Powers of the Facilitation Council under Section 18 of the MSME Act.

[By Arshia Ann Joy]

The author is a student of the National University of Advanced Legal Studies (NUALS), Kochi.

 

Introduction

The Micro, Small and Medium Enterprises Development Act, 2006 (hereafter ‘MSME Act’) envisages an effective and less time-consuming resolution mechanism for disputes pertaining to micro, small and medium enterprises in the country, thus facilitating the smooth functioning of these enterprises.

Section 18 (2) of the MSME Act clearly specifies the procedure to be followed by the Facilitation Council (hereafter ‘the Council) when a dispute is referred to it. The section states that once the Council receives a reference under section 18 (1), the primary step is to conduct conciliation[i] followed by arbitration, should the conciliation attempts be unfruitful.[ii]

This article attempts to discuss whether the scope of the powers envisaged under section 18 can be expanded expanded  to include the power to pass an ex parte order by the Council. This article delves into the nature of the Council as a civil court and its role within the realm of conciliation and arbitration. Furthermore, it examines the ramifications of procedural errors committed by the Council and explores potential remedies available in such circumstances.

This article delves into the nature of the Council as a civil court and its role within the realm of conciliation and arbitration. Furthermore, it examines the ramifications of procedural errors committed by the Council and explores potential remedies available in such circumstances.

The Council as a Civil Court

Ex parte refers to a proceeding by one party in the absence of the other. The Civil Procedure Code under Order IX Rule 6 enables a court to issue an order that a suit shall be heard ex parte once it is proved that summons was duly served. While construing this provision, the Apex Court in Arjun Singh reiterated that if the defendant is absent after due service of summons, the court can proceed ex parte. Furthermore, an ex parte order has to contain the summary of the plaint, the issues and the findings arrived at by the court.[iii] The court further held that,

“The burden becomes much more onerous in ex parte matters. The Court cannot blindly decree the suit on the ground that the defendants are ex parte.”[iv]

Appreciating the evidence before the court is hence key to a valid ex parte order. The Facilitation Council is however not in the nature of a Civil Court as per the Civil Procedure Code and hence it does not have the authority to pass an order ex parte. This is because firstly, the CPC itself provides for a definition as to what constitutes a civil court. As the Apex Court rightly pointed out in Nahar Industrial Enterprises Ltd.

Which courts would come within the definition of the civil court has been laid down under CPC itself…..Civil courts are constituted under statutes like the Bengal, Agra and Assam Civil Courts Act, 1887.” The Supreme Court recently in Bank of Rajasthan Ltd. vs. VCK Shares and Stock Broking Services Ltd, affirmed the rationale in Nahar.

Secondly, a parallel can be drawn between the Facilitation Council and other similar bodies like the Debt Recovery Tribunal and the Securities and Exchange Board of India (hereafter ‘SEBI’). A comparison can be made between these bodies as they are statutorily formed for specific purposes and have certain powers including powers of adjudication ordained to them by the legislature through those statutory provisions.

The Apex Court in Nahar Industrial observed that the Debt Recovery Tribunal could not be treated as a civil court as under the relevant statute, the debtor or a third party does not have an independent right to approach it first nor can any declaratory relief be sought for by the debtor from the Tribunal. The court also noticed that there is no deeming provision in the relevant statute which allowed the Tribunal to be deemed a civil court. Applying the same rationale to the Facilitation Council would provide similar results except for the fact that the Facilitation Council can provide declaratory relief under section 18(3). However, the provision makes it clear that this power could be exercised by the Council when it acts as an Arbitral Tribunal and not as a Civil Court. Hence, as the name suggests, the powers entrusted with the Council is to act as a ‘Facilitator’ rather than as a court.

Unlike the DRT, the SEBI is empowered to pass ex parte orders. However, it can do so only in extreme and urgent cases. As the Securities Appellate Tribunal (SAT), Mumbai has held,

“We hasten to add that Respondent No. 1 (SEBI) is empowered to pass ex-parte ad-interim orders in urgent cases but this power is to be exercised sparingly in most deserving cases of extreme urgency.”

