The Supreme Court (“SC”) has in its judgment dated December 15, 2021 (“Judgement”), in the matter of Jharkhand Urja Vikas Nigam Limited v. The State of Rajasthan and Others [Civil Appeal No. 2899 of 2021], held that the Facilitation Council must before passing an award under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”), upon the failure of conciliation proceedings, compulsorily resort to arbitration.

Facts

The instant case is a civil appeal, challenging the order passed by the Rajasthan High Court, Jaipur Bench (“RHC”), which affirmed the order of the Single Judge of the RHC, who had dismissed the appeal against the order dated August 6, 2012 (“Impugned Order”), passed by the Rajasthan Micro and Small Enterprises Facilitation Council (“Respondent No. 2”/ “Council”). Jharkhand Urja Vikas Nigam Limited (“Appellant”) is the successor company of the Jharkhand State Electricity Board. The Appellant had entered into a contract with M/s. Anamika Conductors Limited, Jaipur (“Respondent No. 3”), for the supply of ACSR Zebra Conductors. Respondent No. 3, claiming to be a small-scale industry, had approached the Council, claiming an amount of INR 74,74,041 towards the principal amount of bills and an amount of INR 91,59,705.02 towards interest. The State of Rajasthan (“Respondent No. 1”), Respondent No. 2 and Respondent No. 3 are collectively referred to as “Respondents”.

On the ground that the Appellant had not responded to earlier notices, the Council had issued summons dated July 18, 2012 for appearance of the Appellant before the Council on August 6, 2012. On the ground of non-appearance of the Appellant, the Impugned Order was passed, directing the Appellant to make the payment to Respondent No. 3, within a period of thirty days from the date of the Impugned Order. When the Appellant challenged the Impugned Order before the RHC, the appeal was dismissed by an order dated December 11, 2017 (“RHC Order”). Aggrieved, the Appellant filed the instant appeal before the SC.

Issue
Whether the Council could pass the Impugned Order without resorting to arbitration.

Arguments

Contentions raised by the Appellant:

The Appellant vehemently opposed the decision of the Council, contending that only on the ground that the Appellant had not responded immediately in the conciliation proceedings, the Impugned Order was passed by the Council, without granting proper opportunity to the Appellant. The Appellant further argued that the Impugned Order had been passed in utter disregard to the mandatory provision under Section 18 (Reference to Micro and Small Enterprises Facilitation Council) of the MSMED Act and the provisions of Arbitration and Conciliation Act, 1996 (“1996 Act”). The Appellant submitted that when conciliation fails as per Section 18(3) of the MSMED Act, the Council has to initiate arbitration proceedings.

The Appellant further averred that on failure of conciliation, the Council shall either itself take up the dispute for arbitration or refer to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the 1996 Act shall apply to the dispute, as if the arbitration was in pursuance of arbitration agreement referred to under Section 7 (1) of the 1996 Act. It was argued that due procedure was not followed by the Council, and instead of granting the Appellant an opportunity to participate in arbitration, the Impugned Order was passed.

The Appellant prayed to consider the Impugned Order to be a nullity and not an award under the 1996 Act, since it was passed in sheer disregard to the 1996 Act. It was further submitted that, as per the terms of the contract, any dispute was subject to jurisdiction of civil courts at Ranchi, and the Respondent having agreed to such terms, had approached the Council in the State of Rajasthan. Thus, it was submitted that the Impugned Order was passed by the Council, without jurisdiction and contrary to the terms and conditions of the agreement.

Contentions raised by the Respondents:

The Respondents argued that there were no grounds to interfere with the RHC Order. It was submitted that it was open to the Appellant to challenge the Impugned Order before the competent forum under Section 34(3) of the 1996 Act, within the specified time. The Respondents deemed the appeal brought by the Appellant to be a belated attempt to question the Impugned Order and submitted that since the Appellant had not responded to the various notices and summons issued by the Council, the Council itself had taken up the dispute and passed an award.

Referring to the MSMED Act as a beneficial legislation to the small and medium enterprises, it was submitted that though proper opportunity was given, the Appellant had not responded to the same before the Council and there were no grounds to interfere with the RHC Order. Reliance was placed by the Respondents on the judgment of the SC in the case of Rajkumar Shivhare v. Assistant Director, Directorate of Enforcement & Another [(2010) 4 SCC 772] in support of the submissions, and was further submitted that the Appellant had partly complied the award by paying an amount of INR 63,43,488/-, and hence the Impugned Order was not open to challenge at a later point of time.

