MSMED Act Section 18: MSEFC Must Formally Transition from Conciliation to Arbitration and Follow the 1996 Act; Otherwise Its “Order” Is Not an Arbitral Award Amenable Only to Section 19

1) Introduction

The Bombay High Court (N.J. Jamadar, J.) decided two connected writ petitions filed by Dodal Electro Instruments (buyer) against (i) The Micro and Small Enterprises Facilitation Council, Daman (MSEFC) and (ii) Mexim Adhesive Tapes Pvt. Ltd. (supplier/seller).

Mexim initiated two references before the MSEFC for recovery of allegedly outstanding principal dues of Rs.1,47,610/- and Rs.3,00,631/- arising out of two work orders for supply of self-adhesive tapes. By orders dated 7 March 2024, the MSEFC directed payment of the principal amounts but also awarded very substantial interest under Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), resulting in totals of Rs.28,49,940/- and Rs.42,35,504/-.

The buyer invoked writ jurisdiction contending (i) breach of natural justice; (ii) non-compliance with the mandatory two-stage procedure under Section 18 MSMED Act (conciliation must terminate before arbitration begins); (iii) lack of supplier eligibility/registration; and (iv) that the impugned “orders” lacked the legal character of an arbitral award under the Arbitration and Conciliation Act, 1996 (1996 Act), making the statutory challenge route under Section 19 MSMED Act inapplicable.

2) Summary of the Judgment

  • The Court held that despite the general rule of alternate remedy (and the discipline of Section 19 MSMED Act pre-deposit), writ jurisdiction can be exercised in exceptional cases, especially where mandatory statutory procedure is breached and the impugned decision is not an award in the eye of law.
  • The Court rejected the buyer’s “natural justice” narrative as unpersuasive on facts, noting the buyer knew of proceedings since July 2018 and had sought adjournments.
  • On supplier eligibility, the Court found Mexim had been registered as a Small Scale Industry on 13 February 2004, and therefore, prima facie, it was not obliged to file the MSMED memorandum within 180 days under the proviso to Section 8(1) to claim MSMED benefits.
  • Crucially, the Court held the MSEFC’s impugned orders did not demonstrate (a) termination of conciliation, (b) a conscious transition to arbitration, or (c) compliance with the arbitral procedure under the 1996 Act (e.g., statements of claim/defence, dealing with default under Section 25). Therefore, the impugned orders did not have the character of an arbitral award and were unsustainable.
  • The Court quashed and set aside both orders and remitted the references to the MSEFC for fresh determination by way of arbitration, directing parties to appear on 6 October 2025 and requesting expeditious disposal.

3) Analysis

3.1 Precedents Cited (and Their Influence)

a) India Glycols Ltd. and Anr. v/s. Micro and Small Enterprises Facilitation Council, Medchal and Ors.

This three-judge Supreme Court decision was relied upon by the respondent to argue that writ petitions should not be entertained to bypass the Section 19 MSMED Act pre-deposit requirement (75% deposit for challenges by non-suppliers).

The High Court treated this as the governing cautionary principle: writ jurisdiction should not be used to defeat the special statutory design. However, it did not apply it as an absolute bar; instead, it examined whether the case fell within exceptional categories (jurisdictional error/mandatory procedure breach) warranting writ intervention.

b) Tamil Nadu Cements Corporation Ltd. V/s. Micro and Small Enterprises Facilitation Council and Anr.

The High Court noted that the Supreme Court expressed reservations about an absolute reading of India Glycols and referred questions to a larger bench, including whether writ petitions are completely barred and whether MSEFC members can both conciliate and arbitrate (Section 18 with Section 80 of the 1996 Act).

Importantly, the High Court held that the mere reference does not erode precedential value, but still chose a fact-specific approach: determine whether exceptional circumstances exist. This allowed it to proceed without adopting a “doctrinaire” absolute-bar stance.

c) Jharkhand Urja Vikas Nigam Ltd. V/s. State of Rajasthan and Ors.