The MSME Act however has no such enabling provision which allows the Council to pass an ex parte order. Further, it is a settled position of law that if a statute prescribes a mode of action, the act done must not deviate from the prescribed procedure. As the Apex Court reiterated in Babu Verghese,

“It is the basic principle of law long settled that if the manner of doing a particular act is prescribed under any statute, the act must be done in that manner or not at all.”

Since section 18 envisages a clear procedure of conciliation and arbitration, the Council cannot resort to passing an ex parte order without adhering to the specifications of the statute.

Role of the Council during Conciliation

The very heart of dispute resolution through conciliation lies in the mutual nature of the proceedings. Conciliation is a process of persuading the parties to reach an agreement.[v] In conciliation, the parties reach an agreement on the basis of mutual consent and not on the basis of legal propriety or legal reasonableness.”[vi] This follows that if either of the parties fail to cooperate, the entire proceedings will be vitiated.

Thus, the Council acting as the Conciliator as per section 18, cannot pass an order during the stage of conciliation without providing an opportunity of hearing to both the parties. Hence, an ex parte order during the stage of conciliation, would be invalid and violative of section 18. This position of law has been reiterated by the Apex Court in Jharkhand Urja Vikas Nigam wherein it was held that non-appearance of one of the parties would not be a valid ground for not initiating arbitration proceedings. The court added that on the failure of conciliation, arbitration proceedings should be initiated and both arbitration and conciliation proceedings should not be merged failing which the order of the Council would be declared a nullity. The High Court of Madhya Pradesh in Meenakshi Associates Private Limited[vii] further construed section 18 to hold that:

“The Facilitation Council before whom the dispute is raised, is required to conduct conciliation proceedings and if conciliation proceedings are not successful or terminated without any settlement between the parties, the Facilitation Council itself can take up the dispute for arbitration or may refer it to another institution providing alternative dispute resolution as per the provisions of the Act of 1996.”

Following this rationale, the High Court of Himachal Pradesh in New Bansal Generation,[viii] nullified the order of the Facilitation Council dropping the proceedings and not referring the dispute for arbitration citing the reason that an arbitration agreement already existed between the parties and the parties should resort to that clause. The court noted that as per the section, if conciliation initiated under section 18 bore no fruit, the Council should have either taken up the dispute for arbitration or should have referred the same to an appropriate institution. Furthermore, sections 15 to 23 of the MSME Act, would have an overriding effect over anything inconsistent with those.

The Supreme Court in Official Trustee, West Bengal and Ors. v. Sachindra Nath, held that a court is considered to have jurisdiction over a particular matter only if it has the authority to pass the orders sought for. Since, the Council has no authority in the first place to pass an ex parte order at the stage of conciliation, it clearly oversteps its jurisdiction provided under section 18.

In spite of the courts across the country directing the Council to follow appropriate procedure, the status quo remains more or less unaltered. The Madras High Court in Raster Images[ix] emphasised upon the unfortunate state of affairs as the Council fails to observe strict adherence to the procedure specified in the Act. The court even went to the extent of imposing costs on the Ministry concerned if the Council continued to flout the mandate under section 18 in the future.

Role of the Council during Arbitration

The provisions of the Arbitration and Conciliation Act, 1996 (hereafter ‘Arbitration Act’) would apply when the Council takes up the matter for Arbitration, post the failure of conciliation proceedings. This Act allows for issuing ex parte orders only after ensuring that adequate notice has been given to the party against whom the ex parte order would be passed. As the High Court of Delhi emphasised in Mittal Pigments,

“It is clear, that before taking an action in accordance with Section 25(c) of the Arbitration Act, the Arbitrator is to examine whether the absence of the parties is with or without showing sufficient cause. Therefore, it is evident that an opportunity is to be given to a party to the dispute before the Arbitrator decides to proceed on the basis of the evidence before it.”

An ex parte award can hence be passed pursuant to an arbitral proceeding only after it is shown that the party absented itself without a sufficient cause. This interpretation of the provisions of the Act ensures that sufficient opportunity is given to the parties to present their cause, in tune with the principles of natural justice.

