Supreme Court Refers Critical Questions on Writ Jurisdiction, Role of MSEFC as Arbitrator, and Pre-Deposit Requirement Under MSMED Act to Larger Bench: Balancing Statutory Arbitration with Constitutional Remedies

Court’s Decision

The Supreme Court, addressing a significant conflict in judicial precedents, referred the issue of whether writ petitions under Article 226 of the Constitution are maintainable against orders of the Micro and Small Enterprises Facilitation Council (MSEFC) to a larger bench. This arose in the context of the mandatory arbitration provisions under Section 18 of the MSMED Act. The Court also sought clarity on whether MSEFC members who conduct conciliation proceedings can subsequently act as arbitrators, considering the prohibition under Section 80 of the Arbitration and Conciliation Act, 1996.

The Court noted that:

• Writ jurisdiction is a constitutional right, forming part of the basic structure of the Constitution.
• The principle of alternative remedies does not impose an absolute bar on the exercise of writ jurisdiction, particularly in cases involving violations of natural justice, jurisdictional errors, or constitutional challenges.

Facts

1. Parties and Contract:
   • Tamil Nadu Cements Corporation Limited (TANCEM), a government-owned enterprise, entered into a contract with Unicon Engineers for the installation of electrostatic precipitators (ESPs) in its Ariyalur cement manufacturing unit.
   • The total contract value was approximately ₹7.5 crore.
2. Dispute and MSEFC Proceedings:
   • Unicon Engineers claimed TANCEM failed to make timely payments, resulting in financial losses. The company approached the MSEFC under Section 18 of the MSMED Act, seeking ₹2.66 crore in dues.
   • The MSEFC, after conciliation failed, directed TANCEM to pay retention amounts and other expenses totaling over ₹39 lakh with interest, calculated at three times the Reserve Bank of India’s bank rate, compounded monthly.
3. Legal Challenges:
   • TANCEM filed multiple challenges against the MSEFC’s orders:
     • Under Section 34 of the Arbitration and Conciliation Act to set aside the award.
     • Writ petitions under Article 226 challenging the MSEFC’s jurisdiction and the vires of Sections 16 to 19 of the MSMED Act.
   • These challenges were dismissed, primarily on procedural grounds, including failure to deposit 75% of the award amount as required under Section 19 of the MSMED Act.

Issues

1. Maintainability of Writ Petitions:
   • Can writ petitions under Article 226 be entertained against orders passed by MSEFC, especially when statutory remedies are available under the Arbitration and Conciliation Act?
2. Alternative Remedy Principle:
   • Under what circumstances can the availability of an alternative remedy be bypassed to invoke writ jurisdiction?
3. MSEFC Members as Arbitrators:
   • Can members of the MSEFC, who facilitated conciliation, act as arbitrators, considering Section 80 of the Arbitration and Conciliation Act?

Petitioner’s Arguments (TANCEM)

• Jurisdictional Errors by MSEFC:
  • TANCEM contended that the MSEFC exceeded its jurisdiction by failing to follow mandatory arbitration procedures and by issuing binding directions without adequate evidence or due process.
• Unreasonableness of Pre-Deposit Requirement:
  • The statutory requirement under Section 19 of the MSMED Act, mandating a pre-deposit of 75% of the award amount before filing objections, was argued to be onerous and violative of the right to access justice.

Respondent’s Arguments (Unicon Engineers)

• Compliance with MSMED Act:
  • Unicon Engineers asserted that the MSEFC acted in accordance with the MSMED Act, which overrides other laws, including the Arbitration and Conciliation Act, through its non-obstante clauses.
• Failure to Meet Procedural Requirements:
  • The petitioner (TANCEM) failed to comply with mandatory procedural requirements, including the pre-deposit condition under Section 19 of the MSMED Act, making their objections untenable.

Analysis of the Law

1. Statutory Framework of MSMED Act:
   • The MSMED Act mandates conciliation and arbitration through MSEFC for disputes involving micro and small enterprises.
   • Sections 15 to 18 emphasize expedited resolution, high interest rates on delayed payments, and statutory arbitration.
2. Conflicting Precedents:
   • Jharkhand Urja Vikas Nigam Limited: Held that writ jurisdiction is maintainable where procedural violations by the MSEFC are apparent.
   • Gujarat State Civil Supplies Corporation Limited: Upheld the overriding nature of MSMED Act provisions, allowing MSEFC members to act as arbitrators post-conciliation.
   • India Glycols Limited: Barred writ petitions, limiting objections to remedies under Section 34 of the Arbitration and Conciliation Act.
3. Prohibition under Section 80 of the Arbitration Act:
   • Section 80 prohibits conciliators from acting as arbitrators unless expressly agreed upon by the parties. The Supreme Court questioned whether this applies to MSEFC proceedings.

Precedent Analysis

The Court reviewed key judgments, including:

• Whirlpool Corporation v. Registrar of Trademarks: Highlighted exceptions to the alternative remedy rule, particularly in cases involving natural justice or jurisdictional errors.
• Shyam Kishore v. Municipal Corporation of Delhi: Addressed the balance between statutory pre-deposit requirements and access to justice.

Court’s Reasoning

1. Writ Jurisdiction:
   • Writ jurisdiction is discretionary but remains a vital tool to address statutory and constitutional violations.
   • Availability of alternative remedies, such as arbitration under the MSMED Act, does not preclude writ jurisdiction, especially in cases of procedural or jurisdictional errors.
2. Pre-Deposit Requirement:
   • The Court noted the onerous nature of the 75% pre-deposit condition under Section 19, which could deter genuine challenges.
3. Role of MSEFC Members:
   • The Court expressed reservations about MSEFC members acting as arbitrators after conducting conciliation, potentially violating the principle of impartiality.

Conclusion

The Supreme Court referred the following questions to a larger bench:

1. Is a writ petition maintainable against orders of the MSEFC under Section 18 of the MSMED Act?
2. Under what conditions can the principle of alternative remedies be relaxed?
3. Can MSEFC members act as arbitrators following failed conciliation, in light of Section 80 of the Arbitration and Conciliation Act?

Implications

The decision underscores the complex interplay between statutory arbitration mechanisms and constitutional remedies. The larger bench’s ruling will have far-reaching implications for the enforceability of MSEFC orders and the scope of High Court jurisdiction in such matters. It will also address concerns about the impartiality of MSEFC proceedings and the fairness of mandatory pre-deposit requirements.

Also Read – Delhi High Court Quashes Reassessment Notices Under Section 148 of Income Tax Act, Citing Lack of Material Specific to Relevant Assessment Years and Generalized Assumptions from Past Surveys