Supreme Court quashes order passed by MSME Council for not following Arbitration Act: Jharkhand Urja Vikas Nigam Ltd. vs. State of Rajasthan (2021)

Date of the Judgment: 15 December 2021

Citation: Civil Appeal No. 2899 of 2021

Judges: Indira Banerjee, J. and R. Subhash Reddy, J.

Can a Micro and Small Enterprises Facilitation Council (MSEFC) issue a payment order without adhering to the mandatory arbitration procedures? The Supreme Court of India recently addressed this critical question in a case involving Jharkhand Urja Vikas Nigam Limited and the State of Rajasthan. The court clarified that the MSEFC must follow the Arbitration and Conciliation Act, 1996, when resolving disputes, and cannot bypass arbitration to directly order payments. The judgment was delivered by a two-judge bench comprising Justice Indira Banerjee and Justice R. Subhash Reddy, with the opinion authored by Justice R. Subhash Reddy.

Case Background

Jharkhand Urja Vikas Nigam Limited (the appellant), a successor company of the erstwhile Jharkhand State Electricity Board, had a contract with M/s. Anamika Conductors Ltd. (respondent No. 3) for the supply of ACSR Zebra Conductors. Respondent No. 3, claiming to be a small-scale industry, approached the Rajasthan Micro and Small Enterprises Facilitation Council (the Council) seeking payment of ₹74,74,041 towards the principal amount and ₹91,59,705.02 towards interest. The Council, after issuing summons to the appellant, passed an order on 06.08.2012 directing the appellant to pay the claimed amount within thirty days, solely because the appellant did not appear before the Council on the specified date.

Timeline

Course of Proceedings

The appellant challenged the Council’s order before the High Court of Judicature at Rajasthan, Jaipur Bench, through Civil Writ Petition No. 11657 of 2017. The learned Single Judge dismissed the writ petition. An intra-court appeal, D.B. Special Appeal Writ No. 1854 of 2017, was also dismissed by the Division Bench, confirming the Single Judge’s order. The High Court upheld the order of the Council, stating that it was open to the appellant to challenge the award passed by the Council under Section 34(3) of the Arbitration and Conciliation Act, 1996 and since the appellant failed to do so, the writ petition was rightly dismissed. This led to the appellant filing the current appeal before the Supreme Court.

Legal Framework

The judgment primarily revolves around the interpretation of Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and its interaction with the Arbitration and Conciliation Act, 1996. Section 18 of the MSMED Act outlines the procedure for resolving disputes related to delayed payments to micro and small enterprises. It mandates that disputes be first subjected to conciliation, and if conciliation fails, the matter must be referred to arbitration.

The relevant part of Section 18 of the MSMED Act is as follows:

“18. Reference to Micro and Small Enterprises Facilitation Council. –
(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 (26 of 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 (26 of 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.
(4) 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.
(5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.”

The Court emphasized that Section 18(3) of the MSMED Act mandates that if conciliation fails, the Council must initiate arbitration proceedings, and the provisions of the Arbitration and Conciliation Act, 1996, would apply as if the arbitration was initiated under Section 7 of that Act.

Arguments

Appellant’s Arguments:

• The appellant contended that the Council passed the order without providing a proper opportunity to be heard and in utter disregard of the mandatory provisions of Section 18 of the MSMED Act and the Arbitration and Conciliation Act, 1996.
• The appellant submitted that the Council should have initiated arbitration proceedings after the failure of conciliation, as mandated by Section 18(3) of the MSMED Act.
• It was argued that the order passed by the Council was a nullity as it did not follow the procedure prescribed under the Arbitration and Conciliation Act, 1996.
• The appellant also argued that the dispute was subject to the jurisdiction of civil courts at Ranchi as per the terms of the contract, and the 3rd respondent had wrongly approached the Council in Rajasthan.
• The appellant highlighted that after inspecting the records, it had already paid ₹63,43,488 to the 3rd respondent, which was accepted without any protest.

Respondent No. 2’s Arguments (Rajasthan Micro and Small Enterprises Facilitation Council):

• Respondent No. 2 argued that the appellant should have challenged the award passed by the Council under Section 34(3) of the Arbitration and Conciliation Act, 1996, within the specified time.
• It was submitted that the Council had taken up the dispute and passed the award as the appellant failed to respond to the notices and summons issued by the Council.

