MSME Council Must Follow Mandatory Arbitration Process Before Passing Award: Madras High Court

On 19 August, the Madras High Court held that an award passed by the Chennai Region Micro, Small and Medium Enterprises Facilitation Council without initiating arbitration as required under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) cannot be sustained.

Justice P.B. Balaji set aside the Rs. 33.40 lakh award passed in favour of Mahalakshmi Trading Corporation against 3F Industries Ltd., holding that the Council had proceeded straight to an “Award” without following the mandatory arbitration procedure under Section 18(3). The Bench observed:

“it is clear that there has been no initiation of arbitration proceedings as required under Section 18(3) of the Act. In such circumstances, the impugned order, without adhering to the provisions of the Arbitration and Conciliation Act, 1996, commencing from a reference to arbitration and thereafter, calling upon the parties to file their claim and defence statements and further contemplating an enquiry/trial before passing an Award has admittedly not been done in the instant case. Therefore, the impugned order dated 13.03.2025 self styled as an Award has no legs to stand and is liable to be set aside.”

Mahalakshmi Trading Corporation had offered to arrange finance for 3F Industries for a 2% commission. After 3F Industries denied accepting the offer, Mahalakshmi raised a claim of Rs. 33.40 lakh before the MSME Facilitation Council.

The Council initially dismissed the claim on 28 July 2022. It later reopened the matter and, on 13 March 2025, allowed Mahalakshmi's claim and passed the impugned order as an arbitral award. 3F Industries challenged the order before the High Court under Article 227 of the Constitution.

It argued that once conciliation failed, Section 18(3) of the MSMED Act required the Council either to conduct arbitration itself or refer the dispute to an institution providing alternative dispute resolution services. The arbitration proceedings would thereafter be governed by the Arbitration and Conciliation Act, 1996.

3F Industries contended that the Council had skipped this mandatory stage and proceeded directly to pass the award. It also pointed out that Mahalakshmi obtained Udyam registration only on 29 October 2020, after the alleged contract dated 4 June 2020, and therefore was not a “supplier” on the date of the transaction.

Mahalakshmi argued that 3F Industries had participated in the reopened proceedings without raising any objection. It contended that the written submissions considered by the Council after conciliation failed substantially satisfied the requirements of Section 18(3). It also questioned the maintainability of the Article 227 petition in the absence of the prescribed pre-deposit.

The High Court rejected the contention that arbitration proceedings had taken place. It found that there was “nothing on record evidencing that arbitration proceedings were even initiated”. It also noted that Mahalakshmi had itself stated in a memo dated 21 January 2025 that no arbitrator had been appointed.

It found no material showing a reference to arbitration, commencement of arbitral proceedings, filing of claim and defence statements or any arbitral enquiry before the Council passed the order.

Further, the Bench held that Section 18(3) required the Council to follow the arbitration procedure prescribed under the Arbitration and Conciliation Act, 1996 after conciliation failed. Since that procedure had not been followed, the order could not be treated as a valid arbitral award.

Accordingly, the High Court set aside the 13 March 2025 order and permitted Mahalakshmi to file a civil suit within three months. It also invoked Section 14 of the Limitation Act, 1963, which permits exclusion of time spent pursuing proceedings before a forum that could not entertain the matter, and directed that the suit should not be rejected on limitation grounds for the period spent in the earlier proceedings.

Appearances for petitioner (M/s. 3F Industries Ltd.): Advocates Advaidh Nelakanttan R and Pranav R. Menon for M/s. ARK Law Associates.

Appearances for respondent (M/s. Mahalakshmi Trading Corporation): Senior Advocate Aravind Subramanian for Advocate S. Manoj, assisted by Advocate S. Naveen Kumar.