Arbitrator Nominated U/S 18(3) MSMED Act Erred In Deciding Merits After Finding Respondent Was Not MSME: Madras HC Upholds Setting Aside Of Award

M/s. Sunwin Papers (Respondent) supplied waste paper to M/s. Sivadarshini Papers (Appellant). The Respondent registered itself as aN MSME on 9.11.2016 under the MSMED Act.

Since payments were not purportedly made by the Appellant to the respondent for the supplies effected by the respondent, the respondent made a reference to the Micro and Small Enterprises Facilitation Council (MSEFC), Madurai on 16.08.2018. MSEFC conducted conciliation. The conciliation did not culminate in a resolution of the dispute between the appellant and the respondent. On 26.07.2019, MSEFC recorded that consensus was reached between the parties to refer the case for arbitration under section 18(3) of the MSMED Act.

The case was transferred to the Arbitration Centre attached to the Court for nominating an Arbitrator. Pursuant to the same, the Sole Arbitrator entered upon reference where the appellant filed an application under Section 18(3) of the MSMED Act r/w Section 16 of the Arbitration and Conciliation Act, 1996, questioning the arbitrability of the dispute between the appellant and the respondent.

The case of the appellant was that the respondent was not a registered MSME either at the time of the transaction which is the subject matter of the dispute or at the time of making reference to the Arbitral Tribunal.

The Sole Arbitrator accepted the appellant's contentions that the respondent was not validly registered as an MSME under the MSMED Act as per the Office Memorandum dated 27.06.2017. The Arbitrator proceeded to decide the matter on its merits as well on the issue whether a dispute existed between the parties and whether the appellant was liable to pay any outstanding amount to the respondent.

Aggrieved by the award dated 01.10.2020, the respondent filed an application challenging it. In its order dated 11.08.2022, the court observed that the Office Memorandum dated 27.06.2017 makes it clear that the activities adumbrated in Table I thereat would not be included in the manufacture and production of goods or providing or entering of services under Section 7 of MSMED Act. It was noted that the Office Memorandum is prospective.

The Court held that the dispute has to be adjudicated by arbitration proceedings. It noted that the Arbitral Tribunal's award constituted a "patent illegality" as per Section 34(2A) of the Arbitration and Conciliation Act, 1996, and was also in conflict with the public policy of India under Section 34(2)(b)(ii). The Court set aside the award.

The Appellant filed the appeal under Order XXXVI Rule XI of the Original Side Rules r/w Section 37 of the Arbitration and Conciliation Act, 1996 (under Section 13(1) of the Commercial Courts Act, 2015) against the Impugned Order dated 11.08.2022.

Observations

The court held that the impugned order did not suffer from any error of jurisdiction. The court noted that the respondent was an MSME within the meaning of the provisions of MSMED Act and therefore the respondent was entitled to invoke jurisdiction of the MSEFC under Section 18 of MSMED Act.

The court noted that before the MSEFC, the appellant had acquiesced in the proceedings under MSMED Act and had thereafter filed an application under section 18(3) of MSMED Act r/w section 16 of the Arbitration Act, questioning locus standi of the respondent to invoke jurisdiction/machinery under the provisions of Section 18 of MSMED Act.

The court held that the respondent was entitled to relief, if any, on the supplies effected under the provisions of MSMED Act.

The court concluded that the Arbitrator ought not to have decided the case on merits after having come to a conclusion that the respondent was not an MSME and therefore not entitled to invoke the machinery under MSMED Act.

The court referred the case to a new arbitrator nominated by the High Court Annexed Mediation and Conciliation Centre. It dismissed the appeal.

Case Title: M/S. Sivadarshini Papers Limited vs. M/S. Sunwin Papers
Case Number: O.S.A. (Comm.App.Div.) No.7 of 2023 and C.M.P.No.2407 of 2023 and C.M.P.No.16053 of 2024

Citation: 2024 LiveLaw (Mad) 420

For Appellant: Mr. Anirudh Krishnan

For Respondent: Mr. P.Rajasekaran (Party-in-Person)

Date of Judgment: 30.10.2024