Mandate for Proper Conciliation and Arbitration Procedures under MSMED Act: Ramesh Conductors v M & SE Facilitation Council

Introduction

The case of Ramesh Conductors P. Limited v. M & SE Facilitation Council adjudicated by the Madras High Court on November 24, 2015, underscores the imperative adherence to stipulated procedural frameworks within the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). This dispute revolves around delayed payments issued by TANTRANSCO to Ramesh Conductors, a micro-enterprise, and the subsequent handling of the claim for interest under the MSMED Act by the Facilitation Council.

Parties Involved:

• Petitioner: Ramesh Conductors P. Limited, a Micro, Small and Medium Enterprise engaged in supplying ACSR, AAAC, and transformers to TANTRANSCO.
• First Respondent: M & SE Facilitation Council, established under the Tamil Nadu Micro and Small Enterprises Facilitation Rules, 2006.
• Third Respondent: TANTRANSCO, the buyer who delayed payments to the petitioner.

The crux of the dispute lies in the petitioner’s claim for interest on delayed payments, which was dismissed by the Facilitation Council. The petitioner contested this dismissal, arguing procedural lapses by the Council in handling the conciliation and arbitration processes under the MSMED Act.

Summary of the Judgment

The Madras High Court, presided over by Justice R. Mahadevan, scrutinized the procedures followed by the M & SE Facilitation Council in addressing the petitioner’s claim for interest due to delayed payments by TANTRANSCO. The Court identified significant deviations from the mandatory procedures outlined in the MSMED Act, specifically Sections 18(2) and 18(3), which govern conciliation and arbitration processes.

The Court observed that the Facilitation Council failed to conduct conciliation proceedings as mandated. Instead, it prematurely rejected the claim without facilitating either a conciliation or referring the matter to arbitration. Furthermore, the arbitration conducted did not comply with the procedural requirements of the Arbitration and Conciliation Act, 1996, rendering the Council's order non-binding.

Consequently, the High Court set aside the Facilitation Council's order and remitted the matter back to the Council for fresh consideration, ensuring adherence to the proper procedural framework within ninety days.

Analysis

Precedents Cited

The petitioner’s counsel referenced pivotal Supreme Court judgments to substantiate the argument against the Council's procedural lapses:

• Narayan Prasad Lihia v. Nikunj Kumar Lohia (2002) 3 SCC 572: This case accentuates the necessity for arbitral tribunals to strictly adhere to procedural norms to ensure fairness and due process.
• S. Kanyalal v. Union of India (AIR 1990 Andhra Pradesh 1): This judgment reinforces the principle that any deviation from established legal procedures can render an arbitral award or facilitation order invalid.

These precedents were instrumental in shaping the Court's perspective that procedural compliance is non-negotiable, especially in mechanisms intended to expedite and facilitate dispute resolution for MSMEs.

Legal Reasoning

The Court's legal reasoning was anchored in a meticulous examination of the MSMED Act's procedural mandates. Key points include:

• Section 18 of the MSMED Act: The Court emphasized that upon receiving a reference under Section 18(1), the Facilitation Council is obligated to either conduct conciliation or refer the dispute to arbitration, strictly following the Arbitration and Conciliation Act, 1996.
• Non-compliance with Conciliation Procedures: The Council did not initiate conciliation proceedings as required, nor did it seek assistance from recognized alternate dispute resolution institutions.
• Improper Arbitration: Even in the hypothetical scenario where arbitration was attempted, the Council failed to comply with procedural standards such as appointing an odd number of arbitrators and adhering to the defined rules of the Arbitration Act.
• Jurisdictional Overreach: The Council's unilateral dismissal of the claim without following due process was deemed an overreach beyond its jurisdiction, invalidating the order.

The Court concluded that the Council's actions were in direct violation of the MSMED Act, thereby necessitating judicial intervention to uphold the statutory framework designed to protect MSMEs.

Impact

This judgment carries significant implications for the administration of the MSMED Act and the broader landscape of dispute resolution for MSMEs:

• Reinforcement of Procedural Adherence: The decision underscores the paramount importance of following statutory procedures in conciliation and arbitration, ensuring that MSMEs have access to fair and structured dispute resolution mechanisms.
• Judicial Oversight: It affirms the judiciary's role in overseeing and rectifying administrative lapses within facilitation bodies, thereby safeguarding the rights of vulnerable enterprises.
• Precedential Value: Future cases involving MSME disputes will likely reference this judgment to advocate for strict compliance with procedural guidelines, thereby enhancing the efficacy and credibility of the MSMED Act's enforcement mechanisms.
• Strengthening MSME Protections: By validating the petitioner’s claims against procedural deficiencies, the judgment fortifies the legal protections afforded to MSMEs against arbitrary administrative actions.

Complex Concepts Simplified

Several legal constructs within the judgment warrant simplification for enhanced comprehension:

• Section 18 of the MSMED Act: This section delineates the procedure for resolving disputes involving MSMEs. It mandates that upon a dispute reference, the Facilitation Council must first attempt conciliation. If conciliation fails, the matter should proceed to arbitration following the Arbitration and Conciliation Act, 1996.
• Conciliation vs. Arbitration: Conciliation is a voluntary process where a neutral third party assists in reaching a settlement. Arbitration, on the other hand, is a binding process where the arbitrator makes a decision after hearing both parties.
• Arbitration and Conciliation Act, 1996: A comprehensive statute governing arbitration and conciliation in India, outlining procedures, arbitrator conduct, and judicial review of arbitral awards.
• Certiorari and Mandamus: Types of writs under Article 226 of the Indian Constitution. Certiorari is used to quash unlawful decisions, while Mandamus compels a public authority to perform its duty.

Conclusion