Challenge to an MSME award - The correct course of action

The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) was enacted as a beneficial legislation to ensure timely payments to micro and small enterprises and to provide them with a speedy and efficacious dispute resolution mechanism.

Section 18 of the MSMED Act establishes a statutory framework for dispute resolution, providing for mandatory conciliation and then arbitration either by the Micro and Small Enterprises Facilitation Council (“MSEFC”) itself or through an institution to which the dispute is referred upon the failure of conciliation.

Despite the express statutory provisions of the MSMED Act, a recurring and unresolved controversy has arisen regarding the correct remedy available to an aggrieved party against an award passed under Section 18(3) of the MSMED Act (“MSME Award”) by the Ld. MSEFC.

The dilemma in this regard is whether the MSME Award is to be challenged under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), subject to the stringent pre-deposit requirement under Section 19 of the MSMED Act, or whether the supervisory jurisdiction of the High Court under Article 227 of the Constitution of India can be invoked to seek appropriate remedies against the MSME Award?

For a binding decision, the aforementioned issue now stands pending before a five-judge Bench of the Supreme Court of India in the matter of Tamil Nadu Cements Corporation Limited vs. Micro and Small Enterprises Facilitation Council (“Tamil Nadu Cements”), vide order/ judgment dated 22.01.2025 (2025 INSC 91).

In Jharkhand Urja Vikas Nigam Limited vs. State of Rajasthan; [(2021) 19 SCC 206], a two-Judge Bench of the Supreme Court had held the since the order under challenge, passed by the MSEFC in this case, was in non-consideration of the provisions of the MSMED Act and the Arbitration Act, the MSME Award is not an award in the eyes of law and, hence, the recourse to Section 34 of the Arbitration Act was not required. In such view, it was held that the writ petition under Article 226/ 227 of the Constitution of India against the said order was maintainable since the alternative remedy was not applicable.

To the contrary, in M/s India Glycols Limited vs. Micro and Small Enterprises Facilitation Council, Medchal – Malkajgiri; (2023 SCC OnLine SC 1852), the Supreme Court categorically barred writ petitions against MSME Awards ruling that writ petitions under Articles 226/ 227 of the Constitution was not maintainable as Section 18 of the MSMED Act provides for recourse to a statutory remedy for challenging an Award under Section 34 of the Arbitration Act.

In Harbanslal Sahnia vs. Indian Oil Corporation; (2003) 2 SCC 107, the Supreme Court had taken notice of the fact that the rule of exclusion of writ jurisdiction in challenging an MSME Award is a rule of discretion and not of compulsion. In this case, the Court relied on Himmatlal Harilal Mehta vs. State of Madhya Pradesh; (1954) 1 SCC 405 wherein it was observed that the principle that a High Court should not issue a prerogative writ when an alternative remedy is available, may not apply when the remedy under the statutes is onerous and burdensome in character. Thus, the Court clarified that in an appropriate case, in spite of availability of alternative remedy, the writ courts can exercise its jurisdiction at least in three contingencies:

i. where there is a violation of principles of natural justice or fundamental rights;

ii. where an order in a proceeding is wholly without jurisdiction; or

iii. where the vires of an Act is challenged.

Subsequently, the confrontation between the different opinions on the issue came before the Supreme Court in the Tamil Nadu Cements Case.

Tamil Nadu Cements filed a Special Leave Petition (“SLP”) after several rounds of litigation against the MSME Award passed in their dispute with Unicon Engineers by the concerned MSEFC.

While hearing the SLP, a three-judge Bench of the Supreme Court acknowledged that an absolute bar on writ jurisdiction could render the right to challenge an MSEFC Order illusory. The Bench also questioned whether the Court’s restriction in India Glycols Limited was absolute or judicial review was possible in exceptional circumstances.

The Bench noted that approaching the Court under Article 226 of the Constitution was “not just a constitutional right, but also a part of the basic structure." It further noted that this was “an inalienable right”, not automatically excluded by alternative remedies. Courts exercise restraint but retain the power to intervene when necessary.

The Bench acknowledged the conflicting decisions, and on 22.01.2025 referred the issue to a five-judge Constitution Bench which is presently pending before the Supreme Court. (2025) 4 SCC 1)

One line of judicial reasoning holds that an award passed under Section 18(3) of the MSMED Act is, is an arbitral award under the Arbitration Act since the statute expressly applies the Arbitration Act to such proceedings. Section 18(3) of the MSMED Act states that pursuant to the disputes between the parties being referred to arbitration under the MSMED Act, the provisions of the Arbitration Act shall apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of the Arbitration Act (an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not). The arbitration initiated under Section 18(3) of the Arbitration Act is deemed to be arbitration agreement under Section 7 of the Arbitration Act as held by Supreme Court in Silpi Industries and ors versus Kerala State Road Transport Corporation and Anr, (2021) 18 SCC 790 and as such an application challenging the award has to be made under Section 34 of the Arbitration Act.

Thus, when viewed in light of the Section 18(3) of the MSMED Act, with an MSME Award, the challenge mechanism under Section 34 of the Arbitration Act necessarily follows. According to this view, permitting recourse to Articles 226 or 227 of the Constitution would effectively enable parties to circumvent the mandatory pre-deposit requirement to challenge or seek setting of an MSME Award under Section 19 of the MSMED Act, thereby defeating the object of the MSMED Act.

To the contrary, another line of authority recognizes that there are exceptional circumstances in which recourse to Article 227 of the Constitution against an MSME Award is justified. In favour of such argument, it has been asserted that the constitutional power under Articles 226 or 227 of the Constitution cannot be curtailed by statutory provisions and remains available to correct jurisdictional errors, patent illegality, and perversity. According to this view, Section 19 of the MSMED Act does not and cannot bar constitutional remedies, particularly where the challenge goes to the root of the authority of the MSEFC to adjudicate the dispute.

Pending clarification before the Supreme Court on the question that which of the two remedies – under Section 34 of the Arbitration Act and Article 226 of the Constitution – is the appropriate and exclusive remedy for challenging an MSME Award, a final conclusion cannot be arrived at.

The pending decision is likely to lay down either a clear ban on challenges under Article 226/ 227 of the Constitution or lay clear parameters delineating the circumstances, if any, in which Articles 226 or 227 of the Constitution may be invoked and status of the rigours of pre-deposit mandate under Section 19 of the MSMED Act to such a challenge.

The resolution of this conflict by the Supreme Court will have far-reaching implications, not only for the present issue but also for the broader jurisprudence on the interplay between special statutes and constitutional remedies.

About the authors: Rohan Raj is a Senior Associate and Sayan Dey is an Associate at MCO Legals (Meharia & Company).

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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