Leave us a Message

CHHATTISGARH HIGH COURT SAYS THAT ARBITRATION PROCEEDINGS SHOULD ONLY COMMENCE ONCE THE CONCILIATION FORMALLY ENDS

Overview

In this case, the Chattisgarh High Court examined whether an arbitral award passed by the Micro and Small Enterprises Facilitation Council (MSME Council) could be enforced when the statutory procedure governing the transition from conciliation to arbitration had allegedly not been followed. 

The matter arose from a petition filed under Article 227 of the Constitution of India challenging an order of the Executing Court, which declined to take up the objections as to the validity of the award. It was stated by the petitioner that the Council never acquired jurisdiction to act as an arbitral tribunal since it failed to comply with the mandatory provisions of Section 18 of the MSMED Act, 2006, read with Arbitration and Conciliation Act, 1996. 

The principal issue to be dealt with by the Court was whether an executing court could examine a challenge alleging that an arbitral award was a nullity on the account of lack of jurisdiction, even when proceedings under Section 34 were already pending.


 

Facts of the Case

The dispute arose out of purchase orders issued by Jai Balaji Industries, the petitioner herein in 2016 for the supply of iron and steel materials. A disagreement arose after the petitioner rejected certain materials on the ground that they did not meet the agreed specifications.

Claiming that payment remained outstanding, Garuda Ispat Pvt. Ltd. approached the Micro and Small Enterprises Facilitation Council in March 2020 under Section 18 of the MSMED Act. 

During the proceedings, the petitioner questioned both the jurisdiction of the Council and the maintainability of the claim on the ground of limitation. 

Although conciliation proceedings were initiated, the petitioner contended that the Council never recorded the failure of conciliation or formally terminated the proceedings. Instead, it allegedly proceeded directly to pass an award without commencing separate arbitration proceedings or following the procedure contemplated under the Arbitration and Conciliation Act. 

The award directed the petitioner to pay about ?28.05 lakhs, including interest. The respondent thereafter initiated execution proceedings. Although the petitioner also challenged the award under Section 34 of the Arbitration Act, no stay was granted because the mandatory pre-deposit under Section 19 of the MSMED Act had not been made. The Executing Court refused to consider the petitioner’s objection pertaining to the jurisdiction, leading to the present writ petition before the Chhattisgarh High Court.

 

Legal Issues

  1. Whether the conciliation proceedings must formally end before arbitration can commence under Section 18 of the MSMED Act.
  2. Whether the Facilitation Council can combine arbitration and conciliation into one single proceeding.
  3. Whether failure to be aware of mandatory arbitral procedure renders an award void for lack of jurisdiction.
  4. Whether an Executing Court can examine a plea of jurisdictional nullity despite pending proceedings under Section 34.
  5. Whether failure to comply with the statutory pre-deposit bars a challenge based on lack of jurisdiction.

 

Decision

The Chhattisgarh High Court allowed the writ petition and set aside both the award passed by the MSME Facilitation Council and the order of the Executing Court. The Court held that conciliation and arbitration under Section 18 of the MSMED Act are two separate statutory stages and that arbitration can only begin after conciliation has failed and has been formally ended.

On examining the record, the Court found no material showing that independent arbitration proceedings had ever commenced. There was nothing to indicate that pleadings had been exchanged, evidence had been recorded, or hearings had been conducted in the manner required under the Arbitration and Conciliation Act, 1996. 

The Court observed that these were not minor procedural defects but the main basis of the Council’s authority to act as an arbitral tribunal. Since the challenge related to inherent lack of jurisdiction, the Court held that such an objection could be considered even during execution proceedings and was not barred merely because a Section 34 petition was pending or because the statutory pre-deposit had not been made. 

Accordingly, the matter was remitted to the Facilitation Council to recommence proceedings from the stage contemplated under Section 18 of the MSMED Act after strictly following the statutory procedure and providing both the parties a fair opportunity of hearing. 

 

Case Reference: - WP 227 No. 67 of 2025 (SJB, Before Ravindra Kumar Agrawal, J.)