Since the implementation of The Micro, Small and Medium Enterprises Development Act, 2006 ["MSMED Act"], which is a special Act[i], there has always been a controversy as to whether the 'Facilitation Council' can act as both - a 'conciliator' as well as an 'arbitrator', when disputes are referred to it under Section 18(1) thereof. There are divergent views of the High Courts on this very issue and till date, there is no definite answer.
The Micro, Small and Medium Enterprises ["sector"] are amongst the strongest drivers of economic development, innovation and employment. Today, they stand next to the agricultural sector in India. For the first time, the MSMED Act provides a legal framework to facilitate the promotion and development and enhancing i.e. competitiveness of this sector, which do not command significant bargaining power. Under Section 18, it provides a mechanism for speedy recovery of money by addressing the issue of delayed payments to the suppliers.
Despite this, still, the sector faces a recurring problem to recover the amount due. Chapter V of the MSMED Act deals with the issue of delayed payments to the sector. Section 15 thereof directs the buyer of the goods to make payment to the supplier within the time stipulated in the agreement between the parties but, not exceeding 45 days from the day of acceptance of goods. In case of delay in making the payment, Section 16 makes the buyer liable to pay compound interest with monthly rests at three times of the bank rate notified by RBI to the supplier on the amount due. Further, Section 17 provides for recovery of amount due. But, when the buyer refuses or delays or makes part payment of the amount due, the supplier has a right to refer such dispute to an institution known as the 'Facilitation Council' under Section 18(1) for its settlement or adjudication. It is pertinent to note that Section 18(1) uses the expression 'any party', therefore, it is not only the 'supplier' but, also a 'buyer' who can approach the Facilitation Council[ii].
Further, it is under Section 20 of the MSMED Act that the respective States have been given the power to establish one or more Facilitation Councils and Section 21 provides for its composition. It provides that the Facilitation Council shall consist of not less than three but not more than five members to be appointed from amongst the categories mentioned therein.
After the dispute is referred to the Facilitation Council under Section 18(1), the mechanism for settlement or resolution of dispute provided under Sections 18(2) to 18(5) kicks in. It provides for conciliation or arbitration through an "institution". It is not "individual" centric, that is, it does not provide that an individual will act as a conciliator or an arbitrator. It, therefore, provides a 'forum' for adjudication of dispute between the parties and that 'forum' has the power or jurisdiction to decide which of their member or members will act as a conciliator or arbitrator when a dispute is referred. It is similar to how a conciliator or arbitrator is appointed when disputes are referred to Singapore International Arbitration Centre, Indian Council of Arbitration, Delhi International Arbitration Centre etc.
Section 18(2) further provides that for the purpose of conciliation, Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 ["Arbitration Act"] shall apply and Section 18(3) provides that for arbitration, all provisions of Arbitration Act shall apply as if the dispute has been referred in pursuance of arbitration agreement referred to under Section 7(1) of the said Act. Therefore, the provisions of Arbitration Act have been incorporated by reference in the MSMED Act.
It is pertinent to mention here that Section 18 is similar to Section 6 of The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 ["the old Act"], which was repealed[iii]. Section 6 came up for interpretation before the Supreme Court in Secur Industries Ltd. v. Godrej & Boyce Mfg. Co. Ltd.[iv] ["Secur Industries case"] and it was observed that it expressly incorporates the provisions of the Arbitration Act and apart from such express incorporation, it goes further and creates a legal fiction whereby disputes referred are to be deemed to have been made pursuant to an arbitration agreement as defined in sub-section (1) of Section 7 of the Arbitration Act. It also observed that incorporation of the provisions of the Arbitration Act into Section 6 of the old Act has also been effected by sub-sections (4) and (5) of Section 2 of the Arbitration Act. Thus, it was held that Part I of the Arbitration Act would apply with full force and the proceedings before the Council, are proceedings under the Arbitration Act and provisions related to claim and counter claim [v], principles of Section 11 [vi], jurisdiction under Section 16 [vii] etc will apply. Therefore, the said interpretation can very well be made applicable to Section 18 as well and hence, Sections 65 to 81 and Part I of the Arbitration Act will apply to the "institutions" as mentioned in Section 18 while conducting conciliation or arbitration respectively.
