Reliance Communications Limited vs The State Of Bihar & Ors

Civil Writ Jurisdiction Case No.8077 of 2018 ======================================================== Reliance Communications Limited, having its registered Office at H Block, 1st Floor, Dhirubhai Ambani Knowledge City, Navi Mumbai- 400071, through its authorised Signatory Mukesh Kumar aged about 40 years, Son of Gopal Sharan Singh, Gandhinagar, Aashiana Nagar, Sector- 4, Police Station-Rajiv Nagar, Patna-800025 (Bihar). .... .... Petitioner Versus 1. The State of Bihar through the Secretary, Department of Industries, Secretariat, Bailey Road, Patna. 2. The Director, Department of Industries, Secretariat, Bailey Road, Patna. 3. The Micro and Small Industries Facilitation Council, through its Chairman, Patna. 4. The Best Towers Private Limited, 9/2 BIADA Industrial Estate, Patliputra, Patna, through its Managing Director. .... .... Respondents With

======================================================== Civil Writ Jurisdiction Case No. 8086 of 2018 ======================================================== Reliance Communications Limited, having its registered Office at H Block, 1st Floor, Dhirubhai Ambani Knowledge City, Navi Mumbai- 400071, through its authorised Signatory Mukesh Kumar aged about 40 years, Son of Gopal Sharan Singh, Gandhinagar, Aashiana Nagar, Sector- 4, Police Station-Rajiv Nagar, Patna-800025 (Bihar). .... .... Petitioner Versus 1. The State of Bihar through the Secretary, Department of Industries, Secretariat, Bailey Road, Patna. 2. The Director, Department of Industries, Secretariat, Bailey Road, Patna. 3. The Micro and Small Industries Facilitation Council, through its Chairman, Patna. 4. The Best Towers Private Limited, 9/2 BIADA Industrial Estate, Patliputra, Patna, through its Managing Director. .... .... Respondents ======================================================== Appearance : (In CWJC No.8077 of 2018) For the Petitioner : Mr. Rajendra Narain, Sr. Advocate Mr. Rakesh Kumar Sinha Mr. Anuj Prakash, Advocates. Patna High Court CWJC No.8077 of 2018 2

For the Respondents : Mr. Ranjeet Kumar Mr. Jai Kishore Sharma Mrs. Ranjeeta Singh, Advocates. For the State : Mr. Kinkar Kumar, SC-9 Mr. Avinash Shekhar, AC to SC-6 (In CWJC No.8086 of 2018) For the Petitioner : Mr. Rajendra Narain, Sr. Advocate Mr. Rakesh Kumar Sinha Mr. Anuj Prakash, Advocates. For the Respondents : Mr. Ranjeet Kumar Mr. Jai Kishore Sharma Mrs. Ranjeeta Singh, Advocates. For the State : Mr. Kinkar Kumar, SC-9 Mr. Avinash Shekhar, AC to SC-6 ======================================================== CORAM: HONOURABLE MR. JUSTICE VIKASH JAIN CAV JUDGMENT Date: 19-06-2018

Heard learned counsel for the petitioner and learned

counsel for the respondents.

2. These writ petitions have been filed for quashing the

common order dated 06.02.2018 passed by the Micro, Small and

Medium Enterprises Facilitation Council, Patna (hereinafter referred to

as "the Council") in Reference Case No. 05/2015 and Reference Case

No. 01/2016 in which the petitioner has been directed to make

payment of a sum of Rs. 4,91,33,701/- plus compound interest totalling

to Rs. 62,08,65,575/-, and a sum of Rs. 2,04,44,080/- plus compound

interest totaling to Rs. 25,25,01,087/- respectively as on 30.09.2017 to

respondent no. 4 against the latter's unpaid bills; and for restraining

the Council from passing further orders in the said matters.

3. The facts of both cases are almost identical and both

writ petitions are accordingly taken up for disposal together at the Patna High Court CWJC No.8077 of 2018 3

admission stage itself with the consent of parties.

