Appropriate Forum To Appeal: Interplay Between MSMED Act, 2006, The Arbitration & Conciliation Act, 1996 And Writ Jurisdiction

Introduction 

‘The Arbitration and Conciliation Act, 1996’, (‘the A&C Act’), is the fundamental law for arbitration in India, which remains in conflict with other statutory provisions providing dispute resolution Mechanism. One such intersection is with the ‘Micro, Small and Medium Enterprises Development Act, 2006’ (‘the MSMED Act’), which was enacted for the development and promotion of micro, small and medium enterprises ensuring the recovery of any delayed payments by the buyer1 (also known as non-MSME entities) to supplier (micro or small enterprises).  

Section 15 to 25 of the MSMED Act, 2006 provide protection to the suppliers against any delayed payment by buyers and obliges them to pay three times compound interest of the bank rate as notified by the RBI.2 Any dispute in furtherance of the same is referred to the Micro and Small Enterprises Facilitation Council (‘Facilitation Council’) for resolution.3 Subsequently, the Facilitation Council conduct the conciliation proceedings as per the A&C Act, 1996.4 If the conciliation fails, the Facilitation Council make efforts to settle the said dispute through arbitration as per the A&C Act, 1996.5 The question arises, whether an award passed by the Facilitation Council could be challenged under Section 34 of the A&C Act or the award debtor can approach High Court through the writ jurisdiction challenging the award. This Article analyses the right to appeal of award debtor and the Interplay Between MSMED Act, 2006, the A&C Act, 1996 and Writ Jurisdiction of the High Court.   

MSMED Act, 2006 and the A&C Act, 1996 

MSMED Act, 2006 does not explicitly provide any provision for the forum to challenge the Arbitral Award passed under MSMED Act. Section 18(3) of the MSMED Act provides that if conciliation fails, the Facilitation Council make efforts to settle the said dispute through arbitration as per the A&C Act, 1996 as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of that Act.6 Therefore, if any award is passed by the Facilitation council, then the same could be challenged under Section 34 of the A&C Act, 1996. Section 19 of the MSMED Act, 2006 requires the award debtor to deposit 75% of award amount before challenging the same under MSMED Act, 20067. However, Section 34 of the A&C Act serves as the exclusive mechanism for challenging an arbitral award within a limited time on certain grounds such as procedural irregularities, jurisdictional overreach, and violations of substantive public policy. Section 34 of the A&C Act does not require the award debtor to deposit 75% of award amount before challenging the same. 

Section 24 of the MSMED Act provides Section 15 to Section 23 overrides any law which is in contravention of the same. In the ‘Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited’8, the Hon’ble Supreme Court has observed that MSMED Act is a special law and the purpose behind its enactment was to “provide for facilitating the promotion and development and enhancing the competitiveness of the MSME entities”9 whereas, the A&C Act is a general law which was enacted to consolidate the law pertaining to arbitration and conciliation. The MSMES Act being a special Act and subsequent in time to protect the interest of a special class i.e. MSMEs will override the general statute i.e. the A&C Act which is prior in time. Therefore, provision of depositing 75% of award amount before challenging the same under the MSMED Act, 2006 will override the A&C Act. Consequently, the question arose whether the award debtor can approach High Court under Article 226/227 of the Constitution to challenge the award to avoid the deposition of 75% of award amount or avoid the time limitation to challenge the award.   

MSMED Act, 2006 and the Writ Jurisdiction of the High Court 

Article 226 of the Constitution of India provides High Courts with the power to issue direction, orders and writs to any person or authority for enforcing fundamental rights as provided under Part III of the Constitution, or for any other purpose. The right of access to High Courts through writ petition Under Article 226/227 of the Indian Constitution is the part of the basic structure, which every citizen can avail if there is a violation of their constitutional or statutory rights. It is settled law that the High Court will not entertain a writ petition under Article 226/227 of the Constitution, if the aggrieved person has an effective alternative statutory remedy. However, there has been three exceptions10 to the rule of the availability of alternative remedies, and writ petition can be entertained by the Hon’ble High Court i.e., 

1. Violation of principles of natural justice or fundamental rights.
2. Order Passed or proceeding is wholly without jurisdiction; or
3. where the vires of an Act is challenged.  

It is pertinent to note that the Facilitation Council performs as an arbitrator under the MSMED Act, 2006 as per the A&C Act, 1996. The Facilitation Council role is of a statutory one and perform within the ambit of the A&C Act, 1996. The A&C Act 1996 provides Section 34 as the exclusive mechanism for challenging an arbitral award. Therefore, the award granted by the Facilitation Council would be considered as an award under the A&C Act and the same can be challenged under Section 34 of the A&C Act and the writ jurisdiction of the High Court could not be invoked unless the same falls under the three exceptions as mentioned above. 

