The enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) was marked as one of the most important legislative efforts to strengthen and protect the interests of the micro and small enterprises in India. One of the biggest problems faced by such enterprises is delay in payments by buyers. Such delays often lead to financial distress and operational instability. To address this issue, the MSMED Act was enacted, introducing a special mechanism for recovery of dues through the Micro and Small Enterprises Facilitation Council (“MSEFC” or “Facilitation Council”). The underlying objective of this framework is to ensure an expeditious and efficient mechanism for resolution of disputes involving micro and small enterprises.
The provisions under Section 18 of the MSMED Act lay down a specific framework for dispute resolution whereby disputes of delayed payments are first referred for conciliation. Upon failure of conciliation, the dispute is then referred to arbitration. However, the language of Section 18 has raised a question as to whether the same Facilitation Council that acts as a conciliator under section 18(2) can subsequently function as an arbitrator under section 18(3). This question becomes significant because section 80 of the Arbitration and Conciliation Act, 1996 explicitly stipulates that a conciliator cannot also act as an arbitrator in the same dispute except otherwise agreed by the parties.
Indeed, the inconsistencies that exists between the two pieces of legislation led to conflicting judicial interpretations by different High Courts. It is only when the issue was ultimately examined by the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. v Mahakali Foods Pvt. Ltd., which clarified the legal position. Nonetheless, the controversy as to arbitral neutrality, institutional bias and procedural fairness remains pertinent.
The dispute resolution mechanism outlined under section 18 of the MSMED Act is distinct as it combines both conciliatory and adjudicatory processes within the single statutory framework. Section 18(1) allows any party involved in a dispute under Section 17 to refer it to the Facilitation Council. Upon receiving such a reference, Section 18(2) authorizes the Council either to conduct conciliation itself or to refer it to any dispute resolution institution or centre. The provision specifically states that Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 are applicable to the conciliation proceedings conducted under the MSMED Act.
Where the process of conciliation fails and no settlement is arrived at between the parties, the Council has powers to either to itself take up the matter for arbitration or to refer it to any institution or centre for arbitration as per Section 18(3). When the matter is referred to the arbitration, the proceedings are governed by the Arbitration and Conciliation Act as if an arbitration agreement exists between the parties under Section 7 of that Act.
The issue arises from Section 80 of the Arbitration and Conciliation Act, which expressly provides that a conciliator shall not subsequently act as an arbitrator in respect of the same dispute that formed the subject matter of conciliation proceedings. The rationale underlying this prohibition is rooted in the principles of neutrality, impartiality, and confidentiality, as parties often disclose sensitive information, settlement proposals, and confidential admissions during the course of conciliation proceedings.
Prior to the authoritative judgment by the Supreme Court of India on the matter, various High Courts adopted divergent approaches to interpret the conflict between Section 18 of the MSMED Act and Section 80 of the Arbitration and Conciliation Act. While some of them interpreted this section of law in harmony with the other statute, some of them provided an overriding effect to this Act as a beneficial Act.
One of the landmark judgments prior to the Supreme Court ruling was Jharkhand Urja Vikas Nigam Ltd. v State of Rajasthan & Ors. Serious concerns were raised about the validity of the authority who acts as conciliator as well as arbitrator in the same subject matter. The Court emphasized that Section 80 of the Arbitration and Conciliation Act reflects the principle of neutrality.
Similar view was adopted by the Bombay High Court in Gujarat State Petronet Ltd. v Micro and Small Enterprises Facilitation Council. The Court observed that although the Facilitation Council is empowered under Section 18 to conduct both conciliation and arbitration, the provision in Section 80 of the Arbitration and Conciliation Act must not be overlooked. The Court underlined the importance of neutrality and unbiasness. It held that once the Council conducts conciliation proceedings, it should not itself proceed with the arbitration in the same subject matter.
On the contrary, certain courts such as the Delhi Hight Court in Bharat Heavy Electricals Ltd. v The Micro and Small Enterprise Facilitation Centre adopted a different view that the MSMED Act is a special beneficial legislation enacted with an objective to protect the interest of micro and small enterprises and ensure speedy recovery of dues. According to this, special statutory mechanism provided under Section 18 overrides the provisions of the Arbitration and Conciliation Act.
The conflict was ultimately resolved and settled by the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. v Mahakali Foods Pvt. Ltd., wherein the Court discussed various aspects concerning Section 18 of the MSMED Act, including whether the Council can act both as conciliator and arbitrator. The Court held that as the MSMED Act is a special beneficial legislation, it shall be liberally construed. The Supreme Court relied upon Section 24 of the MSMED Act, which gives overriding effect notwithstanding anything inconsistent contained in any other law. Importantly, the Supreme Court categorically held that the Facilitation Council having acted as a conciliator under Section 18(2), it is also empowered to arbitrate the dispute under Section 18(3).
Nevertheless, the debate did not end with Mahakali Foods. While dealing with Tamil Nadu Cements Corporation Ltd. v Micro and Small Enterprises Council & Ors., observed that there is a “direct confrontation” between the judgment passed in Jharkhand Urja Vikas Nigam Ltd. v State of Rajasthan & Ors. and the view taken in Gujarat State Civil Supplies Corporation Ltd. v Mahakali Foods Pvt. Ltd.
While discussing writ jurisdiction against awards passed by MSEFC and mandatory pre-deposit requirement in case of Tamil Nadu Cements Corporation Ltd. v M/s Unicon Engineers, the Supreme Court also discussed whether members of the Facilitation Council who conduct conciliation proceedings can themselves act as arbitrators under Section 18 of the MSMED Act read with Section 80 of the Arbitration and Conciliation Act. The Court referred these important to questions to a larger bench of five judges while noting the conflicting views between Jharkhand Urja Vikas Nigam Ltd. and Mahakali Foods. Accordingly, although the decision in Mahakali Foods Pvt. Ltd. presently holds the field, the issue concerning the dual role of the Facilitation Council remains pending consideration before a larger Bench of the Supreme Court.
Section 18 of the MSMED Act provides for a special statutory machinery designed specifically for the purpose of giving quick relief to micro and small enterprises in matters pertaining to delay in payments. On the other hand, Section 80 of the Arbitration and Conciliation Act states the long-established principle of impartiality and confidentiality. Though the conflict between these provisions was resolved in Gujarat State Civil Supplies Corporation Ltd. v Mahakali Foods Pvt. Ltd. and it remains the current law, the question is still remains open for reconsideration of a larger Bench of the Supreme Court after decision in Tamil Nadu Cements Corporation Ltd. v Micro and Small Enterprises Council & Ors.
In conclusion, while the present legal position recognises the authority of the Facilitation Council to undertake both conciliation and arbitration under the MSMED Act, the broader concerns relating to arbitral neutrality, procedural fairness, and institutional impartiality continue to invite debate. As Indian arbitration jurisprudence evolves towards stronger standards of independence and transparency, there remains a possibility that future legislative or procedural reforms may seek to distinctly separate the conciliatory and adjudicatory functions under the MSME dispute resolution framework. The eventual determination of these issues by the larger Bench of the Supreme Court is likely to play a significant role in shaping the future contours of dispute resolution under the MSMED Act.
About the authors: Tejas Jagtap is a Senior Associate, Shraddha Dhanwate and Poonam Shelot are Associates at Rishabh Gandhi and Advocates.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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