“Calcutta HC: MSME Council Cannot Reject Claims Post-Mediation Without Evidence or Reasoned Findings Under Section 18 of MSME Act”
Safiya Malik
In a significant judgement addressing procedural shortcomings in arbitration proceedings under the MSME framework, the High Court at Calcutta, Single Bench, of Justice Shampa Sarkar, on 3rd April 2025, set aside an arbitral award on grounds of patent illegality and violation of natural justice.
The court observed that the award passed by the Micro and Small Enterprises Facilitation Council had been rendered without permitting the parties to adduce evidence and failed to address a core dispute in the case. The decision reaffirms judicial oversight in ensuring fairness in arbitral proceedings arising under the Arbitration and Conciliation Act, 1996, and the MSME Development Act.
The application under Section 34 of the Arbitration and Conciliation Act, 1996 was filed by the petitioner, UMC Technologies Private Limited, seeking to set aside the award passed by the Micro and Small Enterprises Facilitation Council. The petitioner challenged the award on multiple grounds, including procedural lapses and denial of opportunity to present evidence.
Counsel for the petitioner, Mr. Rishabh Karnani, submitted that the Facilitation Council rejected the claim even before the pleadings were complete. It was alleged that the Council held that the supplier had failed to execute the job as per contract terms and failed to produce satisfactory documents, including a job satisfaction certificate, as per the payment terms.
The petitioner relied on the provisions of the Micro, Small and Medium Enterprises Development Act, specifically noting that where mediation under Section 18(3) fails, the Council is mandated to either take up the matter for arbitration or refer it to an institution for alternative dispute resolution. From that stage, the provisions of the Arbitration and Conciliation Act, 1996 become applicable, and the parties are required to be allowed to adduce evidence.
It was submitted that despite completing the contractual obligations, including handing over the results, OMR sheets, admit cards, attendance sheets, and data CDs by letters dated August 29 and 31, 2016, the respondent failed to release the balance 10% of the contractual amount, amounting to Rs. 18,10,611. The petitioner argued that 90% of the contract value had already been paid, and the remaining 10% was wrongly withheld.
The petitioner contended that non-issuance of the job completion certificate for the year 2016 was itself a matter in dispute that ought to have been adjudicated. Furthermore, it was pointed out that the respondent had acknowledged receipt of all deliverables, including the results of the recruitment examination.
The petitioner invoked Sections 15 and 16 of the MSME Act, asserting that the buyer unit was obligated to make timely payments. It was submitted that neither ongoing litigation nor a Central Bureau of Investigation (CBI) enquiry could be grounds for withholding the balance payment, particularly as the petitioner had not been implicated in such proceedings.
In response, counsel for the respondent, Mr. Swatarup Banerjee, argued that the recruitment process was not conducted fairly and that there was a breach of contract. According to the respondent, the supplier had failed to perform the job with the required diligence and integrity. It was submitted that full payment was conditional upon the buyer's satisfaction, which was not achieved.
Mr. Banerjee also informed the court that, due to ongoing disputes, another agency had been engaged to perform remaining functions. He argued that the petitioner failed to demonstrate that the contractual obligations were satisfactorily fulfilled.
It was not disputed that the petitioner was registered under the MSME Act and that facilitation efforts had failed. The Council, as a mediator, was not required to assess evidence at that stage. However, once the matter progressed to arbitration under Section 18(4) of the MSME Act, the adjudicatory function invoked the Arbitration and Conciliation Act, 1996, requiring due process and evidence-based determination.
The court observed that the Council failed to allow parties to present evidence. It was recorded: "The Council itself records that the claimant had alleged that although the Job Completion Certificate for 2015 had been given, but the Job Completion Certificate for 2016, was withheld. However, the Council failed to note that non-supply of the Job Completion Certificate for 2016 was a dispute, which ought to have been decided."
It was also noted that no arguments were advanced by the respondent on the date of the impugned order, who had merely sought time to file a reply. The court recorded: "An opportunity should have been given to the petitioner to satisfy the Council with regard to the legitimacy, validity and the correctness of the claim for the balance 10%."
The judgment went on to note that there was no finding on record supported by evidence establishing that the petitioner had failed to conduct the recruitment process in a free and fair manner. The award, according to the court, appeared to be passed with a closed mind.
Citing precedent, the court referred to the Supreme Court decision in Bharat Coking Coal Ltd. v. L.K. Ahuja, (2001) 4 SCC 86, noting: "So long as an award made by an arbitrator can be said to be one by a reasonable person no interference is called for. However, in cases where an arbitrator exceeds the terms of the agreement or passes an award in the absence of any evidence, which is apparent on the face of the award, the same could be set aside."
Further reference was made to Ssangyong Engg. & Construction Co. Ltd. v. NHAI, (2019) 15 SCC 131, where it was stated: "A finding based on no evidence at all or an award which ignores vital evidence in arriving at its decision would be perverse and liable to be set aside on the ground of patent illegality."
Additionally, the court quoted PSA Sical Terminals (P) Ltd. v. V.O. Chidambranar Port Trust, (2023) 15 SCC 781: "A finding based on no evidence, or an Arbitral Tribunal takes into account something irrelevant to the decision which it arrives at; or ignores vital evidence in arriving at its decision, such decision would necessarily be perverse."
The court concluded that the award was "perverse" and had been rendered in "violation of principles of natural justice, including not allowing evidence to be adduced."
"The award is set aside. The parties are at liberty to act in accordance with law."
"AP-COM/39/2024 is disposed of."
Advocates Representing the Parties
For the Petitioner: Mr. Rishabh Karnani, Advocate, Mr. Sanjay Kr. Baid, Advocate
For the Respondent: Mr. Swatarup Banerjee, Advocate, Mr. Pradyat Saha, Advocate
Case Title: UMC Technologies P Ltd vs Assistant Director of Postal Services (Recruitment)
Case Number: AP-COM/39/2024
Bench: Justice Shampa Sarkar
[Read/Download order]
