Role of Facilitation Council Under MSMED Act – A 'Conciliator' Or An 'Arbitrator'?

1. Introduction:

Since the implementation of The Micro, Small and Medium Enterprises Development Act, 2006 ["MSMED Act"], which is a special Act[i], there has always been a controversy as to whether the 'Facilitation Council' can act as both - a 'conciliator' as well as an 'arbitrator', when disputes are referred to it under Section 18(1) thereof. There are divergent views of the High Courts on this very issue and till date, there is no definite answer.

1. The Facilitation Council:

The Micro, Small and Medium Enterprises ["sector"] are amongst the strongest drivers of economic development, innovation and employment. Today, they stand next to the agricultural sector in India. For the first time, the MSMED Act provides a legal framework to facilitate the promotion and development and enhancing i.e. competitiveness of this sector, which do not command significant bargaining power. Under Section 18, it provides a mechanism for speedy recovery of money by addressing the issue of delayed payments to the suppliers.

Despite this, still, the sector faces a recurring problem to recover the amount due. Chapter V of the MSMED Act deals with the issue of delayed payments to the sector. Section 15 thereof directs the buyer of the goods to make payment to the supplier within the time stipulated in the agreement between the parties but, not exceeding 45 days from the day of acceptance of goods. In case of delay in making the payment, Section 16 makes the buyer liable to pay compound interest with monthly rests at three times of the bank rate notified by RBI to the supplier on the amount due. Further, Section 17 provides for recovery of amount due. But, when the buyer refuses or delays or makes part payment of the amount due, the supplier has a right to refer such dispute to an institution known as the 'Facilitation Council' under Section 18(1) for its settlement or adjudication. It is pertinent to note that Section 18(1) uses the expression 'any party', therefore, it is not only the 'supplier' but, also a 'buyer' who can approach the Facilitation Council[ii].

Further, it is under Section 20 of the MSMED Act that the respective States have been given the power to establish one or more Facilitation Councils and Section 21 provides for its composition. It provides that the Facilitation Council shall consist of not less than three but not more than five members to be appointed from amongst the categories mentioned therein.

1. Reference of dispute & provisions of Arbitration Act:

After the dispute is referred to the Facilitation Council under Section 18(1), the mechanism for settlement or resolution of dispute provided under Sections 18(2) to 18(5) kicks in. It provides for conciliation or arbitration through an "institution". It is not "individual" centric, that is, it does not provide that an individual will act as a conciliator or an arbitrator. It, therefore, provides a 'forum' for adjudication of dispute between the parties and that 'forum' has the power or jurisdiction to decide which of their member or members will act as a conciliator or arbitrator when a dispute is referred. It is similar to how a conciliator or arbitrator is appointed when disputes are referred to Singapore International Arbitration Centre, Indian Council of Arbitration, Delhi International Arbitration Centre etc.

Section 18(2) further provides that for the purpose of conciliation, Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 ["Arbitration Act"] shall apply and Section 18(3) provides that for arbitration, all provisions of Arbitration Act shall apply as if the dispute has been referred in pursuance of arbitration agreement referred to under Section 7(1) of the said Act. Therefore, the provisions of Arbitration Act have been incorporated by reference in the MSMED Act.

It is pertinent to mention here that Section 18 is similar to Section 6 of The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 ["the old Act"], which was repealed[iii]. Section 6 came up for interpretation before the Supreme Court in Secur Industries Ltd. v. Godrej & Boyce Mfg. Co. Ltd.[iv] ["Secur Industries case"] and it was observed that it expressly incorporates the provisions of the Arbitration Act and apart from such express incorporation, it goes further and creates a legal fiction whereby disputes referred are to be deemed to have been made pursuant to an arbitration agreement as defined in sub-section (1) of Section 7 of the Arbitration Act. It also observed that incorporation of the provisions of the Arbitration Act into Section 6 of the old Act has also been effected by sub-sections (4) and (5) of Section 2 of the Arbitration Act. Thus, it was held that Part I of the Arbitration Act would apply with full force and the proceedings before the Council, are proceedings under the Arbitration Act and provisions related to claim and counter claim [v], principles of Section 11 [vi], jurisdiction under Section 16 [vii] etc will apply. Therefore, the said interpretation can very well be made applicable to Section 18 as well and hence, Sections 65 to 81 and Part I of the Arbitration Act will apply to the "institutions" as mentioned in Section 18 while conducting conciliation or arbitration respectively.

