MSEFC Orders Lacking Arbitral Character & Passed Without Following S.18 MSMED Act Procedure Are Unsustainable: Bombay High Court - 2025-09-24

Bombay High Court Quashes MSEFC Orders for Clubbing Conciliation and Arbitration, Remits Matter for Fresh Adjudication

Mumbai: The Bombay High Court, in a significant ruling, has quashed and set aside orders passed by the Micro and Small Enterprises Facilitation Council (MSEFC) for failing to adhere to the mandatory two-stage dispute resolution process outlined in the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006. Justice N. J. Jamadar held that orders passed without distinctly conducting conciliation and arbitration proceedings are a "nullity" and lack the character of a valid arbitral award.

The Court remitted the matter back to the MSEFC for fresh determination through arbitration, emphasizing that failure to follow express statutory provisions provides a strong basis for exercising writ jurisdiction, despite the existence of an alternative statutory remedy.

Background of the Case

The writ petitions were filed by Dodale Electro Instruments, a Pune-based proprietorship, challenging two orders from the Daman MSEFC. These orders directed Dodale to pay a total of over ₹70 lakhs to Mexim Adhesive Tapes Pvt. Ltd., a supplier. Notably, the principal amount in dispute was approximately ₹4.5 lakhs, with the remainder comprising a substantial interest component calculated under Section 16 of the MSMED Act.

Dodale challenged the orders primarily on the grounds that they were passed ex-parte , in violation of the principles of natural justice, and that the MSEFC had fundamentally erred by not following the procedure mandated by Section 18 of the MSMED Act.

Arguments from Both Sides

Petitioner's Contentions (Dodale Electro Instruments):

- Procedural Nullity: The primary argument was that the MSEFC improperly clubbed the conciliation and arbitration stages. The Council never formally terminated the conciliation proceedings or indicated that it was commencing arbitration. This, they argued, is contrary to the law laid down by the Supreme Court in Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan .

- Lack of Arbitral Character: The resulting orders did not possess the "trappings of an award" under the Arbitration and Conciliation Act, 1996, as no procedure for filing claims or defenses was followed.

- Violation of Natural Justice: Dodale claimed it was not given a proper opportunity to be heard.

- Maintainability of Writ: The petitioner contended that the writ petition was maintainable, despite the alternative remedy under Section 19 of the MSMED Act (which requires a 75% pre-deposit), due to the Council's grave procedural and jurisdictional errors.

Respondent's Contentions (Mexim Adhesive Tapes Pvt. Ltd.):

- Circumvention of Statute: The respondent argued that the writ petition was a "subterfuge" to bypass the mandatory 75% pre-deposit required under Section 19 of the MSMED Act.

- Petitioner's Conduct: It was asserted that Dodale had approached the court with "unclean hands," having made false statements about its awareness of the proceedings and having sought multiple adjournments before the MSEFC.

- Statutory Bar on Writ: Relying on the Supreme Court's decision in India Glycols Ltd. , the respondent claimed that the existence of a statutory remedy should bar the High Court from exercising its writ jurisdiction.

Court's Analysis and Key Findings

Justice Jamadar conducted a thorough analysis of the procedural mandate under Section 18 of the MSMED Act, which prescribes a two-stage mechanism for dispute resolution.

On Clubbing Conciliation and Arbitration: The Court found merit in the petitioner's core argument. It observed that the MSEFC's order did not indicate that conciliation had failed and terminated, nor did it show that the Council had subsequently taken up the dispute for arbitration.

The Court observed, "From the perusal of the observations in the impugned order..., it becomes evident that the MSEFC has referred to initiation of conciliation proceedings. The consideration on the said point, stops at that. The impugned order does not indicate that the MSEFC reckoned that the conciliation proceedings did not succeed and stood terminated."

Citing the Supreme Court's judgment in Jharkhand Urja Vikas Nigam Ltd. , the bench reiterated that conciliation and arbitration are fundamentally different processes and cannot be clubbed. The High Court concluded that the MSEFC's orders lacked the essential character of an arbitral award.

"In the absence thereof, the order passed by the MSEFC..., where it is simply recorded that the claim of the seller appears genuine and the purchaser committed default, does not cloth it with the character of an arbitration award."

On Maintainability of the Writ Petition: While acknowledging the self-imposed restraint on writ jurisdiction when an alternative remedy exists, the Court held that this case fell into an exceptional category.

"The impugned orders, therefore, become unsustainable and susceptible to interference in exercise of the writ jurisdiction as the orders have been passed in breach of the mandatory provisions of the Act, 2006 and the Arbitration and Conciliation Act, 1996. Failure to adopt express statutory provisions... furnishes a surer foundation for the exercise of the writ jurisdiction."

The court also noted the "justice of the claim," where the interest amount was disproportionately higher than the principal, as a factor making it a "rare and exceptional situation."

Final Decision and Implications

The Bombay High Court partly allowed the writ petitions, quashing the impugned orders of the MSEFC. The proceedings were remitted back to the Council at Daman for a fresh determination strictly through arbitration as per the provisions of the Arbitration and Conciliation Act, 1996.

This judgment serves as a crucial reminder to MSEF Councils across the country about the importance of adhering to the distinct procedural stages of conciliation and arbitration. It reinforces the principle that a failure to follow the statutory mandate can render an order a nullity, justifying intervention by a High Court under its writ jurisdiction, even when a statutory remedy with a pre-deposit condition exists.