Interim Measures U/S 9 Of Arbitration Can't Be Sought By MSME During Conciliation Proceedings: Calcutta High Court

The Calcutta High Court bench of Justice Shampa Sarkar has held that interim measures under Section 9 of the Arbitration Act can be sought by the MSME only after mandatory conciliation before the MSME Council fails and the dispute proceeds to arbitration—either conducted by the Council or referred to an arbitral institution. Only then do the provisions of the Arbitration Act apply. Consequently, seeking relief under the Arbitration Act during conciliation is clearly prohibited under section 77 of the Arbitration Act. Brief Facts: The petitioner, a registered manufacturing enterprise under the Micro, Small and Medium Enterprises Development (MSME) Act, 2006, was engaged in the textile and apparel business. The respondent, through its directors, approached the petitioner for the manufacture and supply of various garments. Based on an oral agreement, the respondent issued purchase orders, pursuant to which the petitioner supplied the goods and raised invoices. The respondent accepted the goods without any objections, but failed to make the due payments. In view of the above, the petitioner apprehended that the respondent would alienate its assets and properties and remove the money lying in its bank accounts. It was urged that the dishonour of the cheque, was indicative of the fact that the respondent was siphoning off the funds. The rightful claims of the petitioner would be defeated, even if the petitioner was successful in obtaining an award. Contentions: The Petitioner submitted that as an MSME enterprise, the petitioner was entitled to all the benefits under the MSME Act. The protections under the Arbitration Act, should be read into the MSME Act. An arbitral proceeding had been contemplated under the MSME Act, as well. It was further submitted that a harmonious reading of Sections 18(2) and 18(3) of the MSME Act with Section 9 of the Arbitration Act leads to the conclusion that Section 9 reliefs can be invoked before arbitration begins under Section 18(3) of the MSME Act. It was further submitted that the MSME Act grants enterprises the right to recover dues for goods supplied. Being a beneficial legislation, it cannot bar them from seeking interim protection during conciliation. Denying such relief would undermine the Act's purpose, as the buyer could dissipate assets before conciliation ends, leading to irreversible harm. The Respondent submitted that in the absence of an arbitration agreement, the petitioner could initiate judicial proceedings only in exceptional circumstances. The phrase “shall then apply” in Section 18(3) of the MSME Act indicates that the Arbitration Act becomes applicable only after conciliation fails and the dispute is either taken up for arbitration by the Council or referred to a recognized arbitration centre. From that point, the process is deemed an arbitration under Section 7(1) of the Act, and the petitioner may then avail remedies under the Arbitration Act—but not before. Observations: The court noted that section 9 of the Arbitration Act allows a party to seek interim measures before, during, or after arbitration but before enforcement under Section 36. However, "party" under Section 2(h) refers to one in an arbitration agreement. Since no such agreement exists in this case, the petitioner cannot invoke Section 9. It further added that section 77 of the Arbitration Act bars parties engaged in conciliation from initiating arbitration or judicial proceedings on the same dispute, to avoid conflicting actions during conciliation. It further added that however, an exception allows such proceedings if necessary to preserve rights, but only in exceptional cases. This reflects the legislature's intent to promote non-adversarial dispute resolution. In this case, the petitioner has already issued a notice under the Negotiable Instruments Act following cheque dishonour. The court further said that once conciliation is terminated, arbitration begins and is governed by the Arbitration Act, as if an arbitration agreement exists between the parties. Only then does Section 9 become applicable. The Arbitration Act applies only after the Council terminates conciliation and refers the dispute to arbitration. The legislative intent is clear and unambiguous. The court held that “the object is to minimise judicial intervention at the stage of conciliation. If this Court holds that even at the stage of mandatory conciliation, the protections envisaged under section 9 of A & C Act can be granted by entertaining this application, it will amount to the Court legislating, by incorporating equitable principles, which is not the intention of the legislature.” It further observed that in this case, the statute is clear and unambiguous. The legislative intent behind Section 18 is explicit and purposeful. The phrase “shall then apply” in relation to the A&C Act is neither superfluous ...

Interim Measures U/S 9 Of Arbitration Can't Be Sought By MSME During Conciliation Proceedings: Calcutta High Court

Mohd Malik Chauhan

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