Bar Against Even Number Of Arbitrators Is Not Attracted In Case Of Statutory Arbitration U/S 18(3) Of MSMED Act: Calcutta HC

Facts

The present appeal under Section 37, ACA has been preferred against a judgment passed under Section 34, ACA thereby affirming the award passed by the West Bengal State Micro and Small Enterprises Facilitation Council (“Council”).

By the impugned award, the Appellant had been directed to pay an amount of Rs.6,88,852/-, together with interest at three times the bank rate notified by the RBI with effect from the date of expiry of the period of 45 days from the day of acceptance or the day of deemed acceptance of the work as admissible under the provisions of Sections 15 and 16 of the MSMED Act.

Contentions

The Counsel for the Appellant averred the following –

• The Council acted contrary to the scheme of Section 18, ACA in terminating the conciliation process, taking up the matter for arbitration and passing the award by the self- same order dated September 21, 2011. As per Section 18(3), provisions of ACA apply to the arbitration under MSMED Act. The same Council members could not have acted as arbitrators after having themselves taken up the conciliation proceedings, since such a course of action violates Section 80, ACA.
• The four Council members acted as the arbitral tribunal, which violates Section 10, ACA which mandates that the number of arbitrators cannot be an even number.
• The award dismissed on the ground of limitation alone. Although the award was passed in the year 2011, only a purported copy of the award was served by the Respondent on the Appellant. This does not qualify the as the delivery of a signed copy by the arbitral tribunal as mandated under Section 31(5), ACA. The limitation period commences only upon such delivery.
• Section 19, MSMED Act provides that a challenge to the award shall not be entertained unless a pre-deposit of 75 per cent of the award is made. The effect thereof would be that the challenge would not be taken up for disposal prior to such deposit, as opposed to the filing itself being barred due to non- deposit simultaneously with the application.

In reply the Counsel for the Respondent argued –

• The application under Section 34 was palpably barred by limitation. Rule 4(12) of the West Bengal Micro and Small Enterprises Facilitation Council Rules, 2006 ('2006 Rules') provides that copies of the award shall be made available within seven days of filing an application. The Appellant itself had filed an application and obtained such a copy. Section 31(5) has to be read in the context of the MSMED Act, the Rules framed thereunder provide for making an application for getting a copy of the award. Nothing prevented the Appellant from making an application earlier than July 2023, when it was already award of the award upon getting a photocopy of the same from the Respondent.
• Section 19, MSMED provides that a challenge against an award passed under the MSMED Act has to be accompanied by 75 per cent of the awarded which includes the principal as well as the interest. However, in the present case, the deposit was made only to the tune of 75 per cent of the principal amount, thus violating the mandate of Section 19.
• As per the Supreme Court's decision in Gujarat State Civil Supplies Corporation Limited v Mahakali Foods (P) Ltd. (2023) 6 SCC 401 the bar under Section 80, ACA stands superseded by Section 18 read with Section 24, MSMED Act and the Council itself can act both as a Conciliator and an Arbitrator.

Observations

Upon hearing the Counsels for the parties, the Court framed the following issues –

• Whether the application under Section 34 was time- barred;
• Whether the non-deposit of 75 per cent of the entire awarded amount including interest would justify dismissal of the application under Section 34;
• Whether the Council itself could act both as Conciliator and Arbitrator;
• Whether the composition of the Arbitral Tribunal, comprised of four Council members, being in violation of Section 10, ACA, vitiated the impugned award;
• Whether the claim itself was time-barred;
• Whether the award was otherwise vitiated in law

As to issue i), the Court held that Section 18(3), MSMED Act, the parent provision which empowers the Council in the first place to take up the dispute for arbitration, itself stipulates that the provisions of ACA shall apply as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1), ACA.

The Court observed that the parameters of an appeal or a challenge to an award are to be derived from the provision which confers the right of appeal or challenge. There is nothing in the MSMED Act which confers such power. Section 19, MSMED Act merely provides a pre-condition for preferring a challenge, but is not the substantive provision creating the right of challenge. It is Section 34, ACA which is the governing provision regarding challenges against an arbitral award passed by the Council. Additionally, Section 31(5) stipulates that after the arbitral award is made it is incumbent upon the arbitral tribunal to deliver a signed copy to each party. This cannot be equated to photocopy of the award, nor is there any room for doubt that the award is to be delivered at the behest of the arbitral tribunal and not by any party.

