Apex Court quashes order of Rajasthan Micro & Small Enterprises Facilitation Council, being passed in contravention to MSMED Act as well as Arbitration & Conciliation Act, 1996

Read Judgment: Jharkhand Urja Vikas Nigam Limited vs. State of Rajasthan & Others 

Pankaj Bajpai

New Delhi, December 17, 2021: While setting aside the order passed by the Rajasthan Micro & Small Enterprises Facilitation Council (RMSEFC), the Supreme Court has opined that the Council is empowered either to take up arbitration on its own or to refer the arbitration proceedings to any institution as specified u/s 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

A Division Bench of Justice Indira Banerjee & Justice R. Subhash Reddy observed that the order passed by RMSEFC is a nullity and runs contrary not only to the provisions of MSMED Act but contrary to various mandatory provisions of Arbitration and Conciliation Act, 1996. 

Going by the background of the case, Jharkhand Urja Vikas Nigam Limited (Appellant), which is the successor company of erstwhile Jharkhand State Electricity Board, entered into a contract with M/s. Anamika Conductors Ltd. (3^rd Respondent), Jaipur, for supply of ACSR Zebra Conductors. Respondent No.3 claiming to be a small scale industry, approached the Rajasthan Micro and Small Enterprises Facilitation Council, claiming an amount of Rs.74,74,041/- towards the principal amount of bills and an amount of Rs.91,59,705.02 paise towards interest. On the ground that the appellant has not responded to earlier notices, the Council issued summons for appearance of the appellant before the Council.

Since the appellant has not appeared, the Council directed the appellant to make the payment to the 3rd respondent, as claimed, within a period of thirty days from the date of the order. The matter reached the High Court, which was then dismissed by the Single Judge. Hence, present appeal. 

After considering the arguments and the provisions, the Apex Court noted from a reading of Section 18(2) and 18(3) of the MSMED Act, it is clear that the Council is obliged to conduct conciliation for which the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 would apply, as if the conciliation was initiated under Part III of the said Act. 

U/s 18(3), when conciliation fails and stands terminated, the dispute between the parties can be resolved by arbitration, added the Court. 

“It is open to the Council to arbitrate and pass an award, after following the procedure under the relevant provisions of the Arbitration and Conciliation Act, 1996, particularly Sections 20, 23, 24, 25. There is a fundamental difference between conciliation and arbitration. 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 the Indian Evidence Act may not apply”, observed the Court. 

Speaking for the Bench, Justice Reddy clarified that if the appellant had not submitted its reply at the conciliation stage, and 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 for conciliation and arbitration cannot be clubbed, added the Bench. 

Justice Reddy found that in the present case, only on the ground that the appellant had not appeared in the proceedings for conciliation, on the very first date of appearance, an order was passed directing the appellant and/or its predecessor/Jharkhand State Electricity Board to pay Rs.78,74,041/- towards the principal claim and Rs.91,59,705/- odd towards interest.

As it is clear from the records of the proceedings that the Facilitation Council did not initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996, added Justice Reddy. 

The Top Court therefore concluded that under the scheme of the Arbitration and Conciliation Act, 1996 an arbitral award can only be questioned by way of application u/s 34 of the 1996 Act. 

At the same time when an order is passed without recourse to arbitration and in utter disregard to the provisions of Arbitration and Conciliation Act, 1996, Section 34 of the said Act will not apply, added the Court.