MSMED Act, Supreme Court: If Conciliation unsuccessful, Arbitration Proceedings to be resorted

MSMED Act, Supreme Court: If Conciliation unsuccessful, Arbitration Proceedings to be resorted

On Wednesday, the Supreme Court ruled in a case pertaining to delayed payments made to a Conductors supplier by the Jharkhand electricity board held that Section18 of the Micro Small and Medium Enterprise Development Act 2006 [MSMED Act] provided that "Under Section 18(3)," "where conciliation fails and stand terminated, the dispute between the parties can be decided by arbitration".

In this section, the council is given the option to initiate arbitration on its own or to refer the arbitration proceedings to any institution."

Earlier this week, a bench of Justices Indira Banerjee and Subhash Reddy presided over a matter in which Jharkhand UrjaVikas Nigam Limited challenged a Rajasthan High Court order in which the appellant's intra-court appeal to challenge the order given by Rajasthan Micro & Small Industries Facilitation Council (respondent no. 2) in favour of M/S Anamika Conductor Suppliers (respondent no. 3), directing appellants to make a payment of INR 74,74,041, towards the principal amount, plus INR 91,59,705.02 towards interest, to respondent no. 3 due to their contract with respondent no. 3 and their failure to make the payments as required. According to the appellant, the order given by respondent no. 2, ordering the appellant to pay the aforementioned amount to respondent no.3, was without jurisdiction and contrary to the contract between the appellant and respondent no.3.

In this case, the bench was primarily concerned with the question of whether respondent no. 2 was right in passing the order without allowing the appellants to be heard, since respondent no. 2 acted on the very first day of conciliation proceedings, which were necessary to resolve the matter. Furthermore, the bench stated that, under S. 18(3), if and when conciliation fails, the case must be arbitrated, the bench said that "if the appellant had failed to appear in the conciliation stage and not submitted a reply, the facilitation council could have recorded the failure of conciliation and initiated arbitration proceedings as required by the Arbitration and Conciliation Act, 1996, for the determination of the dispute. It is not possible to combine conciliation and arbitration proceedings.

According to the court, it is clear from the records of the impugned proceedings that the facilitation council did not initiate arbitration proceedings in compliance with the relevant provisions of the Arbitration and Conciliation Act, 1996, thus the 6th August 2012 order is null and void and runs contrary to the MSMED Act as well as various mandatory provisions of the Arbitration and Conciliation Act, 1996."

To further clarify the difference between conciliation and arbitration, the court noted, "In resolution, an impartial and independent conciliator assists parties in reaching an amicable settlement. Arbitration involves a tribunal or arbitrator adjudicating disputes between parties. The claim must be proved by adducing evidence before the arbitrator, even if the proceedings are not governed by the rules of the Indian Evidence Act or Civil Procedure Code.

This appeal was allowed and the impugned judgment and order were set aside, the award made by respondent 2 was quash although the apex court left the door open for the 2nd respondent to either take up the argument for arbitration or refer it to another institution providing replacement dispute resolution services or to the center.