Proceedings For Conciliation & Arbitration Under MSME Act Cannot Be Clubbed: Bombay High Court

A bench led by Justice N.J. Jamadar held that “If the appellant had not submitted its reply at the conciliation stage, and failed to appear, the Facilitation Council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996, to adjudicate the dispute and make an award. Proceedings for conciliation and arbitration cannot be clubbed.”

Background:

Mexim (Respondent No 2) supplied two large scale adhesive tapes to Dodal (petitioner). Two work orders were executed. Alleging non-payment, the Respondent filed two references before the council. The council directed the petitioner to pay the amount along with interest under section 16 of the MSME Act. The Petitioner has filed the present petition under Article 226 of the Constitution contending that the orders were passed behind its back and without terminating the conciliation. Furthermore, the provisions of the Arbitration Act were not also followed.

The Petitioner submitted that the council clubbed both the conciliation and arbitration without terminating conciliation or declaring it unsuccessful as mandated under section 18(3) of the MSME Act. Relying on Jharkhand Urja Vikas Nigam Ltd., it was argued that proceedings for conciliation and arbitration cannot be clubbed. It was further submitted that the respondent was not registered as an MSME at the time of supply therefore it lacked locus to invoke section 18.

Per contra, the Respondent submitted that the petitioner sought to bypass 75% pre deposit requirement under section 19 of the Act. The correspondences between the parties show that the petitioner was aware of the proceedings since 2018, sought repeated adjournments and even acknowledged liability. It was further argued that the respondent had been registered as an MSME since 2004. All objections should have been raised in proceedings under section 19 of the Act, not in writ jurisdiction.

Findings:

The court at the outset observed that writ courts insist on exhausting statutory remedies first before granting any relief. The relief under the writ jurisdiction can be granted in exceptional circumstances of breach of natural justice or lack of jurisdiction. On natural justice, the court held that the petitioner was aware of the proceedings since 2018 and sought repeated adjournments. Therefore, the plea of not being heard was a litany of unsubstantiated grievances.

The court further noted that the respondent had been registered as an MSME since 2004. Such an industry was not obligated to file a memorandum within 180 days of the commencement of the Act as per proviso to section 8(1). Therefore, the respondent was prima facie entitled to invoke section 18 of the Act. On the core procedural issue, the court extracted both the sections 18(2) & (3) of the Act.

It noted that the parliament prescribed a two stage mechanism. Firstly, the dispute has to be resolved through conciliation. On failure of conciliation, the matter can be referred to the arbitration. Once the stage of arbitration is reached, the dispute is required to be arbitrated in accordance with the provisions of the Arbitration Act.

The court relied on Jharkhand Urja where it was held that there is a fundamental difference between the conciliation and arbitration. In the former, a conciliator attempts to bring both parties to an amicable settlement whereas in case of arbitration, the arbitrator adjudicates disputes between the parties. Proceedings cannot be clubbed.

The court held that “If the appellant had not submitted its reply at the conciliation stage, and failed to appear, the Facilitation Council could, at best, have recorded the failure of conciliation and proceeded to initiate arbitration proceedings in accordance with the relevant provisions of the Arbitration and Conciliation Act, 1996, to adjudicate the dispute and make an award. Proceedings for conciliation and arbitration cannot be clubbed.”

On perusing the impugned orders, the court noted that the council merely recorded the initiation of the conciliation and straightaway allowed the claim of the seller in the absence of purchaser. There was no indication that the conciliation was terminated and that the council had assumed the role of an arbitrator or that the procedure under sections 24 and 25 of the Arbitration Act were followed. In these circumstances, the impugned order cannot be clothed with the character of an arbitration award and therefore cannot be sustained.

The court concluded that “the impugned orders do not constitute an arbitration award, as envisaged by the provisions of the Act, 1996. The impugned orders, therefore, become unsustainable and susceptible to interference in exercise of the writ jurisdiction as the orders have been passed in breach of the mandatory provisions of the Act, 2006 and the Arbitration and Conciliation Act, 1996.”

Accordingly, the impugned orders were set aside.

Case Title: Dodal Electro Instruments versus The Micro and Small Enterprises Facilitation Council

Case Number: WRIT PETITION NO.9081 OF 2025

Judgment Date: 23/09/2025

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