Introduction
The Supreme Court of India, in M/s Tamil Nadu Cements Corporation Ltd. v. Micro and Small Enterprises Facilitation Council & Anr., has referred two key legal questions to a larger bench:
- Whether a writ petition under Article 226 of the Constitution is maintainable against an order passed by the Micro and Small Enterprises Facilitation Council (MSEFC) under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).
- Whether MSEFC members who conduct conciliation under Section 18(2) of the MSMED Act can also act as arbitrators under Section 18(3), in light of Section 80 of the Arbitration and Conciliation Act, 1996.
This reference follows conflicting decisions by two-judge and three-judge benches of the Supreme Court regarding the interplay between the MSMED Act and the Arbitration and Conciliation Act, 1996.
Facts of the Case
The dispute arose from a contract between Tamil Nadu Cements Corporation Ltd. (TANCEM) and M/s Unicon Engineers for the design, supply, erection, and commissioning of Electrostatic Precipitators (ESP) at TANCEM’s Ariyalur Cement Works. The contract, valued at ₹7.5 crore, was awarded in April 2010.
Chronology of Events:
- April 16, 2010: Work order issued to M/s Unicon Engineers.
- 2012-2013: Repeated warnings issued to Unicon Engineers due to delays in execution and alleged substandard work.
- January 17, 2014: Unicon Engineers approached the MSEFC under Section 18 of the MSMED Act, claiming ₹2.66 crore in unpaid dues.
- June 4, 2016: MSEFC passed an order directing TANCEM to pay ₹39.66 lakh along with interest.
- September 19, 2016: TANCEM challenged the award under Section 34 of the Arbitration and Conciliation Act, 1996, before the Madras High Court, without depositing 75% of the award amount as required under Section 19 of the MSMED Act.
- October 25, 2016: MSEFC rejected TANCEM’s recall petition.
- December 16, 2016: Unicon Engineers initiated execution proceedings before the Madras High Court.
- 2017-2022: Multiple petitions, including a challenge to the constitutional validity of Sections 16-19 of the MSMED Act, were filed before the Madras High Court.
- December 7, 2022: The Madras High Court dismissed TANCEM’s writ appeal, holding that objections under Section 34 were time-barred.
- December 14, 2022: Execution proceedings resumed, and the executing court ordered the sale of TANCEM’s properties.
TANCEM then approached the Supreme Court, challenging the maintainability of the MSEFC award and the bar on writ jurisdiction.
Key Legal Issues
- Can a writ petition be entertained against an MSEFC order, despite the availability of statutory remedies under the Arbitration and Conciliation Act?
- Can MSEFC members act as both conciliators and arbitrators under Section 18 of the MSMED Act, given the restrictions under Section 80 of the Arbitration Act?
Arguments Presented
Appellant’s Contentions (TANCEM)
- Writ Maintainability:
- The MSEFC’s order was passed without following proper arbitration procedures, making it a nullity.
- Under Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan (2021) 19 SCC 206, a writ petition is maintainable if the order is void ab initio.
- The requirement under Section 19 MSMED Act to deposit 75% of the award before challenging it under Section 34 is an unfair and onerous condition.
- MSEFC’s Dual Role as Arbitrator and Conciliator:
- Section 80 of the Arbitration and Conciliation Act states that a conciliator shall not act as an arbitrator in the same dispute unless agreed by the parties.
- The ruling in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023) 6 SCC 401 contradicts Jharkhand Urja Vikas Nigam Ltd., leading to legal uncertainty.
Respondents’ Contentions (Unicon Engineers & MSEFC)
- Writ Maintainability:
- A three-judge bench in M/s India Glycols Ltd. v. MSEFC (2023 SCC OnLine SC 1852) held that writ jurisdiction is barred as an alternative remedy under Section 34 of the Arbitration Act exists.
- The Madras High Court’s dismissal of TANCEM’s Section 34 challenge due to limitation was a procedural failure on TANCEM’s part, not an issue of maintainability.
