Mandate Of MSME Council Not Automatically Terminated For Failure To Refer Dispute To Arbitration Within 90 Days: Delhi High Court

The Delhi High Court bench of Justice Manoj Kumar Ohri has held that the mandate of the MSME Facilitation Council to refer a dispute to arbitration under Section 18(3) of the Micro, Small and Medium Enterprises Development (MSMED) Act, following the failure of conciliation under Section 18(2), is not automatically terminated if the referral is not made within 90 days as prescribed under Section 18(5). Unlike Section 29A of the Arbitration and Conciliation Act, 1996 (Arbitration Act) Section 18(5) of the MSMED Act does not specify any consequences for non-compliance with the 90-day timeline. Brief Facts: The petitioners, MDD Medical Systems (India) Pvt. Ltd. and LSR Medical Pvt. Ltd., have challenged the impugned letters dated 30.07.2019 and 03.08.2019, by which Respondent No. 1 revived the arbitration proceedings with Respondent No. 3 and directed the petitioners to file a Reply/Counter Claim to the Statement of Claim filed by Respondent No. 3. The Petitioners and Respondent No. 3, an MSME unit in the privacy and sun protection industry, had a business relationship involving the supply of goods. A dispute over unpaid dues led Respondent No. 3 to approach the Micro and Small Enterprises Facilitation Council (Respondent No. 2). Due to non-cooperation from both sides, conciliation failed, and the matter was referred to the Delhi International Arbitration Centre (Respondent No. 1) under Section 18(3) of the MSMED Act, 2006. Respondent No. 1 directed Respondent No. 3 to file its Statement of Claim (SOC) but, upon its failure to do so, closed the arbitration proceedings via letters dated 22.10.2018 and 27.10.2018, citing Rule 3(6) of the Delhi International Arbitration Centre (Arbitration Proceedings) Rules, 2012 (2012 Rules). Subsequently, the Petitioners were informed on 30.07.2018 and 03.08.2018 that Respondent No. 3 had filed the SOC and were directed to submit their counterclaims. Contentions: The Petitioner submitted that the reference to Respondent No. 1 was made under Section 18 of the MSMED Act, 2006, which mandates that such proceedings be completed within 90 days. It was further submitted that the mandate given to Respondent No. 1 stood terminated by letters dated 22.10.2018 and 27.10.2018. Revival of the proceedings after more than nine months, without a fresh reference, was contrary to the MSMED Act and lacked legal authority. It was further submitted that while Section 29A of the Arbitration Act allows time extensions, the MSMED Act—having overriding effect under Section 24—contains no such provision. It was also argued that even if a belated SOC can be accepted as per Section 25 of the Arbitration Act, sufficient cause was never shown by Respondent No. 3 for not filing the SOC. Lastly, it was submitted that there is no provision in the Delhi International Arbitration Centre (Arbitration Proceedings) Rules, 2018 (2018 Rules‟) which provides for any revival of the proceedings. Even if it is accepted by this Court that the 2012 Rules are applicable, a fresh request is required to be filed as per Rule 3(6) of the 2012 Rules, which hasn‟t been filed by the Respondent No. 3. Per contra, the Respondent while challenging the maintainability of the writ petition submitted that the point in issue raised in the Writ Petition could be raised before the AT under Section 16 of the Arbitration Act as the proceedings have been revived. It is settled position of law that issues relating to the proceedings, reference or jurisdiction have to be decided by the AT itself. It was also argued that in the present case, the 2018 Rules are inapplicable as they neither provide for revival of proceedings nor for closure of the file. Therefore, the 2012 Rules apply, as is evident from the closure of proceedings vide letter dated 22.10.2018. Lastly, it was submitted that Section 25 of the Arbitration Act does not apply in the present case, as it pertains to proceedings before a constituted Arbitral Tribunal, whereas Respondent No. 1 was only performing a pre-arbitration administrative function. Observations: The court at the outset noted that section 18(5) of the MSMED Act prescribes that every reference made under this section should be decided within ninety days. However, a combined reading of the section's heading and subsections (1) and (5) makes it clear that this timeline pertains to the proceedings before the Facilitation Council, not the arbitral proceedings under Section 18(3). It further added that once the matter is referred to arbitration, the provisions of the Arbitration Act apply as if the arbitration were initiated under an agreement as per Section 7 of that Act. Notably, Section 18(5) does not specify any legal consequence for non-compliance with the 90-day limit, nor does it state that a reference is automatically terminated upon its expiry. Based on the above, it held that the time ...

Mandate Of MSME Council Not Automatically Terminated For Failure To Refer Dispute To Arbitration Within 90 Days: Delhi High Court

Mohd Malik Chauhan

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