Observations of the Supreme Court

The SC took note of the fact that in the instant case, the Appellant had filed a writ petition before the RHC, challenging the Impugned Order. Respondent No. 3 had approached the Council seeking directions against the Appellant for payment of delayed bill amount along with interest under provisions of the MSMED Act. Immediately after filing the application by initiating conciliation proceedings, the Council had issued notices. Since the Appellant had not appeared, summons were issued to the Appellant on July 18, 2012 for appearance on August 6, 2012. The SC noted that only on the ground that even after receipt of summons the Appellant had not appeared, the Council had passed the Impugned Order. As per Section 18(3) of the MSMED Act, if conciliation is not successful, the said proceedings stand terminated and thereafter the Facilitation Council is empowered to take up the dispute for arbitration on its own or refer to any other institution. The SC noted that Section 18(3) of the MSMED Act thus makes it clear that when the arbitration is initiated all the provisions of the 1996 Act will apply, as if arbitration was in pursuance of an arbitration agreement referred to under Section 7(1) of the 1996 Act. The SC clarified that from a reading of Section 18(2) of the MSMED Act, and Section 18(3) of the MSMED Act, the Council was obliged to conduct conciliation for which the provisions of Section 65 (Submission of statements to conciliator) to Section 81 (Admissibility of evidence in other proceedings) of the 1996 Act would apply. Under Section 18(3) of the MSMED Act, when conciliation fails and stands terminated, the dispute between the parties can be resolved by arbitration. The Council is empowered either to take up arbitration on its own or to refer the arbitration proceedings to any institution as specified in Section 18(3) of the MSMED Act. It is open to the Council to arbitrate and pass an award, after following the procedure under the relevant provisions of the 1996 Act.

The SC explained the 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 or 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, 1908 or the Indian Evidence Act, 1872 may not apply. Unless otherwise agreed, oral hearings are to be held. The SC observed that if the Appellant had not submitted its reply at the conciliation stage, and failed to appear, the Council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the 1996 Act, to adjudicate the dispute and make an award. The SC categorically stated that the proceedings for conciliation and arbitration cannot be clubbed. The SC observed that the Council had not initiated arbitration proceedings in accordance with the relevant provisions of the 1996 Act.

The SC thereby concluded that the Impugned Order was a nullity and runs contrary not only to the provisions of the MSMED Act but also contrary to various mandatory provisions of the 1996 Act. The SC noted that under the scheme of the 1996 Act, an arbitral award can only be questioned by way of an application under Section 34 (Application for setting aside arbitral award) of the 1996 Act. Further, it noted that when an order is passed without recourse to arbitration and in utter disregard to the provisions of the 1996 Act, Section 34 of the 1996 Act will not apply. Moreover, the SC refused to accept the contention of delay on part of the Appellant, as submitted by the Respondents. The SC further opined that though Respondent No. 3 had already received an amount of INR 63,43,488/- paid by the Appellant, without any protest and demur, it cannot be said that the Appellant had lost its right to question the Impugned Order.

Decision of the Supreme Court

The SC held the Impugned Order to be patently illegal. The SC thus allowed the appeal and set aside the Impugned Order, directing Respondent No. 2 to either take up the dispute for arbitration on its own or refer the same to any institution or centre providing alternate dispute resolution services, for resolution of dispute between the parties. The SC mandated that for such arbitration, the Council shall follow the provisions of the 1996 Act before passing any award.

VA View:

The SC by this Judgement has highlighted the interplay between the MSMED Act and the 1996 Act, and has clarified that exploring dispute resolution through arbitration proceedings is mandatory after failure of conciliation under the MSMED Act. The proceedings for conciliation and arbitration, being fundamentally different, cannot be clubbed to pass an award.

The SC has emphatically laid down that after failure of conciliation, if an award is straightaway passed by the Facilitation Council, without following due process, and without resorting to arbitration, such award would be in contravention of the 1996 Act and the MSMED Act, and hence cannot be considered as an arbitral award in the eyes of the law.

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