The Delhi High Court adjudicated upon whether Section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”),which provides for ‘application for setting aside decree, award or order’, would apply to a proceeding which has not been initiated as per Section 18 of the MSMED Act which deals with ‘reference to micro and small enterprises facilitation council’.
Dispute arose between the parties with regard to supplies. Liquidated damages were imposed by Union of India/ the Respondent and balance payment was also adjusted. Arbitration was invoked by the Petitioner; The Respondent appointed a sole arbitrator to adjudicate upon the disputes.
Thereafter, the arbitrator published his award inter-alia, reducing the quantum of liquidated damages and directing the Respondent to make payment to AVR Enterprises/Petitioner of the balance amount with compound interest.
The said award was challenged by the Respondent by filing a petition under section 34 (application for setting aside arbitral award) of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the Trial Court.
During the course of the hearing before the Trial Court, the petitioner took a preliminary objection that the petition filed by the respondent under section 34 of the Arbitration Act was not maintainable because the respondent had failed to deposit 75% of the awarded amount in terms of section 19 of the MSMED Act.
The Trial Court in its judgment dated April 18, 2018 held that the provisions of MSMED Act are not applicable and has thus rejected the preliminary objection raised by the petitioner.
The Petitioner approached the High Court impugning the said order dated April 18,2018 .
The Respondent opposed the petition on the ground that the MSMED Act was not applicable to the facts of the case as it was not a case of a statutory reference under the MSMED Act and Arbitrator had been appointed by the parties wherein the Petitioner had invoked arbitration under the Arbitration Act and requested respondent to appoint an arbitrator, pursuant to which the Respondent appointed an arbitrator.
The High Court held that Section 19 of the MSMED Act would apply only to proceedings initiated under section 18 of the MSMED Act and would not apply to an award published by an Arbitrator appointed by the parties otherwise than in accordance with section 18 of the MSMED Act.
The court interalia observed that since there was no reference made to Micro and small Enterprises Facilitation Council by the petitioner, no proceedings were conducted by the Council under Section 18 of the MSMED act. There was also no reference made by the Council to any Institution or Centre for conducting conciliation; There was no conciliation either by the Council or by any Institution or Centre providing alternate dispute resolution services. The Council also did not take up any dispute for arbitration nor did it refer any dispute to any Institution or Centre providing alternate dispute resolution services for such arbitration.
Arbitration in the present case was not an Institutional Arbitration as contemplated under section 18 of the MSMED Act but was conducted under the Arbitration Act by an Arbitrator privately appointed by the Respondent.
No arbitration was conducted under the MSMED Act, hence, there is no question of any decree, award or other order being made either by the Council or by any Institution or Centre providing alternate dispute resolution services to which a reference is made by the Council thus Section 19 of the MSMED Act is not applicable to the present case.
Even though the petitioner may be covered under the MSMED Act, as Petitioner did not invoke its claim under section 18 of the MSMED Act or seek reference thereunder, there is no question of section 19 of the MSMED Act being applicable to the present case.
The Court reiterated the ratio of Bharat Heavy Electrical Limited Versus the Micro and Small Enterprises Facilitation Centre & Anr.
The court further observed that “If the contention of learned counsel for the Petitioner were to be accepted, then it would imply that even in a case where there is Civil Suit for recovery filed and a decree obtained by a supplier, Section 19 of the MSMED Act would apply and the buyer would be mandated to deposit 75% of the decreed amount as a precondition for consideration of his appeal. This would be contrary to Order 41 Rule (1)(3) Civil Procedure Code.
If Section 19 of the MSMED Act, were to apply to every decree award or other order irrespective of whether it was made by the Council, or an Institution or Centre to which reference has been made by the Council or by any other Court, forum or tribunal, there was no necessity for the legislators to provide for the expression “made either by Council or by any institution or centre providing alternate dispute resolution services to which reference has been made by the Council”.
Section 18 of the MSME Act which provides for the institutional arbitration, provides “may…make a reference to the Micro and Small Enterprises Facilitation Centre” which shows that such reference is discretionary and not mandatory for the parties. Parties may opt for arbitration proceedings based on the arbitration clause as provided for under the Agreement and in which case provisions of Section 19 of MSMED Act will not apply.
By Bharti Badesra
O.P. Khaitan & Co