However, the so-called controversy as to the role of Facilitation Council or the so-called inconsistency between the Arbitration Act and the MSMED Act is sought to be created by Section 18(3) of MSMED Act and Section 80 of the Arbitration Act. On one hand, Section 18(3) provides that when conciliation has failed, the Facilitation Council shall either itself take up the issue for arbitration or can refer the matter to a centre or institution for arbitration and in such case, the provisions of Arbitration Act shall apply to such disputes as if the arbitration were pursuant to an arbitration agreement referred to in sub-section (1) of Section 7 of that Act. On the other hand, Section 80 of Arbitration Act which deals with 'role of the conciliator', expressly prohibits the conciliator to act as an arbitrator is respect of a dispute that is the subject of the conciliation proceedings in the absence of an agreement between the parties. The only way to remove this 'ineligibility' in law, is by an express agreement between the parties, which is not the same as an arbitration agreement between the parties [viii].
Therefore, the first issue for consideration is if 'Facilitation Council' has acted as a 'conciliator' under Section 18(2) MSMED Act, can it be prohibited from acting as an 'arbitrator' under Section 18(3) in view of the prohibition contained in Section 80 of the Arbitration Act.
A further controversy is created by Section 24 of the MSMED Act which gives over-riding effect to Sections 15 to 23 thereof. It reads as under:
"24. The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."
Thus, the second question which arises for consideration is whether Section 18(3) of the MSMED Act will over-ride Section 80 of the Arbitration Act by virtue of Section 24 of the MSMED Act and thus, enable the 'Facilitation Council' to act as both – a 'conciliator' under Section 18(2) as well as an 'arbitrator' under Section 18(3).
With regard to the above two issues mentioned, there are divergent views of the High Courts across India. However, one thing common in all these judgments is that they have treated the 'Facilitation Council' as an 'individual' rather than an 'institution' and come to their respective conclusions.
The judgments below have held that under Section 18 of the MSMED Act, the Facilitation Council has to choose which role it wants to play because in view of Section 80 of Arbitration Act, it cannot act as both. Also, there is no inconsistency between Section 18(3) of the MSMED Act and Section 80 of the Arbitration Act and therefore, Section 24 of MSMED Act cannot have an over-riding effect.
(a) Bombay High Court:
i) Technico Agri Sciences Limited v. Micro, Small and Medium Enterprises, 2019 SCC OnLine Bom 5148.
ii) Gujarat State Petronet Ltd. v. Micro and Small Enterprises Facilitation Council, (2018) 5 AIR Bom R 821.
iii) Mazgaon Dock Ltd. v. Micro and Small Industries Facilitation Council and Others, 2018 SCC OnLine Bom 11003.
iv) S.I. Group India Limited & Anr. v. Micro and Small Enterprises Facilitation Council, Konkan Region, Thane & Ors, Writ Petition No.7269 of 2011 dated 16.11.2011.
(i) Pal Mohan Electronics Pvt Ltd v. Secretary, W.P. No. 9485 of 2017 dated 27.03.2019.
The judgments below have held that MSMED Act is a complete code in itself and it provides for a 'special forum' of adjudication of the disputes. By virtue of Section 24 of the MSMED Act, any inconsistency between Section 80 of Arbitration Act read with Section 18(2) and 18(3) of MSMED Act stands over-ridden and therefore, in terms of Section 18(4), the Facilitation Council can act as both.
(a) M/s. Bharat Heavy Electricals Limited v. State of U.P., 2014 SCC OnLine All 2895.
(a) M/s Mahvir Transmission Udyog Pvt. Ltd. v. Paschimanchal Vidyut Vitran Nigam Ltd., AIRONLINE 2018 UTR 633.
