This article has been written by Shreyansh Jain, pursuing the Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.

Introduction

The Micro, Small and Medium Enterprises (“MSMEs”) have been characterised as one of the most crucial divisions for India’s financial development. This has been featured during the difficult stretches of COVID-19, where extraordinary monetary stimulus plans have been showered on this division by the Central Government.

The MSMEs in India are governed under the Micro, Small and Medium Enterprises Development Act, 2006 (“the Act”). One of the fundamental goals of the MSME Act has been to shield the MSMEs from defaulting purchasers, who obstruct the due payments towards these undertakings. Section 15 of the Act mandatorily requires a purchaser of the merchandise as well as administrations from an MSME to make instalments inside a period of 45 days notwithstanding which, the purchaser shall be subjected to a steep rate of interest on the said payment. Further, section 18 of the Act also statutorily empowers the Micro and Small Enterprises Facilitation Council for the purposes of a robust and uniform resolution of disputes for the MSMEs. 

Section 18 of the Act- Importance and Validity

Section 18 of the Act plays an extremely vital role in understanding the difference in the dispute resolution mechanism for MSMEs under the Act and the Arbitration and Conciliation Act, 1996. The impugned section provides for the mechanism for a specified dispute resolution for the Medium and Small Enterprises wherein sub-section (1) of the section stipulates that in case of any dispute arising between the parties to an arbitration agreement with respect to any amount due under section 17 of the act, either of the parties may make a reference to the Micro and Small Enterprises Facilitation Council. 

Further, upon receipt of the said reference as specified in sub-section (1) of the section, the Micro and Small Enterprises Facilitation Council has the option of either commencing conciliation proceedings by itself, or refer the dispute to an institution discharging Alternate Dispute Resolution (ADR) services for the purposes of conducting conciliation proceedings. In such conciliation proceedings, the provisions under sections 65 to 81 of the act shall apply as if the said conciliation proceedings were initiated under Part III of the Act. In case the said conciliation proceedings fail to materialise and the parties are unable to come up with a settlement, thereby resulting in the termination of conciliation proceedings, the Micro and Small Enterprises Facilitation Council has the option of either undertaking the dispute for the purposes of arbitration by itself, or refer the said dispute to any institution or centre discharging ADR services for arbitrating the dispute. 

The arbitration proceedings shall be governed by the Arbitration and Conciliation Act, 1996 as if the proceedings were subject to an arbitration agreement under section 7(1) of the impugned act. Further, sub-section (4) stipulates that the  Micro and Small Enterprises Facilitation Council or the arbitral institution governing the said arbitration proceedings shall be vested with the jurisdiction to decide as well as act as the arbitral tribunal or conciliator. Finally, sub-section (5) of the impugned section prescribes a maximum period of ninety days for the conclusion of the adjudication of the said dispute by the Micro and Small Enterprises Facilitation Council or the arbitral institution governing the said arbitration proceedings. The said period shall be calculated from the date of reference of the impugned dispute, and shall be binding in nature.

One of the crucial inquiries that should be settled concerning the upbraided section is whether an arbitral clause in an understanding relating to an MSME abrogate or remove the ward of the Micro and Small Enterprises Facilitation Council. In the event that we give watching a shot its essence, any lawful plan will have incomparability over the provisos fused in an agreement. A dispute can be made by alluding to Section 24 of the Act as per which if there is anything clashing between sections 15 to 23 of the Act, for this situation being section 18, the arrangements set down in the criticized section will have a superseding impact. 

Regardless, the presence of an arbitration provision in an understanding in itself doesn’t construe that it is in a struggle with section 18 of the Act. For the judgment rendered in BSNL vs Maharashtra Micro and Small Enterprises , there were two arrangements between the parties wherein every understanding had an arbitration clause specifying that any debate emerging between the parties to the arbitration agreement will be settled by Arbitration. The respondents set off the said provision. In any case, in a couple of days ensuing to conjuring the arbitration proviso, they chose to pull back it. Starting there, they recorded a reference at the Micro and Small Enterprises Facilitation Council. Against this, the applicant moved the Bombay high court. The court was of the view that there isn’t anything in the Act which invalidates or proclaims an arbitration arrangement went into between the parties as void. Section 18 of the Act essentially obliges a conversation which follows a comparable plan as that in the Arbitration and Conciliation Act, 1996. 

For this circumstance, parties recently had an arbitration provision set up yet one of parties made a reference under Section 18(1) to the Micro and Small Enterprises Facilitation Council. The court held that since a reference to the Micro and Small Enterprises Facilitation Council. has been made, they have to experience the pacification procedures as referred to in Section 18(2). In any case, resulting to such procedures, the parties are authorised to invoke their own arbitration. 

Subsequently, in the case, Welspun Corp. Ltd. v. The Micro and Small Enterprises Facilitation Council, Punjab & Ors., the candidate who was a buyer raised a dispute asserting infringement of terms of the arrangements while provider ensured that they are not paid for the product provided by them. The Applicant fought that there was an arbitration clause in the contract between the parties inferable from which the purview of the Micro and Small Enterprises Facilitation Council was expelled in alluding the debate to arbitration. While addressing this inquiry, the Punjab and Haryana High Court held that considering the uncommon arrangement made for the headway and improvement of the MSMEs, at any rate, two parties can on mutual consent agree to remove the jurisdiction of the Micro and Small Enterprises Facilitation Council. 

The Arbitration and Conciliation Act, 1996 vs MSME Act

The discussion encompassing the dichotomy between the Arbitration and Conciliation Act,1996 and the MSME Act has been a long one and involves plenty of statutes conveyed by the Indian legal executive. In the case, Saryu Plastics Pvt. Ltd. v. Gujarat Water Supply and Sewerage Board, held that, upon a scrutinizing of Section 18 of MSME Act, the Facilitation Council is affirmed to attempt conciliation either itself or insinuate the equivalent to any organization encouraging ADR administrations. The party is in like manner empowered to arbitrate and pass an arbitral award. Further, it was held thatSection 19 of the MSME Act can’t be seen in a prohibitive manner so as to be material just in a situation where honour is passed under Section 18 of MSME Act. Along these lines, it was held that there can’t be a legitimately suitable situation that Section 19 of MSME Act would apply just in case of an arbitral award being passed by the Facilitation Council or any foundation or establishment to which reference is made by the Council. 

However, one of the landmark judgments on the issue was the Delhi High Court’s judgment in the case AVR Enterprises v. Union of India.  In the reproved judgment, The High Court in like manner couldn’t help contradicting the judgment delivered by the Gujarat High Court in Saryu Plastics, which had held that Section 19 of the MSME Act would similarly apply to arbitral references where the Arbitral Tribunal was named by the parties to the agreement and not under Section 18 of the MSME Act. 

The High Court in like manner couldn’t help contradicting the Gujarat High Court’s comprehension of the term ‘decree’ in Section 19 of the MSME Act to fuse arbitral awards conveyed in arbitral references outside of Section 18 of the MSME Act and held that the comparable ought to be unravelled scarcely to simply mean arbitral awards conveyed in arbitral references recorded under section 18 of the MSME Act and nothing else. As requirements are, the High Court held that since the arrangement of the Arbitral Tribunal was done under the arbitration clause of the contract went into between the parties, and not by technique for a legal reference under Section 18 of the MSME Act, the essential of sparing 75 percent of the total award sum by a judgment debtor going before the test to an arbitral award under the MSME Act, would not rise. The High Court accordingly discarded the appeal made by the Petitioner.