Karnataka HC's Landmark Decision on MSME Council's Role in Arbitration
The Karnataka High Court has ruled that the Micro and Small Enterprises Facilitation Council cannot pass an award solely due to the failure of conciliation. Instead, the Council must refer the matter to arbitration in accordance with legal provisions.
Justice Suraj Govindaraj pronounced this judgment while hearing a petition filed by M/s Enmas GB Power Systems Projects Ltd. The Court stated:
"The matter is remitted to the Karnataka Micro and Small Enterprises Facilitation Council, to formally terminate the conciliation proceedings and thereafter take a decision whether it intends to conduct the arbitration proceedings by itself or refer the matter for arbitration to be held by an institution."
Background of the Case
The dispute originated from a purchase order issued by the petitioner, M/s Enmas GB Power Systems Projects Ltd, to the second respondent, Lotus Power Gear Private Ltd, on February 14, 2013, for the supply of certain materials. Due to incomplete payment, the respondent initiated conciliation proceedings under Section 18 of the Micro, Small, and Medium Enterprises Development (MSMED) Act.
The Council held multiple conciliation meetings and ultimately passed an award on March 14, 2017, directing the petitioner to pay Rs. 11,88,756/- as outstanding dues, along with interest at three times the bank rate notified by the Reserve Bank of India.
Petitioner’s Argument
Challenging the award, the petitioner contended that the Council had only initiated conciliation proceedings and lacked the authority to pass an award. As per Section 18(3) of the MSMED Act, the Council was required to either:
- Terminate conciliation proceedings, or
- Refer the dispute to arbitration, either conducted by itself or through an institution.
The petitioner argued that passing an award without transitioning to arbitration was beyond the Council’s jurisdiction.
Respondent’s Stand
The respondent company asserted that since an award had been passed, the only legal recourse available to the petitioner was under Section 19 of the MSMED Act. They argued that the petitioner could not directly file a writ petition challenging the award.
Court’s Findings
The Karnataka High Court analyzed Section 18 of the MSMED Act and observed:
Read also:- Karnataka High Court Orders Probe Against Judge for Citing Non-Existent Supreme Court Judgments
"In terms of Sub-Section (2) of Section 18, upon receiving a reference, the Council may either conduct conciliation itself or seek assistance from an alternative dispute resolution institution, in accordance with Sections 65 to 81 of the Arbitration and Conciliation Act, 1996."
The bench noted that the Council had improperly passed an award after conciliation failed, stating:
"Essentially, the Council has passed the award on account of conciliation between the petitioner and the second respondent having failed and at the same time concluding that there is no reason to disbelieve the claim of the second respondent."
Further, the Court emphasized:
"Once the conciliation has failed, the Council must terminate its proceedings and either take up the dispute for arbitration itself or refer it to an institution providing alternative dispute resolution services. The Arbitration and Conciliation Act, 1996, then applies to such arbitral proceedings. The Council lacked jurisdiction to pass an award without following this process."
Key Observations
- Council’s Limited Jurisdiction: The MSME Council cannot act as an arbitrator unless the process of arbitration is duly initiated.
- Legal Requirement for Arbitration: Once conciliation fails, disputes must be settled through arbitration.
- Jurisdictional Error: The Council’s award was deemed void as it did not follow the arbitration procedure outlined in the MSMED Act.
Read also:- Karnataka HC Hears ED's Plea Against Order Quashing Summons to Former MUDA Commissioner
Final Verdict
The Karnataka High Court ruled that the award issued by the MSME Council was invalid due to jurisdictional errors. The petition was allowed, and the matter was sent back to the Council with instructions to terminate conciliation formally and proceed with arbitration as per the prescribed legal framework.
Legal Representation
- Advocate Sunil P.P appeared for the petitioner.
- Advocate Suresh P represented the second respondent.
Case Title: M/S Enmas GB Power Systems Projects Ltd vs. Micro and Small Enterprises Facilitation Council & Anr
Case No: Writ Petition No. 29610 of 2017