In Godrej Properties, the Bombay High Court highlighted the very premise on which a valid arbitral proceeding is based. The parties involved must not only be treated equally but each party ‘shall be’ given complete opportunity to plead their cause. Providing sufficient notice is imperative in this scenario. Furthermore, orders passed without giving an opportunity of hearing to the affected parties can be recalled by the High Courts. When the Council conducted arbitral proceedings ‘completely unmindful’ of its obligations, the High Court of Uttarakhand not only nullified the arbitral award but also directed the Council to organise workshops and seminars to educate its officers on the law of Arbitration.

In those instances where an ex parte order is passed during arbitral proceedings without providing an opportunity of hearing to the parties, the aggrieved would be entitled to file a review application before the High Court.

Impact of the Procedural Flaws

The Facilitation Council has been constituted under the MSME Act with the very purpose of providing for a less time-consuming alternative for the aggrieved suppliers. However, when the Council flouts the procedure envisaged under section 18, the parties involved would inevitably end up in a chain of endless litigation. This is because, the next course of action to remedy the wrong is approach the High Court through a writ petition under Article 226 which in turn defeats the whole purpose of constituting the Council under the MSME Act.

Possible Remedies

As rightly pointed out by various courts including the Madras High Court in Raster Images,[x] ensuring that the members appointed are adequately trained in law would be a welcome step. Stringent penalty will have to be imposed by the Ministry concerned, on those Council members who pass orders not conforming to the statutory provisions.

The National Institute for Micro, Small and Medium Enterprises (ni-msme) could pioneer the training of officials in the Council to adjudicate disputes according to the statutory provisions. The raison d’etre of the above-mentioned institute is to aid the government in formulating policies for MSMEs and to help entrepreneurs with training, consultancy etc.

Similarly, a training program could be devised for the officers appointed to the Facilitation Councils across the country under the banner of the MSME Development and Facilitation Office which primarily focuses on training entrepreneurs.

Further, section 5 provides that the National Board for Micro, Small and Medium Enterprises is entrusted with the task of examining the factors affecting the promotion and development of the impugned enterprises and of providing appropriate recommendations to the Central government. The National Board convened its previous meeting in 2017 when decisions were taken on the Draft Udyog Aadhar Memorandum Notification, mandatory certificate on capital investment for public tender participation, approving a ministry sponsored M.Tech course etc.

Since its recommendations have a statutory backing, the National Board must make appropriate proposals regarding the procedure to be followed by the Council when disputes are referred to it.

Furthermore, similar to the notification G.S.R. 596 (E), rule 7, wherein the government has enlisted each step in the procedure to be followed by the National Board while conducting meetings, the Council could also be provided with specific guidelines as to the procedure to be followed should eventualities arise.

Conclusion

It can be concluded that the Council is not empowered to pass an ex parte order as it is not entrusted with the powers of a Civil court. Passing an ex parte during the process of conciliation will also be invalid in the eyes of law. An order of such a nature can be passed only post the initiation of arbitration proceedings. The Council has failed in multiple instances to proceed as per the MSME Act resulting in litigation thus frustrating the whole purpose of the Act. Issuing proper guidelines to counter such practices and training the Council members regularly would help remedy the issue.

[i] MSME Act, 2006, § 18(2), No. 31, Acts of Parliament, 2006 (India).

[ii] Id. at § 18(3).

[iii] Syed Hakmulla v. Ahmad Beg, MANU/KA/0091/1988.

[iv] Id.

[v] Wharton’s Law Lexicon 227 (14th ed. 1937).

[vi] Dr. S. S Misra, Law of Arbitration and Conciliation in India 244 (2nd ed. 2010).

[vii] Meenakshi Associates Private Limited v. Madhya Pradesh Micro and Small Enterprises Facilitation Council and Ors., MANU/MP/0926/2023.

[viii] New Bansal Generation v. Punjab State Power Corp. Ltd. and Ors., MANU/HP/0630/2023.

[ix] Raster Images Pvt. Ltd. v. The Micro Small Enterprises Facilitation Council and Ors., MANU/TN/2585/2023.

[x] Id.

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