4. The brief facts according to the petitioner are that it

had engaged the services of the respondent no. 4 by issuing several

work orders for carrying out construction work for establishment of

towers for mobile services and providing ancillary works and materials

in that regard. The respondent no. 4 approached the Council under

Section 18 of the Micro, Small and Medium Enterprises Development

Act, 2006 (for short "MSMED Act") claiming that certain payments had

not been made by the petitioner for works carried out. The Council by

its order dated 30.06.2016 directed the payments to be made. The

petitioner challenged the order dated 30.06.2016 in C.W.J.C. No. 14884

of 2016 with C.W.J.C. No. 15044 of 2016 which were disposed of by

judgment dated 11.04.2017 by a Bench of this Court with the following

observations -

"69. So, on analysis of the aforesaid provisions, it is very much clear that the Facilitation Council has miserably failed to follow the procedure provided under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 Act, but it appears that on the first day the Facilitation Council decided to lis itself, directed payment and when the objection was raised, then it thought fit to send the matter for arbitration, but the procedure followed is strange procedure, not compatible to the provisions of the Act and not known to the law. If the Facilitation Council has already directed for payment, the question of again sending the matter to the arbitrator is misplaced procedure, instead it should first tried to Patna High Court CWJC No.8077 of 2018 4

conciliate the dispute, in failure to adjudicate the same, either the Facilitation Council itself conducted conciliation or refer the matter to the third party, then arbitration stage had come to adjudication the dispute in terms of Section Arbitration and Conciliation Act, 1996. 74. So from the above quotations and discussions, it is apparently clear that either the Facilitation Council will take the burden on its shoulder for arbitration or it relegates the matter to anybody. Either the Facilitation Council or anybody while making arbitration will follow the certain provision of Code of Civil Procedure as mention in Section 19 of the Act for the arrival to a fair and proper conclusion. 75. For the foregoing reasons, the impugned order containing memo No.3898 dated 27.10.2016 and the order containing memo No.3913 dated 28.10.2016 passed by the Facilitation Council are hereby quashed. But, it is not end of the matter, this Court directs both the parties to appear before the Facilitation Council within 15 days from the date of passing the order of this Court. They should present themselves, the Facilitation Council will make effort to resolve the dispute, in failure, either the Facilitation Council itself will take responsibility of arbitrator or refer the matter to third party, according to the provisions of the Act, for arbitration."

5. The petitioner unsuccessfully carried the matter in LPA

No. 827 of 2017 which was dismissed by judgment dated 17.07.2017

with a direction to the Council to decide the issue within a period of 60

days from the date of receipt/production of a copy of the order.

6. In the de novo proceedings taken up on 16.08.2017, th e Patna High Court CWJC No.8077 of 2018 5

Council initiated conciliation proceedings and both parties were

directed to sit together for conciliation of their accounts and amicably

settle the quantum of interest to be paid. The matter was again taken

up on 07.09.2017 and finally on 21.09.2017 but the Council found that

the petitioner was not interested in disposal of the cases as it had

neither verified the claim nor sat with the applicant for conciliation. It

is however the claim of the petitioner that from the very beginning it

was evident that the Council was extremely hostile towards the

petitioner and its members were sitting with prejudiced minds.

However, no objection was raised by the petitioner considering that it

was participating in conciliation proceedings and also in absence of any

provision for such objection under Section 12 of the Arbitration and

Conciliation Act, 1996 (for short, "the Arbitration Act"). The Council

recorded that conciliation was not possible by reason of non-

cooperation by the petitioner and accordingly recorded that the

conciliation had failed and was finally closed, and took a decision to

start arbitration proceeding under Section 18(3) of the MSMED Act.

The Council then commenced arbitration proceeding and held the first

sitting on 21.11.2017 and on the request of the petitioner, adjourned to

28.11.2017

. Thereafter, the proceeding continued and finally

culminated in the impugned order dated 06.02.2018 (Annexure-6).

7. Mr. Rajendra Narain, learned Senior counsel appearing

on behalf of the petitioner, has challenged the impugned order dated Patna High Court CWJC No.8077 of 2018 6

06.02.2018 as being wholly arbitrary as well as without jurisdiction.