Respondent No. 3’s Arguments (M/s. Anamika Conductors Ltd.):

• Respondent No. 3 contended that the appellant had delayed the payment despite the supplies being made as per the contract.
• It was submitted that the Council had issued several notices, and the appellant had failed to respond, leading to the passing of the award.
• Respondent No. 3 argued that the appellant had partly complied with the award by paying ₹63,43,488 and should not be allowed to challenge the award at this stage.
• Reliance was placed on the judgment of the Supreme Court in the case of Rajkumar Shivhare v. Asst. Director, Directorate of Enforcement & Anr. [(2010) 4 SCC 772] to support the argument that the appellant should have challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996.

Issues Framed by the Supreme Court

The Supreme Court considered the following key issues:

1. Whether the order dated 06.08.2012 passed by the Rajasthan Micro and Small Enterprises Facilitation Council is valid and in accordance with the provisions of the MSMED Act and the Arbitration and Conciliation Act, 1996?
2. Whether the High Court was correct in dismissing the writ petition filed by the appellant?
3. Whether the Council could pass an order for payment without initiating arbitration proceedings as mandated under Section 18(3) of the MSMED Act?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases:

• Rajkumar Shivhare v. Asst. Director, Directorate of Enforcement & Anr. [(2010) 4 SCC 772] – This case was cited by the respondents to argue that the appellant should have challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996. However, the Supreme Court distinguished this case, stating that it does not apply when the order is passed without recourse to arbitration and in utter disregard of the provisions of the Arbitration and Conciliation Act, 1996.

Legal Provisions:

• Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) – This section outlines the procedure for resolving disputes related to delayed payments to micro and small enterprises, mandating conciliation and, if that fails, arbitration. The Court emphasized the mandatory nature of this provision.
• Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 – These sections are applicable to conciliation proceedings initiated under Section 18(2) of the MSMED Act.
• Section 7 of the Arbitration and Conciliation Act, 1996 – This section defines an arbitration agreement. Section 18(3) of the MSMED Act states that the provisions of the Arbitration and Conciliation Act, 1996, apply as if the arbitration was in pursuance of an arbitration agreement referred to under Section 7 of the Act.
• Sections 20, 23, 24, 25 of the Arbitration and Conciliation Act, 1996 – These sections outline the procedure for arbitration, which includes the place of arbitration, statements of claim and defense, hearings, and default of a party.
• Section 34 of the Arbitration and Conciliation Act, 1996 – This section provides the grounds for challenging an arbitral award. The Court noted that this section would not apply when an order is passed without recourse to arbitration.

Judgment

How each authority was viewed by the Court:

• Rajkumar Shivhare v. Asst. Director, Directorate of Enforcement & Anr. [(2010) 4 SCC 772]*: The Court distinguished this case, stating it does not apply when an order is passed without recourse to arbitration.
• Section 18 of the MSMED Act, 2006: The Court emphasized the mandatory nature of the conciliation and arbitration process outlined in this section.
• Sections 65 to 81 of the Arbitration and Conciliation Act, 1996: The Court noted that these provisions are applicable to conciliation proceedings under Section 18(2) of the MSMED Act.
• Section 7 of the Arbitration and Conciliation Act, 1996: The Court highlighted that Section 18(3) of the MSMED Act states that the provisions of the Arbitration and Conciliation Act, 1996, apply as if the arbitration was in pursuance of an arbitration agreement under Section 7.
• Sections 20, 23, 24, 25 of the Arbitration and Conciliation Act, 1996: The Court stated that the Council must follow these procedures if it conducts arbitration itself.
• Section 34 of the Arbitration and Conciliation Act, 1996: The Court clarified that this section does not apply when an order is passed without recourse to arbitration and in utter disregard of the Act.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the procedural lapses of the Micro and Small Enterprises Facilitation Council (the Council). The Court emphasized that the Council’s failure to initiate proper arbitration proceedings, as mandated by Section 18(3) of the MSMED Act and the Arbitration and Conciliation Act, 1996, was a critical flaw. The Court noted that the Council’s order was passed in utter disregard of the mandatory provisions of the Arbitration and Conciliation Act, 1996, making it a nullity.