1. The controversy:

However, the so-called controversy as to the role of Facilitation Council or the so-called inconsistency between the Arbitration Act and the MSMED Act is sought to be created by Section 18(3) of MSMED Act and Section 80 of the Arbitration Act. On one hand, Section 18(3) provides that when conciliation has failed, the Facilitation Council shall either itself take up the issue for arbitration or can refer the matter to a centre or institution for arbitration and in such case, the provisions of Arbitration Act shall apply to such disputes as if the arbitration were pursuant to an arbitration agreement referred to in sub-section (1) of Section 7 of that Act. On the other hand, Section 80 of Arbitration Act which deals with 'role of the conciliator', expressly prohibits the conciliator to act as an arbitrator is respect of a dispute that is the subject of the conciliation proceedings in the absence of an agreement between the parties. The only way to remove this 'ineligibility' in law, is by an express agreement between the parties, which is not the same as an arbitration agreement between the parties [viii].

Therefore, the first issue for consideration is if 'Facilitation Council' has acted as a 'conciliator' under Section 18(2) MSMED Act, can it be prohibited from acting as an 'arbitrator' under Section 18(3) in view of the prohibition contained in Section 80 of the Arbitration Act.

A further controversy is created by Section 24 of the MSMED Act which gives over-riding effect to Sections 15 to 23 thereof. It reads as under:

"24. The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."

Thus, the second question which arises for consideration is whether Section 18(3) of the MSMED Act will over-ride Section 80 of the Arbitration Act by virtue of Section 24 of the MSMED Act and thus, enable the 'Facilitation Council' to act as both – a 'conciliator' under Section 18(2) as well as an 'arbitrator' under Section 18(3).

1. Divergent views of the High Courts:

With regard to the above two issues mentioned, there are divergent views of the High Courts across India. However, one thing common in all these judgments is that they have treated the 'Facilitation Council' as an 'individual' rather than an 'institution' and come to their respective conclusions.

• Facilitation Council – A 'conciliator' or an 'arbitrator':

The judgments below have held that under Section 18 of the MSMED Act, the Facilitation Council has to choose which role it wants to play because in view of Section 80 of Arbitration Act, it cannot act as both. Also, there is no inconsistency between Section 18(3) of the MSMED Act and Section 80 of the Arbitration Act and therefore, Section 24 of MSMED Act cannot have an over-riding effect.

(a) Bombay High Court:

i) Technico Agri Sciences Limited v. Micro, Small and Medium Enterprises, 2019 SCC OnLine Bom 5148.

ii) Gujarat State Petronet Ltd. v. Micro and Small Enterprises Facilitation Council, (2018) 5 AIR Bom R 821.

iii) Mazgaon Dock Ltd. v. Micro and Small Industries Facilitation Council and Others, 2018 SCC OnLine Bom 11003.

iv) S.I. Group India Limited & Anr. v. Micro and Small Enterprises Facilitation Council, Konkan Region, Thane & Ors, Writ Petition No.7269 of 2011 dated 16.11.2011.

• Karnataka High Court:

(i) Pal Mohan Electronics Pvt Ltd v. Secretary, W.P. No. 9485 of 2017 dated 27.03.2019.