Apart from adverting to various circumstances to allege that the

Council was proceeding with a prejudiced attitude against the

petitioner, he has also submitted that the Council inherently lacked

jurisdiction to conduct the arbitration proceeding, and as such the

impugned arbitration award is non est in law. It is submitted that

Section 18(2) of the MSMED Act deals with conciliation and specifically

adopts the provisions of Sections 65 to 81 of the Arbitration Act. A

perusal of Section 80 of the Arbitration Act discloses that there is a

complete bar, in absence of an agreement to the contrary, for a

conciliator to act as an arbitrator in any arbitral or judicial pr oceeding

in respect of a dispute that has been the subject of conciliation

proceedings. It is submitted that the Council having acted as conciliator

was statutorily barred from sitting as arbitrator as was done in the

instant case, and this has dealt a fatal blow to the arbitration award. It

is submitted that no doubt the Council has been invested with the

power to act as conciliator under Section 18(2) and as arbitrator under

Section 18(3) of MSMED Act, but these provisions are easily reconciled

with Section 80 to mean that the Council can sit as arbitrator only in a

situation where it does not conduct conciliation itself but refers the

conciliation to an institution or centre providing alternate dispute

resolution as contemplated under Section 18(2) of the MSMED Act.

Reliance is placed on Harshad Chiman Lal Modi vs. DLF Universal Ltd. Patna High Court CWJC No.8077 of 2018 7

and another, (2005) 7 SCC 791.

8. Mr. Ranjeet Kumar, learned counsel appearing for the

respondent no. 4, on the other hand, submits that the arbitration award

suffers from no infirmity or lack of jurisdiction, rather it is completely

legal and valid and therefore requires no interference. It is pointed out

at the very outset that MSMED Act, 2006 is an enactment subsequent to

the Arbitration Act, 1996, and as such Parliament was conscious of the

provisions of the existing Act. In this backdrop, Section 24 was

specifically incorporated to provide that Sections 15 to 23 of the

MSMED Act would have an overriding effect over all other laws. It is

therefore submitted that in case of inconsistency, the provisions of

Sections 15 to 23 of the MSMED Act must be given primacy over the

Arbitration Act. Thus, Section 18 of the MSMED Act would prevail over

Section 80 of the Arbitration Act, more so as the latter provision does

not contain any non obstante clause. Reliance has been placed on two

decisions of Division Benches of the Madras High Court in the cases of

M/s Eden Exports Company Vs. Union of India [W.A. No. 2461 of 2011

and analogous cases decided on 20.11.2012] and Refex Energy Limited

Vs. Union of India and Others [W.P. No. 17785 of 2016 and analogous

case decided on 02.06.2016].

9. Mr. Ranjeet Kumar further invites reference to

paragraph 75 of the judgment dated 11.04.2017 passed in the first

round of litigation in C.W.J.C. No. 14884 of 2016 wherein this Court had Patna High Court CWJC No.8077 of 2018 8

also contemplated that the Facilitation Council would make effort to

resolve the dispute, and in case of failure, either the Facilitation Council

itself would take up responsibility of an arbitrator or refer the matter

to the third party according to the provisions of the Act, for arbitration.

It is therefore submitted that this Court in so many words had already

directed that the Council would be competent to take up the

responsibility of arbitrator. In this view of the matter, the submission

of the petitioner that the Council could not act as an arbitrator is

completely misconceived and contrary to the order of this Court. As

stated above, the said judgment was also not interfered with in LPA.

10. It is then submitted that in view of the deeming fiction

contained in Section 18 of the MSMED Act, the existence of agreement

between the parties is assumed and it is within the jurisdiction of the

Council to act as arbitrator or conciliator. The jurisdiction exercised is

not dependent upon an agreement consciously entered into between

the parties. The Council assumes jurisdiction immediately upon

reference by the aggrieved party and consent of the other party is not

necessary. Section 80 of the Arbitration Act which begins with the

words "unless otherwise agreed by the parties", does not thus come to

the aid of the petitioner as such agreement is deemed to exist by

operation of law.