- MSEFC’s Dual Role as Arbitrator and Conciliator:
- Section 18(4) of the MSMED Act overrides other laws and allows MSEFC to act as both conciliator and arbitrator.
- The statutory mandate of the MSMED Act prevails over the Arbitration Act due to its special non-obstante clause.
1. Conflicting Precedents on Writ Maintainability
- Jharkhand Urja Vikas Nigam Ltd. (2021) held that writ jurisdiction is maintainable when an MSEFC order is a nullity.
- Gujarat State Civil Supplies Corporation Ltd. (2023) held that MSEFC can act as both conciliator and arbitrator, limiting judicial review.
- M/s India Glycols Ltd. (2023) further barred writ petitions against MSEFC orders, requiring a 75% deposit to challenge the award under Section 34 of the Arbitration Act.
Given the divergence, the Supreme Court referred the issue to a larger bench to determine when a writ petition can be entertained against an MSEFC award.
2. Can MSEFC Members Act as Arbitrators?
- Section 80 of the Arbitration Act states that conciliators cannot act as arbitrators, ensuring impartiality.
- Section 18(3) of the MSMED Act, however, allows the MSEFC to act as an arbitrator despite conducting conciliation.
- This raises a conflict between the MSMED Act and the Arbitration Act, requiring resolution by a larger bench.
3. The Need for Judicial Review in Exceptional Cases
The Court emphasized that while alternative remedies should be exhausted, Article 226 jurisdiction remains available in cases of:
- Violation of natural justice.
- Orders passed without jurisdiction.
- Unconstitutionality of a statute.
Conclusion and Implications
The Supreme Court’s referral to a larger bench will determine:
- Whether writ petitions can be entertained against MSEFC orders despite Section 34 of the Arbitration Act.
- Whether MSEFC members can act as arbitrators after conducting conciliation, in light of Section 80 of the Arbitration Act.
This ruling will significantly impact businesses engaged in disputes under the MSMED Act, clarifying whether MSEFC awards can be challenged directly through writ petitions and whether statutory arbitration under the MSMED Act overrides fundamental principles of neutrality in arbitration.
FAQs:
1. What is the Micro, Small and Medium Enterprises Development Act (MSMED Act)?
The MSMED Act is an Indian law designed to promote and develop micro, small, and medium enterprises. It includes provisions for facilitating payments to these enterprises, particularly through the Micro and Small Enterprises Facilitation Council (MSEFC), which helps resolve payment disputes.
2. Can an award from the MSEFC be challenged in a court?
Yes, an award from the MSEFC can generally be challenged under Section 34 of the Arbitration and Conciliation Act, 1996. However, there is a legal debate, referred to a larger bench of the Supreme Court, regarding whether a writ petition can also be filed against an MSEFC order, especially if the order is deemed a nullity.
3. What is the “75% deposit” rule for challenging an MSEFC award?
Under Section 19 of the MSMED Act, a party challenging an MSEFC award under Section 34 of the Arbitration and Conciliation Act is required to deposit 75% of the award amount before their challenge can be heard. This condition is intended to ensure quicker resolution of disputes for micro and small enterprises.
4. Can the same body act as both conciliator and arbitrator in a dispute under the MSMED Act?
This is a complex legal question that the Supreme Court has referred to a larger bench. While Section 80 of the Arbitration and Conciliation Act generally prohibits a conciliator from acting as an arbitrator in the same dispute to ensure impartiality, Section 18(3) of the MSMED Act appears to allow the MSEFC to perform both roles, creating a conflict between the two laws.
5. When can a writ petition be filed against a legal order if other remedies exist?
Even when alternative statutory remedies are available, a writ petition under Article 226 of the Constitution may be entertained by a High Court in exceptional cases. These include situations where there is a clear violation of natural justice, the order was passed without proper jurisdiction, or the constitutional validity of a statute is being challenged.
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