This was the decisive authority on the core procedural illegality. The Supreme Court held:

  • Conciliation and arbitration cannot be clubbed under Section 18 MSMED Act.
  • If conciliation fails, the council must then initiate arbitration and follow the 1996 Act.
  • An order directing payment merely because a party did not appear at conciliation, without arbitration being properly initiated/conducted, is a nullity—“no arbitral award in the eye of law”.

The Bombay High Court closely aligned the present facts with Jharkhand Urja: the MSEFC order spoke only of conciliation being initiated and then proceeded to allow the claim, without showing termination of conciliation and without conducting arbitration under the 1996 Act.

d) Silpi Industries and Ors. V/s. Kerala State Road Transport Corporation and Anr.

The buyer relied on Silpi Industries for the proposition that MSMED benefits require registration as of the date of contract, and that subsequent registration is prospective.

The High Court used Silpi Industries in two ways:

  • It acknowledged the registration-timing principle argued by the buyer.
  • It also relied on Silpi Industries for the procedural point that once Section 18(3) arbitration is invoked, the 1996 Act applies “as if” there is an arbitration agreement (Section 7 deeming), and procedural rights like filing defence/counter-claim under Section 23 matter.

e) NBCC (India) Limited v. State of West Bengal and others

The Court cited NBCC to show that the registration/maintainability issue under MSMED remains under active clarification and that Silpi Industries is not necessarily decisive on the precise question whether Section 18 reference is barred when supplies preceded filing of the Section 8 memorandum.

Nonetheless, the High Court avoided getting locked into that contested terrain by finding, on facts, that Mexim held SSI registration since 2004, and therefore did not face the “post-contract registration” difficulty in the manner alleged.

f) Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited (Unit-2) and another; Vaishno Enterprises vs. Hamilton Medical AG; Nitesh Estates Ltd. v. Outsourcing Xperts

These were referenced as part of the Supreme Court’s evolving jurisprudence and the perceived conflict leading to reference in NBCC. In this judgment, they function mainly as context: the registration/eligibility question is not fully settled across fact patterns, reinforcing the High Court’s choice to decide on a clearer, dispositive ground—procedural invalidity under Section 18(3).

g) Surinder Sharma V/s. Himachal Pradesh Micro Small Enterprises Facilitation Cuncil and Ors.

The respondent cited this Himachal Pradesh High Court decision to reinforce the policy rationale behind Section 19 pre-deposit and to argue that writ jurisdiction should not be used to circumvent it. The Bombay High Court did not base its ruling on this authority, because it found the impugned orders themselves lacked “award” character due to non-compliance with the statutory arbitration mechanism.

3.2 Legal Reasoning

a) Alternate Remedy vs. Writ Jurisdiction under Article 226

The Court reiterated the established principle: existence of an efficacious alternate remedy is a self-imposed restraint, not a jurisdictional bar. Classic exceptions include:

  • violation of natural justice,
  • lack of jurisdiction,
  • challenge to vires,
  • fundamental rights enforcement.

Applying this framework, the Court found that the “natural justice” ground was factually weak. However, it treated failure to follow mandatory statutory procedure under Section 18(3) and the 1996 Act as a more serious species of illegality—sufficient to justify writ intervention.

b) Supplier Eligibility / Registration under Section 8

The buyer argued Mexim was not a “seller” under Section 2(n) because it was not registered on the supply date. The Court held this was not persuasive on facts:

  • Mexim had SSI registration since 13 February 2004 (pre-MSMED Act).
  • The Court interpreted the provisos to Section 8(1) to mean that pre-existing SSI units with registration certificates had a discretionary (“may”, “at his discretion”) regime regarding filing a memorandum after the MSMED Act commenced, unlike those covered by the 1991 notification who “shall” file within 180 days.

Thus, Mexim’s locus was held prima facie non-debatable for the purposes of the writ court’s scrutiny.

c) The Core Holding: Section 18 Requires a Clear Two-Stage Process

The Court treated Section 18 as a structured, mandatory sequence:

  1. Section 18(2): Conciliation applying Sections 65–81 of the 1996 Act (Part III).
  2. Section 18(3): Arbitration only after conciliation is “not successful” and “stands terminated”, with the 1996 Act applying “as if” there is an arbitration agreement under Section 7(1).