In Jharkhand Urja Vikas Nigam Limited v. State of Rajasthan and Ors.11, once the conciliation between parties failed as the non-MSME entity had not appeared in the proceedings for conciliation, the Facilitation Council passed an order without commencing arbitration in terms of Section 18(3) of the MSMED Act, 2006. The Division bench of the Hon’ble Supreme Court has held that the order was passed in utter disregard to the mandatory provisions of A&C Act, 1996 and will not be considered as an award under the A&C Act, 1996. Therefore, the rule of the availability of alternative remedy is not applicable and the writ petition was considered maintainable. Subsequently, in the ‘Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited’12, the Hon’ble Supreme Court without making any reference to Jharkhand Urja Vikas Nigam Limited v. State of Rajasthan and Ors.13,  has observed that any parallel arbitration agreement between parties will not prevent MSME entities from invoking their right under Section 18 of the MSMED Act, 2006. Further, the Facilitation Council can act as an arbitrator when the conciliation process has not been successful. Therefore, the proceedings before the Facilitation Council is to be governed by the A&C Act, 1996 and therefore any order passed or award made by Facilitation Council must be challenged as per the A&C Act, 1996 and writ is not maintainable against the order of the facilitation council. Therefore, the two judgments have contrary opinion. 

Relying upon the ‘Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited’14, a three-judge bench of the Hon’ble Supreme Court in India Glycols Ltd. v. Micro and Small Enterprises Facilitation Council, Medchal – Malkajgiri, Telangana15, declined the permission to file a petition under Article 226/227 of the Constitution of India against the order of Facilitation Council and held that the remedy against such order is under section 34 of the A&C Act, 1996. The Hon’ble Court noted that entertaining a petition under Article 226/227 of the Constitution of India would defeat the objective of Section 19 of the MSMED Act, 2006 requiring 75% deposit of the award amount. However, contrary to the above view, another three-judge bench of the Hon’ble Supreme Court in Tamil Nadu Cements Corporation Limited vs. Micro and Small Enterprises Facilitation Council and Ors.16, shows its disagreement with the opinion in India Glycols Ltd. v. Micro and Small Enterprises Facilitation Council, Medchal – Malkajgiri, Telangana17, and observed that there cannot be an absolute bar to invoke writ jurisdiction under Article 226/227 of the Constitution as the same is discretionary and part of basic structure and in exceptional and rare cases where fairness, equity and justice may warrant the exercise of writ jurisdiction.  

Analysis and Conclusion 

The approach of the Hon’ble Supreme court in Jharkhand Urja Vikas Nigam Limited v. State of Rajasthan and Ors.18 and Tamil Nadu Cements Corporation Limited vs. Micro and Small Enterprises Facilitation Council and Ors.19, is in line with the settled law of exceptions to the rule of availability of alternative remedy. The exclusion/allowance of writ jurisdiction is discretionary power of the high court and in appropriate cases falling into three exceptions as detailed above, the writ courts must exercise its jurisdiction in the light of justice and equity. Section 18(3) mandatorily requires Facilitation Council to commence arbitration if conciliation becomes unsuccessful. Further, Section 34 of the A&C Act is only available to challenge the award and an order would not be considered as an award under the A&C Act, 1996 unless the same is granted by the Facilitation Council as arbitrator or has been recorded as settlement agreement under Section 30 of the A&C Act, 1996. Therefore, any order passed by the Facilitation Council without commencing the arbitration and following the due process given in the A&C Act, 1996 is wholly without jurisdiction and invites the writ jurisdiction of the Hon’ble High Court under Article 226/227 of the Constitution. 

However, as two three judges’ benches of the Hon’ble Supreme Court are of the distinct view, the issue whether there is a blanket prohibition on maintainability of writ petition before High Court against MSEFC orders and if not, then what would be the circumstances when adequate alternative remedy principle does not apply, have been referred to a Constitutional Bench. 

The issue whether MSEFC conciliators can subsequently act as arbitrators under MSMED Act, 2006 is also referred to the Constitution Bench. In ‘Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Food Private Limited’20, missed the rationale behind Section 80 of the A&C Act while observing that the MSME Act, 2006 being a special Act will override the A&C Act, 1996 a general statute and therefore, the embargo provided under Section 80 of the A&C Act, 1996 will be overshadowed. Objective of Section 80 of the A&C Act, 1996 is to avoid any kind of bias of arbitrator who already acted as a conciliator in the same dispute. Therefore, the caution should be issued that the same members of Facilitation Council cannot act both conciliator as well as arbitrator under the MSMED Act, 2006.  

The matter21 is still pending before the Hon’ble Supreme Court and it will be interesting to see how the Hon’ble Apex Court answers the aforesaid issues balancing the objectives of the MSMED Act, 2006 and the principle of justice and equity.  

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