In ARB No.86 of 2020(O&M)-Micro, Small and Medium Enterprises Development Act, 2006 being special statute shall prevail and have overriding effect vis-à-vis Arbitration and Conciliation Act, reiterates P&H HC Justice Lisa Gill [10-06-2022]

Read Order: M/s SGM Packaging Industries v. M/s Goyal Plywood LLP  

Monika Rahar

Chandigarh, June 13, 2022: While placing reliance on the judgment of the Apex Court in M/s Silpi industries etc., Vs. Kerela State Road Transport Corporation and another,, the Punjab and Haryana High Court has reiterated that the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 being a Special Act shall prevail and have overriding effect vis-à-vis the Arbitration and Conciliation Act. 

The Bench of Justice Lisa Gill further held, “Even in a case where exists an agreement between the parties for resolution of disputes by Arbitration, if a seller is covered under the MSMED Act, the seller is at liberty to approach the competent authority to make its claim and agreement, if any, between the parties is to be ignored in view of the statutory obligations and mechanism provided under the MSMED Act.”

The Court was dealing with a petition filed under Section 14 of the Arbitration and Conciliation Act (‘Arbitration Act’) read with Section 151 CPC seeking termination of the mandate of the Sole Arbitrator. 

Essentially, the petitioner is a proprietorship firm engaged in manufacturing corrugated boxes, packaging material and other materials used in the logistic industry for the safe transportation of goods while the respondent is a supplier of plywood and other wooden material used in the manufacturing of corrugated boxes. The respondent claimed an outstanding amount qua the petitioner in respect of goods supplied by it to the petitioner in the year 2016.

A claim was filed by the respondent before the Haryana Micro and Small Enterprises Facilitation Council (‘HMSEFC’) claiming an amount of Rs. 14,01,505/-. The matter was referred by the HMSEFC for arbitration and a sole arbitrator was appointed. Notice was issued to the petitioner for appearing before the arbitrator.

In response, the petitioner filed an application for Section 12 of the Arbitration Act seeking valid disclosure from the Arbitrator and a specific objection was raised in the said application that since no clause for arbitration existed, therefore HMSEFC could not have referred the matter to the Arbitrator. The petitioner argued that the matter was referred for arbitration without any valid order being passed on conciliation proceedings under the Micro, Small and Medium Enterprises Development Act, 2006 (for short ‘MSMED Act’). 

It was the petitioner’s case that the conduct of the Arbitrator was arbitrary and disclosure regarding the independence and impartiality of the Arbitrator was imperative as per Section 12 of the Arbitration Act. It was further submitted that the claim filed by the respondent was time-barred. It was also argued that in terms of Section 18 (3) MSMED Act the referral to the Sole Arbitrator was illegal as it provides for referral of the dispute to any institution or centre or arbitration. 

On the contrary, the Counsel for the petitioner contended that the petitioner was guilty of concealment of material facts. It was the Counsel’s case that the respondent, a duly registered entity under the MSMED Act, approached the HMSEFC for redressal of its grievances and an intimation of the same was duly conveyed to the petitioner advising it to pay the amount in question and to settle the dispute. When the same was not done, the HMSEFC referred the matter to the empanelled Arbitrator and the Counsel argued that the said order of referral was, at no point in time, challenged by the petitioner. 

It was further the Counsel’s submission that after the dismissal of the petitioner’s application under Section 12 and 13 of the Arbitration Act, the present petition was filed in July 2020. In the meanwhile, a few days later, the Arbitrator struck off the defence of the petitioner. As a result, the petitioner filed a petition under Section 37 of the Arbitration Act (first petition) before the Additional District Judge, Gurugram, challenging the order striking off the petitioner’s defence. No interim order was passed in the petitioner’s favour. The petitioner filed another petition under Section 37 of the Arbitration Act (second petition) before the District Judge, Gurugram, challenging striking off his defence along with an application for a stay of arbitral proceedings. 

It was submitted by the respondent’s counsel that due to concealment of facts and false averments of the petitioner, an order was passed by the Additional District Judge, Gurugram in the second petition under Section 37 staying the pronouncement of the award by the Sole Arbitrator. The Counsel added that the petitioner withdrew the first petition under Section 37 in an utterly devious manner. 

Also, the Counsel added that on the first hearing of the present matter, the petitioner actively concealed the pendency of his second petition Section 37 as well as the interim order, passed therein, due to which ex parte interim order was passed in the present petition to the effect that Arbitrator shall not pass the final award. 

On the maintainability of the proceeding under the MSMED Act, the Counsel argued that the existence of an arbitral clause between the parties is not a sine qua non for the respondent to approach the HMSEFC under the MSMED Act in terms of Section 18 thereof. The petitioner, it was submitted, was merely trying its level best to delay the proceedings in one way or the other and defeat the very purpose of the MSMED Act. 

At the outset, the Court noted that the petitioner did not challenge the appointment of the Arbitrator by the HMSEFC. Having noted this fact, the Court referred to Sections 15, 16, 17 and 18 of the MSMED Act to observe that the respondent who was registered under the MSMED Act, at the relevant time was entitled to approach the HMSEFC under the MSMED Act for redressal of its grievance. 

Further, the Court made reference to the Supreme Court in M/s Silpi industries etc., Vs. Kerela State Road Transport Corporation and another etc. to reiterate that provisions of the MSMED Act being a Special Act shall prevail and have overriding effect vis-a-vis the Arbitration Act. Justice Gill asserted further that even in a case where exists an agreement between the parties for the resolution of disputes by Arbitration, if a seller is covered under the MSMED Act, the seller is at liberty to approach the competent authority to make its claim and agreement, if any, between the parties is to be ignored in view of the statutory obligations and mechanism provided under the MSMED Act.

In light of the above, the Court held that Section 18 of the MSMED Act starts with a non-obstante clause, therefore, the argument that proceedings were not maintainable in the absence of an arbitral clause was devoid of any merit, and hence was rejected. 

With respect to the argument that no conciliation etc., was carried out, it was reiterated by the Court that the order whereby the Sole Arbitrator was appointed was never subjected to challenge by the petitioner. Also, the Court was in agreement with the case advanced by the Respondent’s counsel in concealing material facts of the case. 

Thus, the petition was dismissed without cost.