Introduction:

In a significant ruling, the Delhi High Court, presided over by Justice Jasmeet Singh, addressed the interplay between the Micro, Small, and Medium Enterprises Development Act (MSMED Act) and the Arbitration and Conciliation Act, 1996 (Arbitration Act). The case involved M/S Vallabh Corporation (petitioner) and SMS India Pvt Ltd (respondent), centring on the non-payment of outstanding dues amounting to ₹37,20,31,671/-. The court examined whether, in the absence of mediation initiation by the MSME Facilitation Council under Section 18 of the MSMED Act, it could appoint an arbitrator under Section 11(6) of the Arbitration Act.

Factual Background:

The respondent issued a Letter of Intent to the petitioner for executing civil and associated works for constructing a New Flash Butt Weld Engineering Workshop at Sabarmati. A revised Letter of Intent was subsequently issued on November 14, 2018. Despite completing the work, the petitioner alleged non-payment of dues totalling ₹37,20,31,671/- under both the Purchase Order and the Service Order. Efforts to amicably resolve the dispute failed, leading the petitioner to invoke arbitration on February 29, 2024, proposing five names for the role of Sole Arbitrator.

Petitioner’s Arguments:

The petitioner contended that it had complied with the mandatory mediation requirement stipulated in Section 18 of the MSMED Act by writing to the MSME Facilitation Council on May 16, 2024, seeking mediation. However, the Council did not respond within the subsequent two months. Citing the Bombay High Court’s decision in Microvision Technologies (P) Ltd. v. Union of India, the petitioner argued that upon the Council’s failure to act, it was entitled to approach the High Court under Section 11(6) of the Arbitration Act for the appointment of an arbitrator.

Respondent’s Arguments:

The respondent asserted that the petitioner had two options: either initiate action under Section 11 of the Arbitration Act or refer to the MSMED Act. Once the petitioner invoked the provisions of the MSMED Act, it was obligated to see the process through to its conclusion and could not switch to the Arbitration Act midway. The respondent emphasized that the petitioner should await the outcome of the proceedings under the MSMED Act before seeking recourse under the Arbitration Act.

Court’s Analysis and Judgment:

The court examined the provisions of Section 18 of the MSMED Act, which outlines the process for dispute resolution involving micro, small, and medium enterprises. According to Section 18(2), upon receiving a reference, the Facilitation Council is mandated to either conduct mediation itself or refer the matter to a mediation service provider as per the Mediation Act, of 2023. If the mediation fails or is terminated without a settlement, Section 18(3) stipulates that the Council shall either take up the dispute for arbitration itself or refer it to an institution providing alternative dispute resolution services.

The court referenced the Supreme Court’s ruling in Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd. (2023), which held that the MSMED Act prevails over the Arbitration Act, aiming to ensure timely and smooth payment to suppliers who are micro and small enterprises. However, the court noted that the Arbitration Act is not inconsistent with the MSMED Act, as the latter provides for arbitration under Section 18. In instances where the Facilitation Council fails to act, the High Court or the Supreme Court can appoint an arbitrator under Section 11(6) of the Arbitration Act.

In this case, the petitioner approached the MSME Facilitation Council on May 16, 2024, seeking mediation. The Council did not respond within two months, nor had it initiated any mediation process by the time the petitioner filed the present petition under Section 11(6) of the Arbitration Act. The court observed that the Facilitation Council’s inaction justified the petitioner’s move to seek the court’s intervention for the appointment of an arbitrator.

The court also cited the Bombay High Court’s decision in Microvision Technologies (P) Ltd., which held that upon the Facilitation Council’s failure to refer the dispute to arbitration, an application could be made under Section 11(6) of the Arbitration Act for the appointment of an arbitrator. This precedent supported the petitioner’s position.

Consequently, the court allowed the petition and appointed an arbitrator to adjudicate the disputes between the parties.

Conclusion:

The Delhi High Court’s ruling underscores the judiciary’s proactive stance in ensuring that procedural delays do not hinder the resolution of disputes involving micro, small, and medium enterprises. By empowering the courts to appoint arbitrators under Section 11(6) of the Arbitration Act when the MSME Facilitation Council fails to initiate mediation under Section 18 of the MSMED Act, the judgment reinforces the legislative intent of providing timely and effective dispute resolution mechanisms for MSMEs.