MSMED Act: If Conciliation Not Successful, Arbitration Proceedings Must Be Resorted To: Supreme Court

A bench of Justice Indira Banerjee and Justice Subhash Reddy was presiding over a matter where an appeal was filed by Jharkhand Urja Vikas Nigam Limited to challenge an order by the Jaipur bench of Rajasthan High Court which dismissed an intra-court appeal by the appellant to challenge the order given by Rajasthan Micro & Small Industries Facilitation Council (respondent no. 2) in favour of M/S Anamika Conductor Suppliers (respondent no. 3) directing the appellants to make a payment of INR 74,74,041, towards principal amount plus INR 91,59,705.02 towards interest, to respondent no. 3 because of a contract between appellant and respondent no. 3 and appellants failing to make the due payments. The appellant's grievance was that the order given by respondent no. 2 ordering the appellant to make the payment of the aforementioned sum to respondent no.3 was without any jurisdiction and contrary to the terms & conditions of the contract signed between appellants and respondent no.3.

The bench primarily had to look into the question as to whether respondent no. 2 was right in passing the order without allowing the appellants to be heard because respondent no. 2 passed the aforementioned order on the very first day of conciliation proceedings which were supposed to be undertaken in the matter. In addition to stating that under S. 18(3), if and when conciliation fails, the dispute has to be resolved by arbitration, the bench opined that "if the appellant had not submitted its reply at the conciliation stage and had failed to appear, the facilitation council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996, to adjudicate the dispute and make an award. Proceedings under conciliation and arbitration cannot be clubbed."

The bench also observed that "As it's clear from the records of the impugned proceedings that the facilitation council did not initiate arbitration proceedings in accordance with the relevant purposes of Arbitration and Conciliation Act, 1996, the order dated 06.08.2012 is a nullity and runs contrary not only to the provisions of MSMED Act but to various mandatory provisions of Arbitration and Conciliation Act, 1996."

Further elucidating the difference between conciliation and arbitration, the bench noted, "In conciliation, the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the Arbitral Tribunal/arbitrator adjudicates the disputes between the parties. The claim has to be proved before the arbitrator, if necessary, by adducing evidence, even though the rules of the Civil Procedure Code or Indian Evidence Act may not apply."

The appeal was allowed and impugned judgment and order was set aside, award passed by respondent 2 was quashed although the apex court kept it open for the 2^nd respondent to either take up the dispute for arbitration or refer it to another institution providing alternate dispute resolution services or the centre.

Case Title: Jharkhand Urja Vikas Nigam Limited v. The State of Rajasthan and Ors.

Citation : LL 2021 SC 753

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