Conciliation Under MSMED Act Is Mandatory, Cannot Be Waived By Parties: Kerala High Court

The Kerala High Court on 27 February held that the statutory mandate of conciliation under Section 18(2) of the Micro, Small and Medium Enterprises Development Act, 2006 cannot be waived by a party to proceedings before the Micro and Small Enterprises Facilitation Council.

A Division Bench of Justice Anil K Narendran and Justice Muralee Krishna S allowed a writ appeal filed by Malabar Social Service and Sanitation (MASSS) and set aside the judgment of the Single Judge which had quashed an award passed by the Facilitation Council. The Bench held:

“we are of the considered opinion that a party to a reference made to the Facilitation Council under Section 18(1) of the MSMED Act cannot waive the aforesaid statutory mandate under Section 18(2) of the MSMED Act, which, if permitted, can make the provision in the Act for conciliation itself otiose.”

MASSS had filed an application under Section 18 of the MSMED Act before the Regional Micro and Small Enterprises Facilitation Council claiming Rs. 44,55,301.68 from Socio Economic Unit Foundation towards works allegedly undertaken. The Foundation, a registered society engaged in water and sanitation activities, objected to the claim contending that there was no contract between the parties and that MASSS had obtained MSME registration only in August 2020, subsequent to the execution of the contract.

The Court addressed a conflict in Supreme Court precedents regarding whether MSME registration must predate the contract. While later rulings (Silpi Industries and Mahakali Foods) suggested prospective registration is required, an earlier ruling (Shanti Conductors) held that the date of supply/service is determinative. Following the principle that the earliest view of coordinate Benches must be followed, the High Court relied on Shanti Conductors to uphold the Facilitation Council's jurisdiction.

The Facilitation Council eventually directed payment of Rs. 44,55,301 along with compound interest at three times the RBI bank rate under Section 16 of the MSMED Act. The Council noted that the Foundation had submitted detailed objections initially but was deliberately absent after the third sitting, justifying the award. The Single Judge quashed the award. Aggrieved, MASSS approached the Division Bench.

MASSS contended that the Single Judge erred in quashing the award on the ground that mandatory conciliation under Section 18(2) of the MSMED Act was not conducted. It was argued that the Foundation had, by its conduct, waived its right to conciliation, and therefore the Facilitation Council was justified in proceeding to arbitration.

The Division Bench observed that although the Foundation initially entered appearance and filed objections before the Facilitation Council, it failed to appear on subsequent dates, following which the Council proceeded under Section 18(3) of the MSMED Act.

The Court clarified the "standstill" logic: while a party cannot waive the conciliation mandate, non-cooperation or non-appearance does not prevent the Council from proceeding. The conciliation is treated as "unsuccessful," enabling arbitration under Section 18(3) without violating Section 18(2).

The Court further noted that there is no provision in the MSMED Act which entitles a party to waive the statutory mandate of conducting conciliation. The judgment also cited the 2025 NBCC (India) Ltd. ruling, observing that Section 18 refers to "any party to a dispute" rather than only a registered supplier, making the timing of registration less relevant.

On the question of non-cooperation by the parties, the Court held:

“if all or any of the parties to the reference did not cooperate or did not appear for the conciliation proceedings despite service of notice, the Facilitation Council can proceed further as provided under Sub- section (3) of Section 18, treating the conciliation initiated as unsuccessful.”

The Division Bench further observed that if the Foundation had any objection to the arbitration being conducted without conciliation, such objection ought to have been raised before the Facilitation Council itself.

On the issue of maintainability, the Court held that writ jurisdiction ought not have been invoked by the Foundation in view of alternative remedy under Section 19 of MSMED Act.

The Court clarified that writ petitions against Facilitation Council awards are only maintainable if there is a "patent" and "evident" lack of jurisdiction. Since the jurisdictional question here involved nuanced interpretations of Supreme Court precedents, it was not patently evident, and the Foundation was required to use the remedy under Section 19, including depositing 75% of the claimed amount. It noted:

“It is also relevant to note that as per Section 19 of the MSMED Act, in order to avail the remedy provided in that section, the aggrieved has to deposit with the forum provided under Section 19, 75% 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. It is to escape from the said liability, the 1st respondent approached this Court with the present writ petition.”

Accordingly, the writ appeal was allowed and the judgment of the Single Judge was set aside.

For Appellants: Advocates E.C Ahamed Fazil and K.M Firoz

For Respondents: Senior Government Pleader Nisha Bose