Introduction
The Micro Small and Medium Enterprises Development Act enforced in the year 2006 (“MSMED Act”) for facilitating ease of business, supporting MSMEs and to address challenges faced by these enterprises such as delayed payments, access to credit etc. Section 18 of the MSMED Act plays a pivotal role in this framework. It allows any party to refer dispute pertaining to pending dues to the MSME Facilitation council. On referral, the council is mandated to conduct conciliation between the parties, on failure of which the council shall take up the dispute for arbitration or refer it to any institution or center providing alternative dispute resolution services. It is also provided that the entire process from referral to resolution shall be concluded within 90 days.
The issue arises on the dichotomy present under the two legislations governing arbitration in India i.e. the Arbitration and Conciliation Act of 1996 (“A&C Act”) and Section 18 of the MSMED Act with key issues such as timeline to be followed for arbitration. Another critical question is which legislation would prevail in the event of the existence of a separate arbitration agreement between the parties? While the courts have tried to answer these questions in various judgments, however, a uniform and consistent approach has yet to emerge.
Existing Jurisprudence
The first judgment on the issue was given in the M/S Steel Authority case (2010) wherein Bombay High Court upheld the validity of the arbitration agreement due to the non-applicability of the overriding clause under Section 24 of the MSMED Act. The court held that the existence of a non-obstante clause under Section 18 and Section 24 does not render the independent arbitration agreement invalid observing that the non obstante clause only overrides the laws inconsistent with the provisions provided under it, the separate arbitration clause enforceable under the A&C Act not being inconsistent with the provisions, shall stand enforceable [¶11].
However, the Gujarat High Court took a different view and disagreed with the above view of Bombay High Court in the judgment of Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers). The court ruled that if there is any dispute between the parties governed by the act, 2006, the said dispute is required to be resolved only through the procedure as provided under Section 18 of the MSMED Act, thus giving precedence to the MSMED Act [¶6.1].
This conflict between the MSMED Act and A&C Act came before the Supreme Court in the M/Silpi Industries vs KSRTC which held that out of the two legislations, the provision of the MSMED Act shall prevail especially when it has the overriding provision under Section 24 thereof. The court added that given the special nature of the MSMED Act, it would prevail over the A&C Act. Further, even in cases of agreement between the parties, the same is bound to be ignored in view of statutory obligations under the MSMED Act [¶23].
The jurisprudence on these issues has evolved over the years with the recent landmark judgment of the Supreme Court in the Gujarat Supplies v. Mahakali Foods case (2022). The questions that the court took up for consideration in this case included –
Whether the provisions of MSMED Act would override the provisions of the Arbitration Act?
Whether a party who is covered under the MSMED Act, will be precluded from making a reference to the MSEFC merely by virtue of the existence of an independent arbitration agreement?
Whether the MSEFC who has conducted the conciliation proceedings, can also act as the arbitrator in spite of the bar contained under the Arbitration Act?
The Hon’ble Supreme Court, in light of the previous judgments held that the MSMED Act shall take precedence over the A&C Act following the principle of Generalia Specialibus Non Derogant (general laws shall not prevail over special laws). The court further held that the existence of arbitration agreement between the parties cannot preclude the parties from making a reference to the MSEFC as a “private agreement cannot obliterate the statutory provisions” thus prioritizing statutory mechanism over contractual requirements. Lastly, the court placed reliance upon Section 18 and 24 to rule that given the non-obstante clause, the bar on conciliator acting as an arbitrator under Section 80 of the Arbitration Act is superseded [¶27].
Current Gaps and Challenges
The recent judgment in the Mahakali Foods case highlight substantive flaws and lacunae in the existing law, the most prominent is visible with respect to the timeline that is to be followed for the proceedings under arbitration. The timeline provided under Section 18(5) of the MSMED Act prescribes a 90-day limit for resolution of reference made to the council. However, the Supreme Court made two conflicting observations – firstly, that Chapter 5 of the MSMED Act would prevail over the provisions of the A&C Act and secondly, that the provisions of the A&C Act shall apply to the proceedings conducted by the Facilitation Council. These two observations present a dilemma over which timeline to follow for the arbitration proceedings conducted under the MSMED Act. In the light of these observations, two views arise – first, since Section 18 has an overriding effect over any other laws in force, the time limit of 90 days prescribed for the proceedings shall be adhered to. However, another view that emerges is that after the completion of the conciliation proceedings, the provision of A&C Act shall be applicable and hence the timeline provided under the A&C Act (6+12) months shall be followed. However, if this timeline is followed, it would result in Sub – Clause 5 of Section 18 being overridden by the A&C Act.
Additionally, a serious lacuna exists in the present structure of the law i.e. accountability. This issue is highlighted in the judgment of Bafna Udyog v. MSMED which demonstrated a lack of accountability of the Facilitation Council as despite the petitioner taking up all measures required for the council to take up the dispute for arbitration, it did not take up the dispute. Aggrieved by the same, the petitioner approached the Bombay High Court under Section 11 of A&C Act. However, the court refused to appoint an arbitrator observing that there is no arbitration agreement. This case shows that by inaction of MSMEFC, the whole procedure can come to standstill. This lacuna added up with the observation in the Mahakali Foods case which held that the conciliator is not barred from acting as the arbitrator allows a risk of bias against the parties. The bar under Section 80 aims to prevent bias from arising in the arbitration proceedings and ensure a fair and impartial proceeding. However, the dual role of the council to act as conciliator and arbitrator allows a potential risk of bias against the parties and possible disruption in arbitration proceedings.
Lastly, there is no mandate for the parties to show up for the proceedings. Even in cases where the parties do not show up to the proceedings and cause delay, there is no penalty prescribed. Further the timeline being directory in nature adds to this already existing defect in the law. Even in cases, the arbitral award is passed by the council in favor of the MSME, there exists no mechanisms to enforce the award except for approaching the courts. Therefore, to enforce the awards the MSME would have to engage in costly and lengthy litigation process, thus, counterproductive to the aim of the MSMED Act to provide an institutional mechanism and ultimately a speedy resolution for disputes arising under the act.
Conclusion
In view of above, the legal framework governing arbitration under the MSMED Act remains unsettled, necessitating clear guidelines for dispute resolution under Section 18. Establishing a fixed timeline for the arbitration proceedings is essential to ensure efficiency. Furthermore, there is a need for proper guidelines to ensure accountability in the proceedings while also ensuring a harmonious construction between the two legislations to ensure fairness and impartiality of the proceedings. Lastly, there is a need for resolving the lacunae in the law regarding the delay and enforcement of awards by ensuring strict adherence to the time period and award passed through proper penalties. By resolving these challenges, the MSMED Act can foster a more conducive environment for MSMEs to conduct business seamlessly.
Author(s)
Biswajeet Shekhar Panda
Student at RMLNLU, Lucknow