Karnataka HC: MSME Council Cannot Pass Award After Failed Conciliation Without Referring Matter to Arbitration
Sanchayita Lahkar
The Karnataka High Court has set aside an award passed by the Micro and Small Enterprises Facilitation Council, Bengaluru, on the ground that the Council lacked jurisdiction to adjudicate the matter under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006, following the failure of conciliation proceedings. The Single Bench of Justice Suraj Govindaraj, concluded that no arbitration had been conducted or formally initiated after conciliation failed, and the Council had no authority to pass an award in such circumstances.
The petitioner is a private company engaged in infrastructure, power, and industrial sector projects. On 14 February 2013, the petitioner placed a purchase order with the second respondent for the supply of specific materials at an agreed value of ₹2,25,70,000, with a gross value of ₹2,58,86,845.04, inclusive of taxes. A dispute arose regarding the alleged non-payment of the balance amount, following which the second respondent initiated proceedings under Section 18 of the MSMED Act before the Facilitation Council.
The case was registered as Case No. 1/2016 before the Council. Several meetings were held in pursuance of the conciliation process. The petitioner submitted a memorandum stating that a sum of ₹12,69,643 was payable, and any claim above that amount was denied. This amount was subsequently paid, first by cheque and later via demand draft. The payment was acknowledged by the second respondent on 24 November 2016.
Despite the payment, further reconciliation did not materialise. In the meeting held on 8 February 2017, the Council recorded that the parties had failed to reconcile their accounts, and based on the documents on record, including delivery challans and affidavits, it concluded that a balance was still due. Accordingly, the Council passed an award on 14 March 2017, directing the petitioner to pay a further sum of ₹11,88,756 along with interest at three times the bank rate notified by the Reserve Bank of India.
The petitioner approached the High Court under Articles 226 and 227 of the Constitution of India, challenging the jurisdiction of the Facilitation Council to pass the award without initiating arbitration, as contemplated under Section 18(3) of the MSMED Act. The petitioner contended that after conciliation failed, the Council was obligated either to commence arbitral proceedings itself or refer the matter to a recognised arbitral institution.
The petitioner further argued that the award was passed without providing an opportunity to file objections, lead evidence, or contest the matter on merits. As a result, the petitioner submitted that the award was rendered without jurisdiction and therefore liable to be quashed.
In response, the second respondent submitted that the award had been passed based on the materials and admissions available on record. It was further argued that the award could only be challenged under Section 19 of the MSMED Act, and that the writ petition under Article 226 was not maintainable. According to the second respondent, there was no error in the award passed by the Council.
The Court examined the statutory framework under Section 18 of the MSMED Act. Section 18(1) permits a party to a dispute regarding any amount due under Section 17 to make a reference to the Facilitation Council. Section 18(2) authorises the Council either to conduct conciliation itself or seek the assistance of another institution. Section 18(3) provides that where conciliation fails without any settlement, the Council shall either take up the dispute for arbitration or refer the matter to another arbitration centre.
Justice Suraj Govindaraj observed that in the present case, the Council had chosen to conduct the conciliation proceedings on its own. He recorded that “during the process of the said conciliation, the petitioner filed a memo of calculation that the total amounts due... was a sum of ₹12,69,643” and that this amount was subsequently paid and acknowledged by the second respondent.
Following the failure of reconciliation, the Council proceeded to determine that a balance amount was due, and passed the award on the basis of documents such as delivery challans and affidavits. The Court noted that no arbitral proceedings had been initiated, nor had the matter been referred to any arbitral institution. The award was passed solely on the strength of conciliation materials.
The Court recorded that “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.” It was further noted that such arbitration would have to be governed by the provisions of the Arbitration and Conciliation Act, 1996.
The Court found that the Council had not afforded the petitioner any opportunity to file objections, lead evidence, or contest the claim in a formal arbitration. It was stated that “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... without providing an opportunity.”
Referring to the precedent of the Supreme Court in Whirlpool Corporation v. Registrar of Trade Marks, Mumbai and Others, the Court observed that a writ petition under Article 226 is maintainable where an authority has acted without jurisdiction. The High Court concluded that the award passed by the Facilitation Council was “contrary to sub-section (3) of Section 18” and that “there being no jurisdiction vested with the Council to pass any such award after the conciliation has failed.”
Allowing the writ petition, the Court quashed the award dated 14 March 2017 passed by the Facilitation Council. The Court directed that the matter be remitted back to the Karnataka Micro and Small Enterprises Facilitation Council.
The operative part of the order states: “The writ petition is allowed. The award dated 14.03.2017 at Annexure - L passed by the 1st respondent is quashed. 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.”
The Court also directed the Registrar (Judicial) to forward a copy of the order to the Council both by registered post with acknowledgment due and by email to its official address.
Advocates Representing the Parties
For the Petitioners: Sri Sunil P.P., Advocate
For the Respondents: Sri Suresh P., Advocate
Case Title: M/s Enmas GB Power Systems Projects Ltd. v. Micro and Small Enterprises Facilitation Council and Another
Neutral Citation: 2025:KHC:11298
Case Number: WP No. 29610 of 2017
Bench: Justice Suraj Govindaraj
[Read/Download order]
