The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) stands as a significant legislative effort aimed at safeguarding the interests of micro and small enterprises in India. A primary challenge faced by these enterprises is the delay in payments from buyers, which can lead to financial difficulties and disrupt operations. In response to this issue, the MSMED Act established a mechanism through the Micro and Small Enterprises Facilitation Council (“MSEFC” or “Facilitation Council”) to expedite the recovery of overdue payments.
Dispute Resolution Mechanism under the MSMED Act
Section 18 of the MSMED Act introduces a dual approach combining conciliation and arbitration for resolving payment disputes. Initially, disputes are referred for conciliation, and if unresolved, they proceed to arbitration. However, the language of Section 18 raises concerns about whether the same Facilitation Council can act both as a conciliator and arbitrator in the same dispute. This issue is further complicated by Section 80 of the Arbitration and Conciliation Act, 1996, which prohibits a conciliator from acting as an arbitrator in the same dispute unless agreed otherwise by the parties involved.
Judicial Interpretations and Supreme Court Clarification
The conflicting interpretations of these legal provisions by different High Courts led to varying judicial opinions. The Supreme Court of India ultimately addressed this ambiguity in the case of Gujarat State Civil Supplies Corporation Ltd. v Mahakali Foods Pvt. Ltd. The Court ruled that the MSMED Act, being a special beneficial legislation, should be liberally construed. Relying on Section 24 of the MSMED Act, which grants overriding effect to its provisions, the Court concluded that the Facilitation Council could act as both conciliator and arbitrator under Section 18.
Prior to this ruling, High Courts had adopted differing stances. For instance, in Jharkhand Urja Vikas Nigam Ltd. v State of Rajasthan & Ors., concerns were raised about the validity of the same body acting in both roles due to the principle of neutrality. Similarly, the Bombay High Court in Gujarat State Petronet Ltd. v Micro and Small Enterprises Facilitation Council emphasized the importance of neutrality, suggesting that the Council should not arbitrate disputes it has conciliated.
Conversely, the Delhi High Court in Bharat Heavy Electricals Ltd. v The Micro and Small Enterprise Facilitation Centre argued that the MSMED Act’s provisions supersede those of the Arbitration and Conciliation Act, emphasizing the legislation’s intent to protect micro and small enterprises.
Ongoing Legal Debates and Future Implications
Despite the Supreme Court’s decision in Mahakali Foods, the debate continues. In Tamil Nadu Cements Corporation Ltd. v Micro and Small Enterprises Council & Ors., the Supreme Court acknowledged the “direct confrontation” between prior judgments and referred key questions to a larger bench. This includes the role of Council members in both conciliation and arbitration, and the mandatory pre-deposit requirement as discussed in Tamil Nadu Cements Corporation Ltd. v M/s Unicon Engineers.
Currently, Mahakali Foods remains the prevailing legal position, affirming the Facilitation Council’s authority to conduct both conciliation and arbitration. However, the broader concerns of arbitral neutrality and procedural fairness persist, awaiting further scrutiny by a larger Supreme Court bench.
As Indian arbitration jurisprudence evolves, there may be legislative reforms to distinctly separate conciliatory and adjudicatory roles within the MSME dispute resolution framework. The forthcoming decisions by the Supreme Court are poised to significantly influence the future landscape of dispute resolution under the MSMED Act.
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About the authors: Tejas Jagtap is a Senior Associate, while Shraddha Dhanwate and Poonam Shelot are Associates at Rishabh Gandhi and Advocates.
Disclaimer: The views expressed in this article belong to the author(s) and do not necessarily reflect the views of Bar & Bench.
