MSME Conciliation and Arbitration: Sections 18 and 19

Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 creates the most unusual dispute resolution machinery in Indian law. A supplier who is not paid may refer the matter to a Micro and Small Enterprises Facilitation Council, which must first conciliate and, if that fails, must itself arbitrate or refer the dispute to an institution. The arbitration arises by force of the statute and not from any agreement, the same body may conciliate and then decide, and Section 19 requires a buyer challenging the award to deposit seventy-five per cent of it before the application will be entertained.

The two stages, the features peculiar to this Act, and the deposit on challenge

1. The Setting

Sections 15 to 17 of the Act require a buyer to pay a micro or small enterprise supplier within the agreed period, which cannot exceed forty-five days, and make the buyer liable for compound interest at three times the bank rate on default. Section 18 supplies the forum in which that liability is established. The scheme exists because the supplier is typically small and the buyer large, and an ordinary suit or arbitration would cost more than the claim is worth and take longer than the supplier can survive.

2. Reference and Conciliation: Section 18(1) and (2)

Section 18(1) and (2), MSMED Act, 2006

(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.

(2) On receipt of a reference, the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation, and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.

The non obstante clause in sub-section (1) is the source of most of the litigation on this Act. It means that the reference lies notwithstanding an arbitration clause between the parties, notwithstanding a jurisdiction clause, and notwithstanding any other law. The reference to Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 imports the conciliation code as it stood; since the Mediation Act, 2023 substituted Part III, a reference to conciliation in another enactment is now read as a reference to mediation under that Act.

3. Arbitration on Failure: Section 18(3)

Where the conciliation is not successful and stands terminated without any settlement, the Council either takes up the dispute for arbitration itself or refers it to any institution providing alternate dispute resolution services, and the Arbitration and Conciliation Act, 1996 then applies to the dispute as if the arbitration were in pursuance of an arbitration agreement referred to in Section 7(1) of that Act. Section 18(4) gives the Council jurisdiction where the supplier is located within its jurisdiction and the buyer is located anywhere in India, and Section 18(5) requires every reference to be decided within ninety days from the date of making it.

Statutory arbitration. There is no arbitration agreement. The Act creates the reference, which is why this is described as statutory arbitration and why the ordinary questions about the existence and validity of an agreement do not arise.
The same body conciliates and arbitrates. Section 80 of the Arbitration and Conciliation Act, 1996 as it stood forbade a conciliator from acting as arbitrator in the same dispute. Section 18(3) displaces that prohibition by express provision, and the Council may do both.
Conciliation is a condition precedent. The arbitration stage is reached only where conciliation has been attempted and has failed.
Ninety days. The period in Section 18(5) is directory in practice, but it states the object of the scheme.

📖 Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan, (2021) 19 SCC 206

Held: A Facilitation Council which proceeds straight to arbitration without first attempting conciliation under Section 18(2) acts without jurisdiction. The two stages are sequential, and the award made in such a case is liable to be set aside.

📖 Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd., (2023) 6 SCC 193

Held: Chapter V of the MSMED Act, 2006 has an overriding effect, so that a reference to the Facilitation Council prevails over an independent arbitration agreement between the same parties. The Council is competent to act as a conciliator and thereafter as an arbitrator, and no objection lies on that ground. A party seeking the benefit of the Act must have been registered as a supplier under it before entering into the contract; registration obtained afterwards does not attract the Chapter to a transaction already concluded. The deposit required by Section 19 is mandatory.

Significance: This is the governing decision on the relationship between the Act and the Arbitration and Conciliation Act, 1996, and on the registration requirement.

4. The Deposit on Challenge: Section 19

Section 19, MSMED Act, 2006

No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant, not being a supplier, has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court. The proviso permits the court to order that such percentage of the amount deposited shall be paid to the supplier as it considers reasonable, pending disposal of the application.

Three points follow. The requirement applies only to a buyer; a supplier challenging an award need not deposit anything. The deposit is a condition of entertaining the application under Section 34 of the Arbitration and Conciliation Act, 1996, so an application filed without it cannot be taken up, though courts have permitted the deposit to be made in instalments in a proper case. And the court may direct part of the deposit to be released to the supplier pending the challenge, which is the provision that gives the section its practical bite.

5. The MSMED Act and the Arbitration Act Compared

Basis	MSMED Act, 2006	Arbitration and Conciliation Act, 1996
Source of the reference	The statute; no agreement is needed	An arbitration agreement in writing under Section 7
Who decides	The Facilitation Council, or an institution to which it refers	The tribunal constituted under the agreement or under Section 11
Sequence	Conciliation first, and arbitration only on its failure	Arbitration directly; Section 30 permits settlement during it
The same neutral	The Council may conciliate and then arbitrate	A conciliator was forbidden from acting as arbitrator in the same dispute
Time	Ninety days from the reference, Section 18(5)	Twelve months from completion of pleadings, Section 29A
Challenge	Section 34 applies, but subject to the seventy-five per cent deposit under Section 19	Section 34, with no deposit as a condition of entertaining
Overriding effect	Section 24 gives Sections 15 to 23 effect notwithstanding anything inconsistent in any other law	Applies subject to other laws where they so provide

⚠ The objection of principle, and the answer

A body that has heard what each side would accept in conciliation, and has perhaps proposed terms, then decides the dispute. In an ordinary arbitration that sequence would be fatal, and it is the objection that has been pressed against Section 18(3) since the Act was passed. The answer accepted in Gujarat State Civil Supplies is that the statute expressly so provides, that the claims are small and repetitive, and that the supplier would otherwise have no effective remedy. The parallel is with Section 22C(8) of the Legal Services Authorities Act, 1987, under which a Permanent Lok Adalat decides when conciliation fails.

6. Related Topics and Provisions

Topic or provision	Connection
ADR in Commercial and Corporate Disputes	The setting in which this machinery operates
The Permanent Lok Adalat	The other forum that conciliates and then decides
Conciliation under Part III: Sections 61 to 81	The code imported by Section 18(2)
Challenge to the Arbitral Award: Section 34	The challenge, subject to the Section 19 deposit
Sections 15 to 19 and 24, MSMED Act, 2006	Payment, interest, the reference and the overriding effect