• Facilitation Council – A 'conciliator' and an 'arbitrator':

The judgments below have held that MSMED Act is a complete code in itself and it provides for a 'special forum' of adjudication of the disputes. By virtue of Section 24 of the MSMED Act, any inconsistency between Section 80 of Arbitration Act read with Section 18(2) and 18(3) of MSMED Act stands over-ridden and therefore, in terms of Section 18(4), the Facilitation Council can act as both.

• Gujarat High Court:

• Principal Chief Engineer v. Mani Bhai and Brothers, F.A. No. 637 of 2016 dated 20.06.2016.

• Supreme Court:

• Order dated 05.07.2017 passed in Principal Chief Engineer v. Manibhai & Bro, SLP No. 17434 of 2017 (2J) upholding the Gujarat High Court judgment above [ix].

• Delhi High Court:

• Bata India Limited v. AVS International Pvt. Ltd, 2019 SCC OnLine Del 9801 dated 09.08.2019 – Relied upon the above order passed by Supreme Court.
• Mangalore Refinery & Petrochemicals Ltd. v. Micro and Small Enterprises Facilitation Council & Anr., 2019 SCC OnLine Del 6860 dated 24.01.2019.

• Patna High Court:

• Best Towers Pvt. Ltd. v. Reliance Communication Ltd., LPA No. 1036 of 2018 dated 14.02.2019.

• Madras High Court:

• Refex Energy Ktd, Mumbai v. Union of India, AIR 2016 Madras 139 dated 02.06.2016.
• Eden Exports Company v. Union of India, 2013 (1) MadLJ 445.

• Allahabad High Court:

(a) M/s. Bharat Heavy Electricals Limited v. State of U.P., 2014 SCC OnLine All 2895.

• Punjab and Haryana High Court:

• Welspun Corp. Ltd. v. Micro and Small, Medium Enterprises Facilitation Council, 2011 SCC OnLine P&H 16956.

• Uttarakhand High Court:

(a) M/s Mahvir Transmission Udyog Pvt. Ltd. v. Paschimanchal Vidyut Vitran Nigam Ltd., AIRONLINE 2018 UTR 633.

1. Broader issues not dealt in any of the judgments:

1. Section 18 provides for resolution of dispute by 'institution' & not, 'individual':

• None of the judgments referred above clarify that disputes under Section 18 is to be resolved by "institutions" only and it does not at all refer to any "individual". Certainly, "institutions" cannot be referred to as "individuals". Thus, Section 18 only speaks about referring the dispute to an institution which provides a forum or platform for resolving it.

• When a dispute is referred to such institution under Section 18(1) of the MSMED Act, it is the members of such institution who will be appointed by the institution itself to act as a conciliator or an arbitrator. These members represent the institution. It is in this sense Section 18 provides that Facilitation Council or centre or institute providing ADR services can act as conciliator or arbitrator.

• Section 21 of the MSMED Act provides for the composition of the Facilitation Council. It is only these members who can be appointed as a conciliator or arbitrator under Section 18(2) or 18(3) in the absence of an independent panel of conciliator or arbitrator. Similarly, if Facilitation Council decides to refer the dispute to a centre or institute providing ADR services, it is their members chosen from the panel who will act as a conciliator or arbitrator under Section 18(2) or 18(3).

• However, Section 18(2) makes it explicitly clear that for conciliation, Sections 65 to 81 of Arbitration Act will apply. The prohibition contained in Section 80 of the Arbitration Act, therefore, will apply to the member of the institution and in law, he is prohibited from performing dual role that is, act as both – a conciliator as well as an arbitrator until and unless, parties expressly waive this 'ineligibility' in law. Thus, under Section 18(3), the said member cannot act as an arbitrator if he has performed him role as a conciliator in respect of the same dispute.

1. No inconsistency between Section 80, Arbitration Act and Section 18(3), MSMED Act:

• Seen thus, there is no inconsistency at all between Section 18(3) of the MSMED Act and Section 80 of the Arbitration Act which nonetheless is sought to be created and for which, Section 24 of the MSMED Act is being used to over-ride the provisions of the Arbitration Act.

