Madhya Pradesh High Court Sets Aside ₹4.56 Crore MSME Award, Says Conciliation Cannot Be an 'Eyewash'

The Madhya Pradesh High Court has held that conciliation under the MSMED Act cannot be reduced to an “eyewash”, while setting aside an award passed by the Madhya Pradesh Micro and Small Enterprises Facilitation Council against Aurionpro Solutions Ltd.

A Division Bench of Chief Justice Sanjeev Sachdeva and Justice Vinay Saraf held that the Council could not proceed to arbitration without first conducting and terminating conciliation proceedings in the manner prescribed by law.

Observing that conciliation has statutory recognition and that the conciliator is required to assist the parties in an independent and fair manner, the Bench observed:

“The manner of conducting conciliation and even the role to be played by the conciliator to assist the parties in an independent and fair manner to arrive at a settlement has been statutorily proscribed. There is a legal sanctity attached the entire process of conciliation. It can not be made a mere eyewash as has been done in the present case.”

The dispute arose from a Madhya Pradesh Police project for maintenance and upgradation of the Safe City System. Aurionpro Solutions Ltd. entered into an agreement dated June 8, 2021 with Hypersthene IT Solutions Pvt. Ltd. in connection with the project.

According to Aurionpro, Hypersthene failed to meet its obligations under the agreement, leading the Madhya Pradesh Police to impose penalties under the project. Those deductions, Aurionpro said, reduced the amounts payable to it. A show-cause notice was issued to Hypersthene on September 19, 2022, and the agreement was terminated a little over two months later, on November 29, 2022.

The parties subsequently entered into a settlement agreement on April 4, 2023. Under its terms, Aurionpro agreed to refund about ₹2.23 crore towards the security deposit and pay around ₹2.45 crore towards outstanding invoices. The invoice amount was to be adjusted against payments due to vendors and employees through an escrow mechanism.

The settlement did not end the dispute. Hypersthene later approached the Facilitation Council seeking payment of about ₹4.56 crore, claiming the invoice amounts remained unpaid. The Council ultimately directed Aurionpro to pay the claimed amount together with interest at 4.40 per cent per annum.

The Council later directed Aurionpro to pay ₹4.56 crore along with interest at 4.40% per annum.

Aurionpro challenged the award before the High Court. It contended that no valid conciliation proceedings had been conducted before the Council proceeded to arbitration.

The High Court agreed that the mandatory conciliation procedure had not been followed. It found that the Council neither conducted conciliation proceedings in accordance with law nor referred the dispute to any institution or centre providing alternative dispute resolution services.

On the distinction between conciliation and arbitration, the bench observed,

“The proceedings for Conciliation and Arbitration cannot be clubbed as there is a fundamental difference between conciliation and arbitration.”

The Court further found that the proceedings had not been terminated in the manner prescribed by law. Referring to the manner in which the Council proceeded, the Bench held,

“Neither were the conciliation proceedings held as mandated by law nor were they terminated in accordance with law. They were terminated by a simple declaration of the applicant, without following the due procedure prescribed for termination of proceedings under Section 76 of the Arbitration & Conciliation Act, 1996.”

Holding that the statutory requirements governing conciliation had not been complied with, the Court held,

“Thus the very initiation of the arbitration proceedings under section 18(3) of the MSMED Act, 2006 were illegal, incorrect, unjust and without jurisdiction and thus non est.”

While noting that the matter could ordinarily have been remitted for fresh proceedings, the Court observed that the parties had entered into a written settlement agreement and that the principal amounts settled between them had already been paid, though belatedly.

Having set aside the award, the Court declined to remit the matter to the Facilitation Council. Instead, it issued directions to bring quietus to the dispute.

The Court directed Aurionpro to pay simple interest at 8% per annum on the security deposit amount and 12% per annum on the settled invoice amount within three months. It further declared that all inter se disputes and claims between the parties would be deemed to be fully and finally settled.

For Petitioner (Aurionpro Solutions Ltd.): Advocates Mansi Chatpalliwar, Pranav Proothi, Prateek Jain, Aditya Singh and Anshveer Singh Nalwa.

For Respondent (MP MSE Facilitation Council and Hypersthene IT Solutions Pvt. Ltd.): Advocates Siddharth Sharma, Rida Ahmed, Subham Manchani, Mayank Upadhyay, Lavkush Rathore and Satyam Shukla.