Facilitation Council Which Was The Conciliator Under MSMED Act, Can Arbitrate The Dispute; Bar Contained In S. 80 Of Arbitration Act Not Applicable: Allahabad High Court

The Allahabad High Court has ruled that the discretion given to Facilitation Council under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) in respect of selection of forum for arbitration between the parties, is absolute and has overriding effect over any other law. In exercise of the said discretion, the provisions of the Arbitration and Conciliation Act, 1996 (A&C Act), including the prohibition contained in Section 80, will have no application, the court has ruled. Therefore, the court held that in the event the conciliation proceedings carried out by the Council under Section 18(2) of the MSMED Act fail, the Council can itself proceed to arbitrate the dispute between the parties.

The bench comprising Justices Mahesh Chandra Tripathi and Manjive Shukla remarked that the MSMED Act is a special law containing special provisions in respect of Micro, Small and Medium Enterprises. The bench said that it is for this purpose that Section 24 of the MSMED Act has given overriding effect to Sections 15 to 23 of the said Act. Therefore, the bar contained in Section 80 of the A&C Act will not be applicable at the stage of selection of forum for arbitration by the Facilitation Council, the court held.

Section 80 of the A&C Act provides that unless otherwise agreed by the parties, the conciliator shall not act as an arbitrator in any arbitral proceedings in respect of a dispute that is the subject of the conciliation proceedings.

The petitioner, Bata India Limited, and respondent No.2, AVS International Private Limited, entered into an agreement under which AVS International agreed to manufacture and supply footwear to Bata.

After certain disputes arose between the parties under the manufacturing agreement, the respondent, who is a registered Micro, Small and Medium Enterprise, approached the U.P. State Micro and Small Enterprises Facilitation Council (Facilitation Council).

After the conciliation proceedings initiated by the Facilitation Council failed, the Council passed an order under Section 18(3) of the MSMED Act deciding to arbitrate the dispute between the parties.

The representation made by Bata for referring the dispute for arbitration to any institution providing alternate dispute resolution (ADR) services, was also rejected by the Council.

Bata challenged both the orders of the Facilitation Council before the Allahabad High Court.

Bata submitted before the court that the conciliation proceedings initiated by the Facilitation Council under Section 18(2) of the MSMED Act, had failed. It added that since the Council itself was the Conciliator, therefore, in view of the prohibition contained in Section 80 of the A&C Act, the Council could not itself arbitrate the dispute between the parties.

Perusing the provisions of the MSMED Act, the court remarked that the Act contains various provisions to deal with the Micro, Small and Medium Enterprises. Therefore, the MSMED Act is a special law dealing with Micro, Small and Medium Enterprises. And for that purpose, Section 24 of the MSMED Act has given overriding effect to Sections 15 to 23 of the Act, the court observed.

The bench reckoned that Section 18(1) of the MSMED Act provides that notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under Section 17, make a reference to the Facilitation Council under the Act.

Further, Section 18(3) of the MSMED Act provides that where the conciliation initiated under Section 18(2) by the Facilitation Council or any institution or centre, is not successful and is terminated, the Facilitation Council may either itself take up the dispute for arbitration or refer the matter to any institution or centre for arbitration.

The court further noted that when a matter is taken up for conciliation under Section 18(2) of the MSMED Act, the provisions of Sections 65 to 81 of the A&C Act shall apply to such a dispute as if the conciliation was initiated under Part III of the A&C Act. Also, when the matter is referred to arbitration under Section 18(3) of the MSMED Act, the provisions of the A&C Act shall apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of that Act.

After referring to Section 24 of the MSMED Act, the court, however, concluded that the provisions under Section 18 of the MSMED Act have an overriding effect. The bench remarked that Section 18(3) has given absolute discretion to the Facilitation Council that in the event of failure of the conciliation proceedings, the Council can either itself proceed to arbitrate the dispute between the parties or it may refer the arbitration to an institution providing ADR services.

“We find that so far as the selection of forum of arbitration is concerned, the legislature has given absolute discretion to the Council that either Council itself can proceed to arbitrate the dispute between the parties or can refer the dispute for arbitration to an institution providing alternate dispute resolution services and in exercise of the said discretion the provisions of the Act of 1996 have not been made applicable. Rather after exercise of the said discretion in selection of forum of arbitration proceedings, the provisions of the Act of 1996 are made applicable in respect of procedure to be adopted by the Arbitrator,” the court held.

The court added that the MSMED Act is a special law and in view of the provisions contained in Section 24 of the said Act, the discretion given to the Council under Section 18(3) for selecting the forum of arbitration between the parties, has overriding effect. “Therefore, at the stage of selection of forum for arbitration by the Council the prohibition contained in Section 80 of the Act of 1996 will not be applicable,” the court said.

The bench further observed that the top court in Gujarat State Civil Supplies Corporation Ltd. vs. Ramkrishna Foods Pvt Ltd. & Anr., 2022 SCC OnLine SC 1492, has held that the Facilitation Council, which had initiated the conciliation proceedings under Section 18(2) of the MSMED Act, would be entitled to act as an arbitrator despite the bar contained in Section 80 of the A&C Act.

The court thus concluded, “We find that the legislature has enacted a special law in the form of Act of 2006 containing the special provisions in respect of Micro, Small and Medium Enterprises and further the legislature has given overriding effect to Sections 15 to 23 of the Act of 2006. Thus, the discretion given to Facilitation Council under Section 18(3) of the Act of 2006 in respect of selection of forum of arbitration between the parties is absolute and has overriding effect to any other law. Therefore, in the event of conciliation proceedings being carried out by the Council and on its failure the Council itself can proceed to arbitrate the dispute between the parties and the prohibition contained in Section 80 of the Act of 1996 will have no application in exercise of the said discretion by the Council.”

The bench thus dismissed the writ petition.

Case Title: Bata India Limited & Anr. vs U.P. State Micro and Small Enterprise Facilitation Council & Anr.

Dated: 31.05.2023

Counsel for the Petitioners: Chandra Bhan Gupta

Counsel for the Respondents: Ashok Kumar Singh, Ashok Kumar Singh, Sujeet Kumar

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