• Here, under the MSMED Act, Section 18(3) instead of expressly stating which all specific provisions of the Arbitration Act would apply, expressly incorporated by reference all its provisions as if it were a part of the MSMED Act itself. Further, it creates a legal fiction whereby disputes referred are to be deemed to have been made pursuant to an arbitration agreement as defined in sub-section (1) of Section 7 of the Arbitration Act. In the well-known case of East End Dwellings Co. Ltd. v. Finsbury Borough Council[x] Lord Asquith, observed:

"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative, state of affairs had in fact existed, must inevitably have flowed from or accompanied it. … The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."

This statement of law in respect of a statutory fiction is being consistently followed by the courts[xi]. Further, in Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union[xii], it has been observed that:

"legislation by incorporation is a common legislative device where the legislature, for the sake of convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of verbatim reproducing the provisions, which it desires to adopt in another statute. Once incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute."

• Once Sections 65 to 81 and Part I of Arbitration Act have been incorporated by reference in the MSMED Act, they have to be applied with full force and when these provisions have been incorporated by reference in the MSMED Act, how can Section 24 be used to over-ride a provision contained in MSMED Act itself. Section 24 uses the expression "in any other law for the time being in force". Hence, it refers to an enactment or a law made by the Indian Parliament other than MSMED Act and non-obstante clause or over-riding effect will come into effect only when there is a conflict between provisions of the MSMED Act and other Act and not, within the provisions of MSMED Act itself[xiii]. In Secur Industries case, this is precisely what has been observed by the Supreme Court. Also, this interpretation is fortified by Section 2(4) of the Arbitration Act which specifically provide that Part I except sub-section (1) of Section 40, Section 41 and 43 shall apply to every arbitration under any other statutory enactment provided provisions of this Part are not inconsistent with that of other statutory enactment or rules made thereunder.

• Therefore, the interpretation given by the Gujarat High Court in Principal Chief Engineer v. Mani Bhai and Brothers and upheld by the Supreme Court is incorrect as it observed that Section 18 of MSMED Act will have an over-riding effect over Arbitration Act, not realizing that the provisions of Arbitration Act has been incorporated by reference in MSMED Act. Therefore, these judgments as well as those which rely upon them require reconsideration.

1. Section 18 of the MSMED Act deals with 'procedural' aspect:

• Further, Section 18 of the MSMED Act only deals with the procedural aspect. Section 18(1) is somewhat similar to Section 21 of the Arbitration Act as both deals with 'reference of dispute'. Only difference being, in arbitration, dispute is referred to an arbitrator in consonance with the terms of arbitration agreement, and under MSMED Act, a statutory reference is made to the Facilitation Council irrespective of existence or non-existence of arbitration agreement. Thereafter, the procedure as per Arbitration Act is required to be followed.

• It is a settled law that all judicial and quasi-judicial body are bound by fundamental principles of law which includes – procedural fairness, neutrality, impartiality and independence of judges, adherence to principles of natural justice including rule against bias. These principles have to be followed at each and every stage and are sacrosanct in nature. The incorporation of the provisions of the Arbitration Act in MSMED Act precisely takes care of this aspect. Therefore, under Section 12 of the Arbitration Act, a member of the institution who is proposed to be appointed as an arbitrator, has to mandatorily disclose circumstances giving justifiable doubt as to his independence and impartiality. These circumstances are enumerated in the Fifth Schedule and Seventh Schedule to the Arbitration Act.

• However, Section 12(5) of the Arbitration Act makes a person 'ineligible' in law to be appointed as an arbitrator if he falls under any categories specified in the Seventh Schedule. Item 16 in the Seventh Schedule provides – "the arbitrator has previous involvement in the case". In HRD Corpn. v. GAIL (India) Ltd. [xiv], the Supreme Court has observed that it would mean that the proposed arbitrator has had previous involvement in the case in some other avatar. Thus, a member of the institution having acted as a conciliator under Section 18(2) is ineligible in law to act as an arbitrator under Section 18(3). The State of Telangana has recently amended its MSMED Rules and has specifically incorporated Section 12 of the Arbitration Act [xv]. No other State has incorporated the said provision in its Rules.