The impugned orders, on their face, showed:

  • only that conciliation was “initiated”,
  • multiple hearings where the buyer was absent,
  • some letters seeking time for settlement, and
  • a conclusion that the seller’s claim was genuine and hence allowed.

What was missing (and legally fatal) was:

  • any express finding that conciliation failed and was terminated,
  • any record that the MSEFC “took up the dispute for arbitration”, and
  • any adherence to arbitration procedure under the 1996 Act—especially Section 23 (statement of claim/defence) and Section 25 (consequences of default including proceeding on evidence and making an award).

The Court emphasized that even if the respondent’s right to defence could be forfeited, it still requires a clear arbitral framework and procedural compliance. A conclusory “claim is genuine” order is not enough to confer “award” character.

d) Proportionality and the “Rare/Exceptional” Dimension

Although the buyer’s conduct was not “unblemished”, the Court considered it significant that the interest dwarfed the principal (interest being ~27–39 lakhs on principals of ~1.5–3 lakhs). This was not used to dilute Sections 16/19 as a matter of principle, but to underscore why strict compliance with mandatory adjudicatory procedure matters and why the case qualified as exceptional for writ intervention.

3.3 Impact

  • Institutional discipline for MSEFC proceedings: Councils must create a clear record of (i) conciliation commencement, (ii) termination/failure, and (iii) formal commencement of arbitration, followed by the procedural steps mandated by the 1996 Act.
  • “Award” characterization is not automatic: Not every MSEFC directive to pay is an “award” merely because it arises in a Section 18 reference. Without the arbitration stage being properly invoked and conducted, the order may be treated as legally infirm and vulnerable to writ review.
  • Section 19 pre-deposit avoidance is not endorsed, but illegality can override restraint: The judgment is carefully framed as exceptional—writ relief is justified not because Section 19 is harsh, but because the impugned orders were passed in breach of mandatory statutory procedure.
  • Practical guidance for future litigants: Buyers resisting MSEFC orders may focus on demonstrable procedural lapses (failure to transition to arbitration; non-compliance with Sections 23/25), while suppliers and MSEFCs should ensure procedural robustness to preserve enforceability and avoid remands.

4) Complex Concepts Simplified

  • Conciliation vs. Arbitration: Conciliation is settlement-facilitation; arbitration is adjudication resulting in a binding award. Under Section 18, they are sequential and cannot be merged.
  • “Deeming fiction” of arbitration agreement (Section 18(3)): Even if parties never signed an arbitration clause, the law treats the dispute as if an arbitration agreement exists once conciliation fails.
  • “Trappings of an award”: An arbitral award generally reflects that arbitration procedure was followed (pleadings, opportunity, evidence/material consideration, and a decision rendered as an arbitral tribunal). A mere payment direction without arbitral process may not qualify.
  • Section 19 pre-deposit: A buyer challenging an MSME award/order must deposit 75% of the amount. Courts generally discourage writ petitions used to bypass this requirement.
  • Suggestio falsi and suppressio veri: Alleging that a party asserted false facts and suppressed true material facts; relevant to discretionary writ relief. Here, the Court did not dismiss solely on this, but it did find the buyer’s “first knowledge in 2020” claim incorrect.
  • “Nullity”: An order so fundamentally defective (e.g., passed without adopting mandatory statutory procedure) that it is treated as having no legal force as an “award”.

5) Conclusion

The Bombay High Court’s key contribution is a procedure-centric rule: MSEFC must clearly complete and terminate conciliation, then consciously commence arbitration and follow the Arbitration and Conciliation Act, 1996; otherwise its payment direction may not constitute an arbitral award and can be quashed in writ jurisdiction in exceptional cases. While the Court reaffirmed the policy against bypassing Section 19 pre-deposit via writ petitions, it held that mandatory procedural non-compliance under Section 18(3) and the 1996 Act supplies a strong ground for writ intervention. The matter was therefore remitted for fresh arbitration, preserving the statutory framework while insisting on adjudicatory legality.