Individual Arbitrator Cannot Be Appointed For MSME Disputes U/S 18 MSMED Act: Himachal Pradesh HC

The Himachal Pradesh High Court on 7 July held that a Micro and Small Enterprises Facilitation Council cannot refer disputes under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) to an individual arbitrator and must either decide the dispute itself or refer it to an arbitral institution or centre providing alternate dispute resolution services.

A Bench of Justice Jyotsna Rewal Dua set aside the ex parte arbitral award passed against Tynor Orthotics Pvt. Ltd. and quashed the reference made by the Himachal Pradesh Micro and Small Enterprises Facilitation Council, holding that the Council had exceeded its statutory powers by appointing an individual arbitrator. It observed:

“Firstly, it is to be noticed that the empanelment of an arbitrator by the State Government would not make such arbitrators fall within the definition of the word 'Institution' or 'centre' of arbitration' as assigned in the Act and the Rules framed thereunder. Even if empanelled by the State Government, the arbitrator so empanelled would remain an individual arbitrator.”

The dispute arose from a commercial transaction between Tynor Orthotics Pvt. Ltd. and Kunal Aluminium Company. The latter claimed that Rs. 2.60 crore remained unpaid for goods supplied and approached the Himachal Pradesh Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act (which provides a mechanism for conciliation and arbitration of disputes involving micro and small enterprises).

After conciliation failed, the Council referred the dispute on 27 May 2022 to an arbitrator from a panel notified by the State Government on 18 September 2015. The arbitrator rejected Tynor Orthotics' requests for adjournments, proceeded ex parte and passed an award against the company on 29 September 2022.

Tynor Orthotics challenged the Council's reference through a writ petition and separately challenged the ex parte award under Section 34 of the Arbitration and Conciliation Act, 1996 (which provides for setting aside an arbitral award). It argued that Kunal Aluminium had described itself as a medium enterprise before the Council and the arbitrator and was therefore not entitled to invoke Section 18 of the MSMED Act.

It further contended that the Council had acted contrary to Section 18(3) of the MSMED Act by referring the dispute to an individual arbitrator, as the provision permits the Council to either arbitrate the dispute itself or refer it to an institution or centre providing alternate dispute resolution services.

Kunal Aluminium argued that although it was registered as a medium enterprise at the time of the proceedings, the dispute related to a period when it was registered as a small enterprise. It relied on its registration certificate to claim the benefit of the MSMED Act.

The High Court accepted that Kunal Aluminium was registered as a small enterprise during the relevant period and was therefore entitled to invoke Section 18 of the MSMED Act. However, it held that the Council failed to verify the claimant's status before assuming jurisdiction. It observed:

“It was the bounden duty of respondent No.1-Council to verify the status of respondent No. 2 before taking further action upon the reference made to it by respondent No. 2 under Section 18 of the Act.”

The Bench further held that neither the MSMED Act nor the Himachal Pradesh Micro and Small Enterprises Facilitation Council Rules, 2018 empowered the Council to refer a dispute to an individual arbitrator. It observed:

“There is no provision either under the Act or the applicable Rules for referring the dispute for arbitration to an individual arbitrator.”

Accordingly, the High Court quashed the Council's reference dated 27 May 2022 and set aside all consequential proceedings, including the ex parte award dated 29 September 2022. It directed the Council to verify whether a claimant qualifies as a “supplier” before entertaining a reference under Section 18 of the MSMED Act. It further clarified that the Council must either conduct the conciliation and arbitration proceedings itself or refer them only to an institution or centre providing alternate dispute resolution services, and not to an individual arbitrator.

Appearances for petitioner (M/s Tynor Orthotics Pvt. Ltd.): Senior Advocate Suneet Goel and Advocate Vivek Negi.

Appearances for respondent (Himachal Pradesh Micro & Small Enterprises Facilitation Council): Additional Advocate General L.N. Sharma and Advocate Himanshu Thakur.

Appearances for respondent (M/s Kunal Aluminium Company): Advocate Lalit K. Sehgal.