2022 Supreme(Guj) 1336

IN THE HIGH COURT OF GUJARAT AT AHMEDABAD
SONIA GOKANI, NISHA M. THAKORE, JJ.
M/s Karan Paper Mills – Appellant
Versus
M/s Shah Paper Pack Industries – Respondent
R/Special Civil Application No. 21687 of 2022
Decided on : 11-11-2022

The Commercial Court does not have jurisdiction to entertain a challenge to the rejection of an application filed under Section 16 of the Arbitration and Conciliation Act, 1996, as the remedy available to the aggrieved party is to wait for the arbitral proceedings to be concluded and the final arbitral award to be challenged under Section 34 of the Act. The order rejecting the application under Section 16 of the Act cannot be treated as an arbitral award as defined under Section 2(ca) of the Act. Once the arbitral proceedings are initiated under Section 18(3) of the MSME Act, then any challenge to the order passed in such arbitral proceedings ought to be by way of Section 19 of the MSME Act and under no other provisions.

Headnote:

ARBITRATION - JURISDICTION - LIMITATION - INTERFERENCE BY COURT - SECTION 34 OF ARBITRATION AND CONCILIATION ACT, 1996 - SECTION 16(5) AND 16(6) OF ARBITRATION AND CONCILIATION ACT, 1996 - SECTION 18(3) OF MICRO, SMALL AND MEDIUM ENTERPRISE DEVELOPMENT ACT, 2006 - SECTION 2(1)(C) OF ARBITRATION AND CONCILIATION ACT, 1996 - SECTION 115 OF CODE OF CIVIL PROCEDURE, 1908 - SECTION 226 AND 227 OF THE CONSTITUTION OF INDIA - The Gujarat High Court held that the Commercial Court does not have jurisdiction to entertain a challenge to the rejection of an application filed under Section 16 of the Arbitration and Conciliation Act, 1996, as the remedy available to the aggrieved party is to wait for the arbitral proceedings to be concluded and the final arbitral award to be challenged under Section 34 of the Act. The Court further held that the order rejecting the application under Section 16 of the Act cannot be treated as an arbitral award as defined under Section 2(ca) of the Act. Once the arbitral proceedings are initiated under Section 18(3) of the MSME Act, then any challenge to the order passed in such arbitral proceedings ought to be by way of Section 19 of the MSME Act and under no other provisions.

Fact of the Case:

The petitioner, a supplier of MG Craft Papers, raised four separate tax invoices on the respondent in the year 2013 for which the petitioner accumulated to total Rs. 13,10,388/- with a credit period of 60 days to enable the respondent to make payment. Since the respondent did not respond to the invoices raised and no payment had been made, the petitioner filed an application before the Micro and Small Enterprise Facilitation Council (MSEFC Council) requesting the said MSEFC Council to refer the matter to the conciliation under Section 18(2) of the MSME Act. The MSEFC Council issued notice upon the respondent and convened a meeting. The respondent did not appear and various notices were issued. The MSEFC Council was left with no option but to pass an order on 11.09.2018 referring the matter to the Gujarat Chamber of Commerce and Industry under Section 18(3) of the MSME Act. The Gujarat Chamber of Commerce and Industry issued notice upon the parties on 19.06.2019 intimating the parties about the matter being referred to the Arbitration which was acknowledge by both the parties. A request was made by the Gujarat Chamber of Commerce and Industry to the sole arbitrator on 21.08.2021 to accept the appointment as the Arbitrator to try and resolve the matter between the parties. The Sole Arbitrator accepted the appointment vide letter dated 27.08.2021 and entered reference on 15.09.2021 and issued notice upon the parties for fixing the preliminary meeting on 09.10.2021. The petitioner filed statement of claim on 31.10.2021 for the principal amount of 13,10,388/- along with 18% compounded monthly interest. The respondent chose to remain absent in the next arbitral proceedings held on 04.12.2021 and appeared only through his advocate on 18.12.2021 and sought time to file statement of defence. He chose not to file statement of defence and instead filed an application under Section 16 on 23.12.2021 inter alia challenging the jurisdiction of the learned Sole Arbitrator to proceed further with the arbitration proceedings in view of the claims of the petitioner being barred by limitation as per the Limitation Act, 1963. The respondent chose not to file the statement of claim and insisted on hearing of the application preferred under Section 16 of the Act. After the parties exchanged the pleadings and filed written submissions in relation to the application filed under Section 16 of the Act, the learned Sole Arbitrator after considering the same proceeded to pass the order on 09.06.2022 rejecting the application of the respondent under Section 16 and directed the parties to proceed further with the arbitral proceedings. The respondent, against the said order, preferred the CMA along with the application for seeking the interim reliefs before the Commercial Court under Section 34 of the Act on 04.08.2022. Without serving the notice upon the petitioner, on 10.08.2022, the Commercial Court granted ex-parte interim stay on the arbitral proceedings initiated by the petitioner vide its order dated 06.09.2022.

Finding of the Court:

The Court held that the Commercial Court does not have jurisdiction to entertain a challenge to the rejection of an application filed under Section 16 of the Arbitration and Conciliation Act, 1996, as the remedy available to the aggrieved party is to wait for the arbitral proceedings to be concluded and the final arbitral award to be challenged under Section 34 of the Act. The Court further held that the order rejecting the application under Section 16 of the Act cannot be treated as an arbitral award as defined under Section 2(ca) of the Act. Once the arbitral proceedings are initiated under Section 18(3) of the MSME Act, then any challenge to the order passed in such arbitral proceedings ought to be by way of Section 19 of the MSME Act and under no other provisions.

Issues: 1. Whether the Commercial Court has jurisdiction to entertain a challenge to the rejection of an application filed under Section 16 of the Arbitration and Conciliation Act, 1996? 2. Whether the order rejecting the application under Section 16 of the Act can be treated as an arbitral award as defined under Section 2(ca) of the Act?

Ratio Decidendi: 1. The remedy available to the aggrieved party is to wait for the arbitral proceedings to be concluded and the final arbitral award to be challenged under Section 34 of the Act. 2. The order rejecting the application under Section 16 of the Act cannot be treated as an arbitral award as defined under Section 2(ca) of the Act.

Final Decision: The petition was allowed quashing and setting aside the interim order passed by the Commercial Court.