"If you are bidden to treat an imaginary state of affairs as real, you must surely, unless prohibited from doing so, also imagine as real the consequences and incidents which, if the putative, state of affairs had in fact existed, must inevitably have flowed from or accompanied it. … The statute says that you must imagine a certain state of affairs; it does not say that having done so, you must cause or permit your imagination to boggle when it comes to the inevitable corollaries of that state of affairs."
This statement of law in respect of a statutory fiction is being consistently followed by the courts[xi]. Further, in Bharat Coop. Bank (Mumbai) Ltd. v. Employees Union[xii], it has been observed that:
"legislation by incorporation is a common legislative device where the legislature, for the sake of convenience of drafting incorporates provisions from an existing statute by reference to that statute instead of verbatim reproducing the provisions, which it desires to adopt in another statute. Once incorporation is made, the provision incorporated becomes an integral part of the statute in which it is transposed and thereafter there is no need to refer to the statute from which the incorporation is made and any subsequent amendment made in it has no effect on the incorporating statute."
Hence, the interpretation given by various High Courts clearly amounts to re-writing of the statute and gives an interpretation which was not intended by the Legislature itself. MSMED Act is a complete code in itself and the provisions of Arbitration Act that is, Section 65 to 81 under Section 18(2) and Part I under Section 18(3) have been incorporated by reference in the MSMED Act and will apply with full force for resolving disputes under Section 18 of the MSMED Act.
[i] GE T&D India Ltd. v. Reliable Engineering Projects and Marketing, 2017 SCC OnLine Del 6978 dated 15.02.2017.
Steel Authority of India Ltd. v. Micro, Small Enterprise Facilitation Council, 2010 SCC OnLine Bom 2208.
[iii] Section 32 of the MSMED Act.
[iv] (2004) 3 SCC 447 (2J). Relied upon in Modern Industries v. SAIL, (2010) 5 SCC 44.
[v] Shah & Parikh v. Urmi Trenchless Technology Pvt. Ltd., 2019 SCC OnLine Bom340. See also: Waman Shriniwas Kini V. Ratilal Bhagwandas & Co., AIR 1959 SC 689, B.H.P. Engineers Pvt. Ltd. v. Director, Industries, U.P. (Facilitation Council), AIR 2009 All 155.
[vi] Indian Railway Welfare Association v. Creative Consortium, 2018 SCC Online Del 10235.
[vii] Bharat Sanchar Nigam Ltd. v. The Maharashtra Micro and Small Scale Enterprises Facilitation Council & Additional Commissioner (Revenue) & Ors., (2015) 3 AIR Bom R 659.
[viii] Bharat Broadband Network Ltd. v. United Telecoms Ltd., (2019) 5 SCC 755.
[x] 1952 AC 109. Relied upon in Bengal Immunity Co. Ltd. v. State of Bihar (1955) 2 SCR 603, J.K. Cotton Spinning and Weaving Mills Ltd. v. Union of India, AIR 1988 SC 191, Pioneer Urban Land and Infrastructure Ltd. v. Union of India, (2019) 8 SCC 416.
St. Aubyn v. Attorney General, 1952 AC 15 (HL).
(2007) 4 SCC 685. See also: Secy. of State v. Hindustan Coop. Insurance Society Ltd, AIR 1931 PC 149, U.P. Avas Evam Vikas Parishad v. Jainul Islam, (1998) 2 SCC 467, P.C. Agarwala v. Payment of Wages Inspector, (2005) 8 SCC 104, Sarabjit Rick Singh v. Union of India, (2008) 2 SCC 417.
Atma Ram Properties (P) Ltd. v. Oriental Insurance Co. Ltd., (2018) 2 SCC 27.
(2018) 12 SCC 471.
[xvi] Manek Lal v. Prem Chand, AIR 1957 SC 425. See also: Brij Bihari Singh v. Bihar State Financial Corpn., (2015) 17 SCC 541.
[xvii] (2017) 4 SCC 665.