The Court’s reasoning was heavily influenced by the legal framework, particularly the mandatory nature of the arbitration process under the MSMED Act and the Arbitration and Conciliation Act, 1996. The factual aspects of the case, such as the partial payment made by the appellant, were secondary to the legal principle of adherence to due process.

The Court considered that the Council had not followed the correct procedure. The Council should have initiated arbitration proceedings after the failure of conciliation. Instead, the Council passed an order for payment on the very first date of appearance, which was not in accordance with the law. The Court rejected the argument that the appellant should have challenged the order under Section 34 of the Arbitration and Conciliation Act, 1996, stating that this provision does not apply when the order is passed without recourse to arbitration.

The Supreme Court emphasized the importance of adhering to the mandatory arbitration procedures outlined in the MSMED Act and the Arbitration and Conciliation Act, 1996. The court held that the Council’s actions were a nullity and were contrary to the established legal framework.

“From a reading of Section 18(2) and 18(3) of the MSMED Act it is clear that the Council is obliged to conduct conciliation for which the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 would apply, as if the conciliation was initiated under Part III of the said Act.”

“In this case only on the ground that the appellant had not appeared in the proceedings for conciliation, on the very first date of appearance, that is, 06.08.2012, an order was passed directing the appellant and/or its predecessor/Jharkhand State Electricity Board to pay Rs.78,74,041/- towards the principal claim and Rs.91,59,705/- odd towards interest.”

“The order dated 06.08.2012 is a nullity and runs contrary not only to the provisions of MSMED Act but contrary to various mandatory provisions of Arbitration and Conciliation Act, 1996. The order dated 06.08.2012 is patently illegal. There is no arbitral award in the eye of law.”

Key Takeaways

• Micro and Small Enterprises Facilitation Councils (MSEFCs) must strictly adhere to the mandatory arbitration procedures outlined in Section 18 of the MSMED Act and the Arbitration and Conciliation Act, 1996.
• MSEFCs cannot pass orders for payment without first initiating proper arbitration proceedings after the failure of conciliation.
• Orders passed by MSEFCs in violation of mandatory arbitration procedures are considered a nullity and can be challenged.
• Partial compliance with an invalid order does not prevent a party from challenging the order’s validity.
• The judgment emphasizes the importance of due process and adherence to legal procedures in dispute resolution.

Directions

The Supreme Court directed that it is open to the 2nd respondent – Council to either take up the dispute for arbitration on its own or refer the same to any institution or center providing alternate dispute resolution services, for resolution of dispute between the parties. It was also observed that for such arbitration, the Council shall follow the provisions of Arbitration and Conciliation Act, 1996 before passing any award. The Court clarified that it had not gone into the merits of the claim made by the 3rd respondent, and it is open for the arbitral tribunal to decide the matter on its own merits.

Development of Law

The ratio decidendi of this case is that Micro and Small Enterprises Facilitation Councils (MSEFCs) must strictly adhere to the mandatory arbitration procedures outlined in Section 18 of the MSMED Act and the Arbitration and Conciliation Act, 1996. The Supreme Court clarified that MSEFCs cannot bypass arbitration and directly order payments. This judgment reinforces the importance of following due process and the legal framework established for dispute resolution under the MSMED Act. This case clarifies that any order passed by the Council without following the arbitration procedures is a nullity.

Conclusion

The Supreme Court allowed the appeal, quashing the order passed by the Rajasthan Micro and Small Enterprises Facilitation Council (MSEFC) on 06.08.2012. The Court held that the Council had failed to initiate proper arbitration proceedings as mandated by Section 18(3) of the MSMED Act and the Arbitration and Conciliation Act, 1996. This judgment underscores the importance of adhering to mandatory legal procedures and ensures that MSEFCs follow the due process of law when resolving disputes between micro and small enterprises and their buyers. The Court emphasized that the Council must initiate arbitration proceedings after conciliation fails and that orders passed without following this procedure are a nullity. The Supreme Court set aside the judgment of the High Court and remanded the matter to the Council for fresh consideration in accordance with the law.