arbitration Act shall then apply.”

The Court further clarified, “At that stage the Facilitation Council has no jurisdiction to make thorough enquiry and take evidence. However, once the conciliation fails and the settlement is not arrived at during the conciliation and thereafter when the arbitration proceedings commences as per Sub-Section (3) of Section 18, the Council as an arbitrator shall have all the powers of the arbitrator as are available under the provisions of the Arbitration Act.”

The Court also noted, “As per the scheme of the MSMED Act, the Facilitation Council has a dual role to play, one as a Conciliator as per Sub-Section (2) of Section 18 and thereafter in case the conciliation is unsuccessful as an Arbitrator as per Sub-Section (3) of Section 18.”

Key Takeaways

• The Facilitation Council under the MSMED Act has a dual role: conciliation and, if that fails, arbitration.
• The Facilitation Council must first attempt conciliation as per Section 18(2) of the MSMED Act before initiating arbitration.
• An order by the Facilitation Council dismissing an application for lack of jurisdiction without attempting conciliation is not an “award” and is not appealable under Section 34 of the Arbitration Act.
• The MSMED Act has an overriding effect over other laws, including the Arbitration Act, to the extent of any inconsistency.

Directions

The Supreme Court quashed the order of the Facilitation Council dated 10 January 2012, as well as the judgment of the High Court. The matter was remitted to the Facilitation Council to decide the case afresh, following the procedure under Section 18 of the MSMED Act. The Facilitation Council was directed to complete the proceedings within six months from the date of receipt of the order.

Development of Law

The ratio decidendi of this case is that the Facilitation Council under the MSMED Act must follow the procedure under Section 18, first attempting conciliation and then, if that fails, proceeding to arbitration. The judgment clarifies the dual role of the Facilitation Council and ensures that the mandated procedure is followed before an order is considered an award under the MSMED Act. This judgment clarifies the procedure to be followed under Section 18 of the MSMED Act.

Conclusion

The Supreme Court’s judgment in M/s Vijeta Construction vs. M/s Indus Smelters Ltd. clarifies the procedure to be followed by the Facilitation Council under the MSMED Act. The Court emphasized that the Council must first attempt conciliation before proceeding to arbitration. The decision ensures that the mandated procedure is followed, and that orders passed without adhering to this procedure cannot be considered as awards under the MSMED Act.