Shobhana Gupta v. Atlas Cycles Haryana Ltd

1. This petition has been taken up today for hearing as 09.03.2023 was declared as a Court holiday.

2. This petition has been filed under Section 11 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the „Arbitration Act‟) seeking appointment of an Arbitrator for adjudicating the disputes that have arisen between the parties in relation to the Purchase Orders that were placed upon the petitioner by the respondent.

3. Admittedly, there is no Arbitration Agreement in writing between the parties contained either in the Purchase Orders or otherwise.

4. The petitioner being aggrieved of the non-payment of its alleged dues by the respondent, invoked the procedure under Section 18(1) of the Micro, Small & Medium Enterprises Development Act, 2006 (hereinafter referred as to the „MSMED Act‟) before the Micro, Small & Medium Enterprises Facilitation Council, District North-West, Delhi (hereinafter referred to as the „Facilitation Council‟).

5. The conciliation proceedings before the Facilitation Council failed on 20.05.2022. The Facilitation Council, however, refused to act as an Arbitrator or refer the disputes to an institution for appointment of an Arbitrator, observing as under: “Respondent informed that the company is under insolvency and the matter is before NCLT Principal Bench. Since the matter is pending in NCLT, Claimant may take action as per provisions of NCLT Act. No purpose will be served in keeping the case pending in this council. Hence the case is closed.”

6. The petitioner is aggrieved of the above order. It is the case of the petitioner that though proceedings under the Insolvency and Bankruptcy Code, 2016 (in short, „the Code‟) have been filed against the respondent and are pending adjudication, the same have not been admitted and, therefore, the moratorium as contemplated under Section 14 of the Code has not kicked in against the respondent. The learned counsel for the petitioner submits that, therefore, the refusal of the Facilitation Council to act as an arbitrator or to refer the dispute to an institution for the appointment of an arbitrator was incorrect and based on fallacious grounds.

7. On the other hand, the learned counsel for the respondent, though admitting that there moratorium has not been declared for the respondent company as the petitions under the Code have yet not been admitted against the respondent company by the learned National Company Law Tribunal, submits that the present petition is not maintainable under Section 11 of the Arbitration Act as there is no Arbitration Agreement between the parties as required in Section 7 of the Arbitration Act. He submits that Section 11 of the Arbitration Act can be invoked only where there exists an arbitration agreement between the parties.

8. In rejoinder, the learned counsel for the petitioner submits that in terms of Section 18(3) of the MSMED Act, the provisions of the Arbitration Act are to be applied as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of the Arbitration Act. He submits that, therefore, Section 11(6)(c) of the Arbitration Act would apply on the failure of the Facilitation Council to act as an arbitrator or to refer the dispute to an institution or centre for arbitration, and the petitioner has rightly invoked the remedy there-under.

9. I have considered the submissions made by the learned counsels for the parties.

10. As noted hereinabove, admittedly there is no arbitration agreement between the parties as contemplated under Section 7 of the Arbitration Act. Section 18(3) of the MSMED Act reads as under:

11. A reading of the above provision would show that where the conciliation proceedings initiated under sub-Section 2 of Section 18 of the MSMED Act are not successful and stand terminated without settlement between the parties, the Facilitation Council is empowered to either itself take up the dispute for arbitration or refer it to any institution or Centre providing alternate dispute resolution services for such arbitration. The provision further states that upon taking up of arbitration by the Facilitation Council itself or upon such reference to any institution or centre, the provisions of the Arbitration Act shall apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-Section 1 of Section 7 of the Arbitration Act. The use of the word “then” clearly indicates the intent of the legislature that it is only when the arbitration proceedings are initiated in form of the Facilitation Council itself taking it up or referring the dispute to any institution or Centre providing alternate dispute resolution services for such arbitration that the provisions of the Arbitration Act are to apply. The deeming fiction under Section 18(3) of presuming existence of an Arbitration Agreement gets attracted only once the arbitration proceedings are initiated thereunder. The provisions of the Arbitration Act do not apply prior to that stage.

12. In Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Pvt. Ltd., 2022 SCC OnLine SC 1492, the Supreme Court, on a detailed examination of the provisions of MSMED Act and the Arbitration Act, observed as under: “26. The court also cannot lose sight of the specific non obstante clauses contained in subsection (1) and sub-section (4) of Section 18 which have an effect overriding any other law for the time being in force. When the MSMED Act, 2006 was being enacted in 2006, the Legislative was aware of its previously enacted Arbitration Act of 1996, and therefore, it is presumed that the legislature had consciously made applicable the provisions of the Arbitration Act, 1996 to the disputes under the MSMED Act, 2006 at a stage when the Conciliation process initiated under subsection (2) of Section 18 of the MSMED Act, 2006 fails and when the Facilitation Council itself takes up the disputes for arbitration or refers it to any institution or centre for such arbitration. It is also significant to note that a deeming legal fiction is created in the Section 18(3) by using the expression „as if‟ for the purpose of treating such arbitration as if it was in pursuance of an arbitration agreement referred to in sub-section (1) of Section 7 of the Arbitration Act, 1996. As held in K. Prabhakaran v. P. Jayarajan, (2005) 1 SCC 754 a legal fiction presupposes the existence of the State of facts which may not exist and then works out the consequences which flow from that state of facts. Thus, considering the overall purpose, objects and scheme of the MSMED Act, 2006 and the unambiguous expressions used therein, this court has no hesitation in holding that the provisions of Chapter-V of the MSMED Act, 2006 have an effect overriding the provisions of the Arbitration Act, 1996 xxxx

29. The aforesaid legal position also dispels the arguments advanced on behalf of the counsel for the buyers that the Facilitation Council having acted as a Conciliator under Section 18(2) of the MSMED Act, 2006 itself cannot take up the dispute for arbitration and act as an Arbitrator. Though it is true that Section 80 of the Arbitration Act, 1996 contains a bar that the Conciliator shall not act as an Arbitrator in any arbitral proceedings in respect of a dispute that is subject of conciliation proceedings, the said bar stands superseded by the provisions contained in Section 18 read with Section 24 of the MSMED Act, 2006. As held earlier, the provisions contained in Chapter-V of the MSMED Act, 2006 have an effect overriding the provisions of the Arbitration Act, 1996. The provisions of Arbitration Act, 1996 would apply to the proceedings conducted by the Facilitation Council only after the process of conciliation initiated by the council under Section 18(2) fails and the council either itself takes up the dispute for arbitration or refers to it to any institute or centre for such arbitration as contemplated under Section 18(3) of the MSMED Act, 2006. ”