Section 18 Of MSMED Act – Proceedings For Conciliation And Arbitration Cannot Be Clubbed: Supreme Court Explains The Difference

The Supreme Court in this context also held, "If the appellant had not submitted its reply at the conciliation stage, and failed to appear, the Facilitation Council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996, to adjudicate the dispute and make an award."

Senior Standing Counsel Mr Anup Kumar appeared for the Appellant, Senior Counsel Dr. Manish Singhvi appeared for the 2^nd Respondent (Council) and Senior Counsel Mr Kailash Vasdev appeared for the 3^rd Respondent during the proceedings before the Court.

The Apex Court was hearing an appeal assailing the judgment of the Division Bench of the Rajasthan High Court which had confirmed the order passed by the Single Judge in the Writ Petition filed by the Appellant against the order passed by the Rajasthan Micro & Small Industries Facilitation Council, Jaipur.

The Appellant had entered into a contract with the third Respondent for the supply of ACSR Zebra Conductors. Thereafter, Respondent No. 3 approached the Council claiming an amount of Rs.74,74,041/- towards the principal amount of bills and an amount of Rs.91,59,705.02 paise towards interest.

As the Appellant did not adhere to the notices sent by the Council, the latter issued summons for appearance of the Appellant, as the Appellant did not appear, an order was passed by the Council directing the Appellant to make the payment to the 3^rd Respondent as claimed.

The order was challenged by the Appellant before the High Court. However, it came to be dismissed by the Single Judge and subsequently by the Division Bench.

The Appellant contended before the Apex Court that only on the ground that he did not respond in the proceedings, straightway the order was passed by the Council without giving proper opportunity.

It was further argued that the order passed by the Council was in violation of the mandatory provision under Section 18 of Micro, Small and Medium Enterprises Development Act, 2006 (MSMED) Act and Arbitration and Conciliation Act. The Appellant further argued that he had already paid the due amount of Rs.63, 43,488/- to the 3rd respondent and the latter received it without any protest.

Also, it was pleaded by the Appellant that once the conciliation proceedings fail as per Section 18(3) of the MSMED Act, Council has to initiate arbitration proceedings either suo moto or refer the dispute to any institution or centre providing alternate dispute resolution services and the provisions of the Arbitration Act shall apply to the dispute, as if the arbitration was in pursuance of an arbitration agreement.

While the 2^nd Respondent (Council) argued that against the order passed by the Council it was open to the Appellant to challenge the same before the competent forum under Section 34 (3) of the Arbitration Act within the time period.

Further, it was contended that having failed to question the award before the competent forum, the Appellant made a belated attempt by questioning the order of the Council by way of Writ Petition.

The 3^rd Respondent argued that as the Appellant did not make the payment for the supplies it necessitated the 3^rd Respondent to approach the Council.

The Apex Court noted, "Only on the ground that even after receipt of summons the appellant has not appeared the Council has passed order/award on 06.08.2012. As per Section 18(3) of the MSMED Act, if conciliation is not successful, the said proceedings stand terminated and thereafter Council is empowered to take up the dispute for arbitration on its own or refer to any other institution."

"There is a fundamental difference between conciliation and arbitration. In conciliation the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the Arbitral Tribunal/ arbitrator adjudicates the disputes between the parties. The claim has to be proved before the arbitrator, if necessary, by adducing evidence, even though the rules of the Civil Procedure Code or the Indian Evidence Act may not apply. Unless otherwise agreed, oral hearings are to be held," the Court observed.

Further, the Bench opined, "As it is clear from the records of the impugned proceedings that the Facilitation Council did not initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996."

The Court held that the order passed by the Council was a nullity and ran contrary to the provisions of the MSMED Act and Arbitration Act. The order of the Council was patently illegal, the Court added. There was no arbitral award in the eye of law, the Bench further held. In this context, the Court asserted –

"It is true that under the scheme of the Arbitration and Conciliation Act, 1996 an arbitral award can only be questioned by way of application under Section 34 of the Arbitration and Conciliation Act, 1996. At the same time when an order is passed without recourse to arbitration and in utter disregard to the provisions of Arbitration and Conciliation Act, 1996, Section 34 of the said Act will not apply."

The Court also held that the appeal cannot be rejected only on the ground that the Appellant did not avail the remedy under Section 34 of the Arbitration Act.

In the light of these observations, the Court allowed the appeal and set aside the impugned order of the High Court. The Court also directed the 2^nd Respondent to either take up the dispute suo moto or refer it to an institution or centre providing alternate dispute resolution services for the resolution of disputes between the parties. For such arbitration, the Council would follow the provisions of the Arbitration and Conciliation Act before passing any award, the Court further directed.

Click here to read/download the Judgment