Thus, Section 31(5) read in conjunction with Section 34(3), ACA left no doubt that the starting point of limitation for preferring a challenge under Section 34 is the date on which the signed copy of the arbitral award is received by the intending challenger of the award.

The Court also observed that contrary to the Respondent's submission Rule 4(12) of the 2006 Rules did not make the filing of an application for getting copies of the award by the parties mandatory, but mandates the issuance of copies thereof within seven days of such application by the Council.

Thus, the Court decided the issue of limitation against the Respondent. The Section 34 application was held to have been filed within the statutory limitation period and the finding of the subordinate court on this point was held to be erroneous.

As to issue ii), the Court observed that insofar as the mandatory prior deposit of 75 per cent of the awarded amount is concerned, Section 19 of the MSMED Act merely provides that no application for setting aside an award made by the Council shall be “entertained” unless such amount is deposited. The expression “entertained” cannot be equated with “filed”. An application is only entertained when substantive orders are passed thereon.

The Court further held that even if an application under Section 34 challenging an award of the Council is filed without such deposit, the application shall merely be kept in limbo until the deposit is made. Only after such deposit is made, substantive orders can be passed on the application. Thus, the non-deposit of the amount of deposit simultaneously with the Section 34 application or on the awarded amount including interest did not entail dismissal of the application under Section 34, ACA.

As to issue iii), The Court observed that Section 18, MSMED is the source of the Council's power to conduct conciliation and thereafter arbitration. Sub-sections (2) and (3) of Section 18 merely enable the applicability of ACA. ACA would not apply per se to conciliation and arbitration proceedings under MSMED Act unless Section 18 (2) and (3) so provide. Thus, the governing provision is Section 18, MSMED Act and not the provisions of the ACA.

Section 24 of the MSMED Act, as well as the opening non obstante clause in Section 18 itself, clearly lend overriding effect to the provisions of Section 18 over all other statutes, including ACA.

Additionally, the Court noted that Section 18(4), MSMED Act provides the Council jurisdiction to act both as arbitrator or conciliator under the said Section. Hence, the general applicability of the provisions of Section 65 to 81, ACA as stipulated in Section 18(2) cannot be used to invoked the rigours of Section 80, ACA in the teeth of the contrary provisions of Section 18 (2), (3) and (4), MSMED Act. The Court held that this position of law had been made clear by the Apex Court in Gujarat State Civil Supplies Corporation Limited v Mahakali Foods (P) Ltd. (2023) 6 SCC 401.

As to issue iv), The Court observed that Section 18(3), MSMED Act provides that the provisions of ACA shall apply to an arbitral proceeding held by the Council. Thus, the provisions of Section 10, ACA, at the first blush, ought also to apply to such a proceeding. Section 10(1), ACA provides that the parties are free to determine the number of arbitrators, provided that it shall not be an even number. However, Section 18 clearly provides that the Council “shall either itself or through the assistance of any institution or centre, conduct conciliation as well as arbitration.”

The Court highlighted that arbitration under Section 18(3), ACA is a statutory arbitration emanating from the MSMED Act and would be governed by the provisions of the said Act. The bar restricting the number of arbitrators to even numbers, which is applicable when the parties themselves appoint arbitrators under the ACA, is not attracted to a statutory arbitration under Section 18(3), MSMED Act

Thus, even if the number of the Council members who acted as arbitrators in the present case was four (an even number), it per se does not vitiate the award.

As for issue v), The Court observed that the issue of limitation could not be decided conclusively at the present stage and was being kept open for being decided in an appropriate proceeding.

As for issue vi), the Court did not find the award to be otherwise vitiated in law.

In view of the above, the Court allowed the application for setting aside the impugned order dated August 22,2023 passed by the Chief Judge, City Civil Court at Calcutta whereby the application under Section 34, ACA was allowed ad the award dated September 21, 2011 passed by the Council was set aside.

Case Title – M/s BESCO v M/s Hindon Chemicals Pvt. Ltd.

Case No. – F.M.A.T (Arb. Award) No. 47 of 2023

Appearance-

For Petitioner –Mr. Siddartha Banerjee, Ms. Debjani Sengupta, Mr. Rajub Mullick, Ms. Ayantika Saha…. Advocates

For Respondent – Mr. Arnab Dutt, Mr. Kaustav Chnadra Das, Mr. Jit Ray, Mrs. Labani Dey…. Advocates

Date – 08.07.2025

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