MSME Council Cannot Pass Award On Account Of Failure Of Conciliation Proceedings, Has To Refer Matter To Arbitration: Karnataka HC

Justice Suraj Govindaraj held thus while allowing the petition filed by M/s Enmas GB Power Systems Projects Ltd. It said, “The matter is remitted to the Karnataka Micro and Small Enterprises Facilitation Council, to formally terminate the conciliation proceedings and thereafter take a decision whether it intends to conduct the arbitration proceedings by itself or refer the matter for arbitration to be held by an institution.”

The petitioner had issued a purchase order to 2nd respondent (Lotus Power Gear Private Ltd)- Company on 14.02.2013 for the supply of certain materials. The entire payment not having been made, the 2nd respondent had initiated conciliation proceedings under Section 18 of the Micro, Small and Medium Enterprises Development Act. There were several meetings held by the Council and finally an award was passed on 14.03.2017 directing the petitioner to make payment of sum of Rs.11,88,756/- towards the principal outstanding dues along with interest at three times of the bank rate notified by the Reserve Bank of India.

The petitioner challenging the award contended that what was taken up by the council was only conciliation proceedings, no award could have been passed by the Council upon the conciliation having failed, it was required for the Council to terminate the conciliation proceedings and either take up the matter as arbitral proceedings by itself or refer the matter to institutional arbitration. The Council has passed an award, which is not permissible under Section 18(3) of the MSMED Act.

The respondent company submitted that, the award having been passed, it is only the proceedings under Section 19, which could be initiated by the petitioner. The petitioner cannot approach this Court by filing a writ petition.

Findings:

The bench noted that in terms of Sub Section (2) of section 18, on receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, in terms of sections 65 to 81 of the Arbitration and Conciliation Act, 1996.

It observed that “Essentially the Council has passed the award on account of conciliation between the petitioner and 2nd respondent having failed and at the same time concluding that there is no reason to disbelieve the claim of 2nd respondent.”

The bench said “In terms of Sub-Section (3) of Section 18, which is reproduced herein above, it is clear that when the conciliation initiated under sub-section (2) of Section 18 is not successful i.e. there is no settlement arrived at between the parties then the conciliation proceedings would have to be terminated and thereafter the Council shall either take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration under the provisions of the Arbitration and Conciliation Act, 1996 as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act.”

Following this, it held “Once the conciliation had failed, it was the duty and obligation on part of the Council to terminate its proceedings and refer the matter to arbitration or take up the matter for arbitration, which would require the Arbitration and Conciliation Act, 1996 to apply to the Arbitral proceedings. None of them having occurred, the Council could not have on its own come to a conclusion that there is no reason to disbelieve or discard the claim of the petitioner allegedly supported by the documents without providing an opportunity to the petitioner to file its detailed objections to lead evidence and contest the matter.”

It added, “Award has been passed contrary to sub-section (3) of Section 18 by the Council there being no jurisdiction vested with the Council to pass any such award after the conciliation has failed. The award having been passed suffering from jurisdictional error i.e. to say there being no jurisdiction at all.”

Accordingly, it allowed the petition.

Appearance: Advocate Sunil P.P for Petitioner.

Advocate Suresh P for R2.

Citation No: 2025 LiveLaw (Kar) 123

Case Title: M/S ENMAS GB POWER SYSTEMS PROJECTS LTD AND MICRO AND SMALL ENTERPRISES FACILITATION COUNCIL & ANR

Case No: WRIT PETITION NO. 29610 OF 2017