1. Facilitation Council or institutions can act as a 'conciliator' and an 'arbitrator':

• It is a well-recognized international practice that a conciliator cannot act as an arbitrator. The rationale underlying this prohibition is that the conciliator obtains a comprehensive knowledge of the parties case, including their strengths and weaknesses. Parties willingness to confide in the conciliator might be compromised if they feared that their disclosures might be used by the conciliator against their interests in a subsequent proceeding. Also, if an arbitrator is predisposed or suffers from prejudices or has a biased mind, he disqualifies himself from acting as an arbitrator. Therefore, to address this problem, various domestic as well as international rules specifically prohibited dual role to be played by a conciliator. For instance, Rule 19 of the ICADR Conciliation Rules, 1996, Rule 19 of ICA Rules of Conciliation, Article 19 of UNCITRAL Conciliation Rules, 1980, Article 10 of the ICC Arbitration and Conciliation Rules and Rule 17 of the International Arbitration Act, 1994 (Singapore).

• Now, under Section 18 of the MSMED Act, there is nothing which stops the Facilitation Council or the institutions to perform dual role. The only caveat being – they cannot appoint same member to act as a conciliator as well as an arbitrator in view of the prohibition contained in law. Thus, no question of applying Section 24 of the MSMED Act arises.

1. Increased litigation & burden on Courts:
2. From the perusal of the various High Court judgments referred above, it will be seen that the dispute between a party and the Facilitation Council essentially arises because the Facilitation Council appoints the same member to perform dual role and they justify it by using Section 24 of MSMED Act. They appoint the same members as they do not have an independent panel of conciliators and arbitrators, and as per Section 21, they have minimum three members and maximum five members.

• Further, while appointing an arbitrator, the Facilitation Council or the institution does not take consent of the parties. Appointment is, thus, unilateral in nature. Therefore, the Facilitation Council is duty bound to appoint an arbitrator who will be able to act impartially, objectively and without any bias[xvi]. However, appointing the same member to perform dual role is in clear violation of these principles. The parties, therefore, approach Courts regularly for setting aside the decision of Facilitation Council or such institution.

1. Requirement of a broadbased panel of conciliator and arbitrator:
2. Under Section 21(1) of the MSMED Act, it is not necessary for the Facilitation Council to have a member from the field of industry, law, trade or commerce as at the end of sub-section (iii), the word used is "or". Therefore, without there being a member who has basic understanding of principles of law, justice cannot be meted out effectively and consequently, the burden on courts will increase.

• Thus, the time is ripe for the Facilitation Councils of each State to form a panel of conciliators and arbitrators, which should be broadbased. Apart from serving members as mentioned in Section 21, the panel should comprise of persons with legal background like Judges and lawyers of repute, accountants, retired government officers and other prominent persons from various fields. It would create a healthy arbitration environment. In Voestalpine Schienen GmbH v. Delhi Metro Rail Corpn. Ltd.[xvii], the Supreme Court observed that independence and impartiality of the arbitrator are the hallmarks of any arbitration proceedings. Rule against bias is one of the fundamental principles of natural justice which applies to all judicial and quasi-judicial proceedings.

1. Conclusion:

Hence, the interpretation given by various High Courts clearly amounts to re-writing of the statute and gives an interpretation which was not intended by the Legislature itself. MSMED Act is a complete code in itself and the provisions of Arbitration Act that is, Section 65 to 81 under Section 18(2) and Part I under Section 18(3) have been incorporated by reference in the MSMED Act and will apply with full force for resolving disputes under Section 18 of the MSMED Act.