90-Day Timeline In Section 18(5) Of MSME Act Is Directory : Calcutta High Court

Background Facts

Porel Dass Water & Effluent Control Pvt. Ltd. (the petitioner) had initiated an arbitral proceeding under the MSME Act. The petitioner sought an extension of the mandate of the Council acting as arbitrator after the arbitration proceedings exceeded the statutory period of 90 days under Section 18(5) of the MSME Act. The petitioner filed the application under Section 29A of the Arbitration and Conciliation Act, 1996 for extending the mandate.

Issues

1. Whether Section 18 of the MSME Act stands amended by Section 62 of the Mediation Act, 2023;
2. Whether the Court having jurisdiction over an arbitral proceeding under the MSME Act has the authority/jurisdiction to substitute the Council or its designated nominee as Arbitrator in an arbitration under Section 18 of the MSME Act; and
3. Whether the mandate of the Council or its nominee under Section 18(3) of the MSME Act terminates after the expiry of 90 days from the date of making the reference.

Arguments

The Counsel for the petitioner made the following arguments:

• Section 62 of the Mediation Act, 2023 has amended the MSME Act in the manner specified in the Seventh Schedule, replacing conciliation under Section 18(2) and (3) of the MSME Act with pre-arbitration mediation by the MSME Facilitation Council.
• Section 18(4) of the MSME Act now allows for arbitration by the Council or an ADR institution if the mediation stands terminated. The previous sub-section (5) of Section 18, which provided that every reference under Section 18 shall be decided within a period of 90 days from the date of making such a reference has been deleted. Thus, there is no longer any statutory time frame for the completion of arbitral proceedings by the Council.
• As the 90-day period expired on 08.05.2023, the Court can extend the Council's mandate under Section 29A of the 1996 Act by virtue of Section 18(4) of the MSME Act.
• Even if Section 62 of the Mediation Act is inapplicable, the original Section 18 of MSME Act remains, and Section 29A of the 1996 would apply to MSME arbitrations.
• The 90-day period under Section 18(5) is directory, as held in GPT Infra Projects Ltd. v. Miki Wire Works Pvt. Ltd. [2023 SCC OnLine Cal 595].
• Section 18(4) confers exclusive jurisdiction on the Council for arbitration. Section 18(1) and (4) contain non obstante clauses. Thus, there cannot be any substitution of the Council even if the mandate expires, within the contemplation of either Section 29A or Section 15 of the 1996 Act. As the MSME Act is a special statute, it overrides the 1996 Act. Reliance was placed upon Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Pvt. Limited [ (2023) 6 SCC 401]

The Counsel for the respondent made the following arguments:

• Section 62 of the Mediation Act has not yet been notified in Notification No. S.O. 4384(E) dated 09.10.2023. The Madras High Court in its judgment dated 19.03.2024 in Tamil Nadu Medical Services Corp. Limited. v. M/s Smilax Healthcare Pvt. Ltd., has also noted that Section 62 of the Mediation Act is yet to be notified and the amended Section 18 of the MSME Act has not come into force.
• The Council's mandate as Arbitral Tribunal expired on 08.05.2023 (90 days from 10.02.2023), per Section 18(5) of the MSME Act.
• In Gujarat State Civil Supplies, the non obstante clauses in Section 18(1) and (4) of the MSME Act were held to override the 1996 Act.
• The 90-day limit under Section 18(5) of the MSME Act is mandatory, leaving no room for extensions under Section 29A of the 1996 Act.
• The only option before the parties is to seek a substitution under Section 15(2) of the 1996 Act.
• Section 18(4) of the MSME Act, containing a non obstante clause, gives the Council jurisdiction as Arbitrator or Conciliator. Section 80(a) of the 1996 Act bars a Conciliator from acting as an Arbitrator. This bar does not prevent the appointment of a fresh Arbitrator under Section 15 of the 1996 Act.

Observations

1. Whether Section 18 of the MSME Act stands amended by Section 62 of the 2023 Act

The Court observed that Notification No. S.O.4384(E) dated 09.10.2023 issued by the Ministry of Law and Justice did not include Section 62 of the Mediation Act. As such, section 62 had not yet been notified or implemented, and the amendments under it had not come into force. The court stated that section 18 of the MSME Act remains unamended by the Mediation Act. Thus, the court answered the question in the negative.

2. Whether the Court has jurisdiction to substitute the Council or its nominee as Arbitrator under Section 18 of the MSME Act

The Court observed that Section 18(3) of the MSME Act confers exclusive jurisdiction on the Facilitation Council to either conduct the arbitration or refer it to any institution or centre providing alternative dispute resolution services. The non obstante clause in Section 18(1), states that a reference can be made to the MSME Council in respect of matters covered under Section 17.

Further, the non obstante clause in Section 18(4) provides that the Council or its nominee shall have jurisdiction to act as an Arbitrator or Conciliator under the said Section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India. Therefore, it would be de hors the MSME Act to substitute the Council or its nominee with another Arbitrator.

Referring to the Supreme Court's decision in Gujarat State Civil Supplies, the Court held that the provisions of the MSME Act override the Arbitration and Conciliation Act, 1996 in such matters. The court stated:

“The Court under Section 2(1)(e) of the 1996 Act does not have jurisdiction under any of the provisions of the 1996 Act, be it Section 29A(6), Section 14(1) or Section 15(2) of the 1996, Act to substitute the Council or its nominee by an alien Arbitrator.”

This question was also answered in the negative.

3. Whether the mandate of the Council or its nominee under Section 18(3) of the MSME Act terminates after the expiry of 90 days from the reference

The Court relied upon the judgment in GPT Infra Projects Limited, and held that the 90-day period mentioned in Section 18(5) of the MSME Act is not mandatory but directory due to the absence of any penal consequences for exceeding the 90-day timeline.

The court compared Section 18(5) of the MSME Act with Section 29A of the Arbitration and Conciliation Act, 1996. It noted that both sections use the term “shall” for timelines—12 months from the completion of pleadings in Section 29A(1) and 90 days from the reference in Section 18(5). However, Section 29A(4) states that if the award is not made within the specified period, the Arbitrator's mandate terminates unless extended by the court. The court noted that no such sanction or adverse consequence for non-adherence to such outer time-limit exists in the MSME Act. The court thus held that the 90-day timeline in Section 18(5) is directory, not mandatory, despite the use of "shall" in both provisions. “The timeline is only to nudge the Council into action and is a provision in terrorem”, the court stated.

The court further held that the expiry of the timeline under Section 18(5) of the MSME Act does not terminate or affect the validity of the mandate of the Council as Arbitrator. Thus, the Council retains its mandate even beyond the 90-day period.

The application under Section 29A seeking an extension of the Council's mandate was deemed redundant. The Court expressed hope that the Facilitation Council would complete the arbitration proceedings expeditiously, ideally within 3 months from the communication of the order.

Case Title: Porel Dass Water & Effluent Control Private Limited vs. The West Bengal Power Development Corporation Limited and Ors.

Case Number: AP-COM No. 789 of 2024

Counsel for the petitioner: Mr. Sabyasachi Chaudhury, Adv., Mr. Satadeep Bhattacharyya, Adv., Ms. Sriparna Mitra, Adv., Mr. Arindam Paul, Adv., Ms. Debarati Das, Adv.

Counsel for the respondent: Mr. Jishnu Chowdhury, Adv., Mr. Chayan Gupta, Adv., Mr. Aritra Basu, Adv., Mr. Rittick Chowdhury, Adv., Mr. Aviroop Mitra, Adv., Mr. Satrajeet Sen, Adv.

Date of Judgment: 30.09.2024

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