MSME Council Has No Jurisdiction To Pass Award After Conciliation Failed; Matter Has To Be Referred To Arbitration: Karnataka High Court

The Petitioner approached the Karnataka High Court for the issuance of a direction quashing the award passed by the first respondent- Micro and Small Enterprises

Facilitation Council. The Petitioner also sought a direction to the first respondent to conduct the proceedings in the manner stipulated under Sec.18(3) of the MSME Act.

The Single Bench of Justice Suraj Govindaraj held,“It is clear that award has been passed contrary to sub-section (3) of Section 18 by the Council there being no jurisdiction vested with the Council to pass any such award after the conciliation has failed. The award having been passed suffering from jurisdictional error i.e. to say there being no jurisdiction at all.”

Advocate Sunil P.P. represented the Petitioner, while Advocate Suresh P represented the Respondents.

Factual Background

The Petitioner, claiming to be a private company providing economical solutions for the infrastructure, power and Industrial sectors, had issued a purchase order to the second respondent - Company for the supply of certain materials at the cost of Rs.22,570,000 with a gross value of Rs.25,886,845.04. The entire payment not having been made, the second respondent initiated conciliation proceedings under Section 18 of the Micro, Small and Medium Enterprises Development Act (MSMED Act) for recovery of the balance money.

The matter was taken up by the Council, and finally, an award was passed directing the petitioner to make a payment of a sum of Rs.11,88,756 towards the principal outstanding dues along with interest at three times the bank rate notified by the Reserve Bank of India. The petitioner challenged the said award before the High Court.

Reasoning

The Bench found that the Council had passed the award on account of conciliation between the petitioner and the second respondent having failed and at the same time concluding that there was no reason to disbelieve the claim of the second respondent.

It was explained by the Bench that in terms of Sub-Section (3) of Section 18, when the conciliation initiated under sub-section (2) of Section 18 is not successful i.e. there is no settlement arrived at between the parties then the conciliation proceedings would have to be terminated and thereafter the Council shall either take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration under the provisions of the Arbitration and Conciliation Act, 1996 as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7.

In the matter at hand, upon the conciliation having failed, the Council neither terminated the proceedings nor did it take up the matter for arbitration or refer the matter for arbitration to any institution. “Once the conciliation had failed, it was the duty and obligation on part of the Council to terminate its proceedings and refer the matter to arbitration or take up the matter for arbitration, which would require the Arbitration and Conciliation Act, 1996 to apply to the Arbitral proceedings. None of them having occurred, the Council could not have on its own come to a conclusion that there is no reason to disbelieve or discard the claim of the petitioner allegedly supported by the documents without providing an opportunity to the petitioner to file its detailed objections to lead evidence and contest the matter.”

The Bench applied the judgment of the Apex Court in Whirlpool Corporation v. Registrar of Trade Marks, Mumbai and others (1998) to exercise its jurisdiction under Article 226 to intervene where such injustice had occurred by passing orders by an authority having no Jurisdiction.

Thus, quashing the order, the Bench directed, “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. The said orders to be passed within a period of 30 days on receipt of copy of this order.”

Cause Title: M/S ENMAS GB Power Systems v. Micro and Small Enterprises Facilitation Council & Ors. (Neutral Citation: 2025:KHC:11298)

Appearance:

Petitioner: Advocate Sunil P.P.

Respondent: Advocate Suresh P

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