11. It is lastly submitted that objection with regard to

jurisdiction was not raised by the petitioner before the Council at the Patna High Court CWJC No.8077 of 2018 9

appropriate time. From the record of proceedings of the Council dated

21.09.2017, it transpires that the conciliation was terminated upon its

failure and the Council decided to start arbitration proceeding under

Section 18(3) of the MSMED Act. It is evident from the proceedings of

the Council's sitting on 16.11.12017 as well that no objection regarding

its jurisdiction was raised by the petitioner. Rather the petitioner

participated in the proceeding before the Council by seeking for some

time to respond to the claim submitted by the respondent no. 4 as this

was the first date for arbitration, and the matter was adjourned to

28.11.2017, granting a last chance to the petitioner. The petitioner has

itself admitted in paragraph 11 of the writ petition that it did not raise

any objection and participated before the Council. It was only on the

last occasion i.e. on 28.12.2017, over three months after conciliation

was closed, that the petitioner challenged the jurisdiction of the

Council to act as arbitrator, on which date the Council observed that

detailed award was being passed separately. It is therefore submitted

that the petitioner, having participated in the proceedings before the

Council, could not be permitted to t urn around to question of the

validity of proceedings or the jurisdiction of the arbitrator.

12. Reliance has been placed on behalf of the respondents on

a judgment of Division Bench of the Madras High Court in the case of

M/s Eden Exports Company Vs. Union of India [W.A. No. 2461 of 2011

and analogous cases decided on 20.11.2012] wherein it has been held Patna High Court CWJC No.8077 of 2018 10

as follows -

"21. A cursory reading of the aforesaid provision makes it clear that a conciliator could not act as an arbitrator. It is no doubt true that Sections 18(2), 18(3) and 18(4) have given dual role for the Facilitation Council to act both as Conciliators and Arbitrators. According to the learned counsel for the appellants, the Facilitation Council should not be allowed to act both as Conciliators and Arbitrators. This contention, though prima facie appears to be attractive, it is liable to be rejected on a closer scrutiny. Though the learned counsel would vehemently contend that the Conciliators could not act as Arbitrators, they could not place their hands on any of the decisions of upper forums of law in support of their contentions. As rightly pointed out by the learned single Judge, Section 18(2) of MSMED Act has borrowed the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act for the purpose of conducting conciliation and, therefore, Section 80 could not be a bar for the Facilitation Council to conciliate and thereafter arbitrate on the matter. Further the decision of the Supreme Court in (1986) 4 SCC 537 (Institute of Chartered Accountants of India v. L.K. Ratna), on this line has to be borne in mind. One should not forget that the decision of the Facilitation Council is not final and it is always subject to review under Article 226 of the Constitution of India and, therefore, the appellants are not left helpless.

25. In all these writ petitions filed by various companies challenging the award / order passed by the Arbitrators / Facilitation Council, the question to be gone into is whether such writ petitions could be maintained before this Court. If one carefully goes through the provisions of the MSMED Act under Chapter V, in particular Section 18, it could be seen Patna High Court CWJC No.8077 of 2018 11

that the said Act is in consonance with the Arbitration and Conciliation Act, 1996. Moreover, the award / order passed by the Arbitrators / Facilitation Council is similar and identical to that of the award passed under Section 31 of the Arbitration and Conciliation Act. Section 5, which is contained in Part I of the Arbitration Act, defines the extent of judicial intervention in arbitration proceedings. It says that notwithstanding anything contained in any other law for the time being in force, in matters governed by Part I, no judicial authority shall intervene except where so provided in that Part. The Hon'ble Supreme Court in (2000) 4 SCC 539 (P. Anand Gajapathi Raju v. P.V.G. Raju ), has held that the judicial intervention in arbitration proceedings should be minimal. Keeping in view the object of the MSMED Act, we have no hesitation in adopting Section 5 of the Arbitration and Conciliation Act, 1996, which prohibits interference of the judicial authority, to the awards passed under the MSMED Act.

26. Apart from the reason stated above, these writ petitions were filed without complying with the provisions contained in Section 19 of the MSMED Act, which contemplates pre - deposit of 75% of the decree amount. The petitioners cannot overtake Section 19 and invoke Article 226 of the Constitution before this Court. As we have held that pre - deposit of 75% is mandatory, we see no reason to entertain the present writ petitions. Moreover, once the petitioners have submitted themselves to the jurisdiction of the Council and when the decision of the Council went against them, they cannot turn round and state that the Council has no jurisdiction or the conciliators cannot sit as arbitrators or the pre-deposit of 75% is against the provisions of law. As rightly pointed out by the learned single Judge it is always open to the petitioners to move the appropriate civil court Patna High Court CWJC No.8077 of 2018 12

for relief or to invoke arbitration clause, if provided in the agreement. Hence, we are not inclined to entertain the present writ petitions filed challenging various awards / orders passed by the Facilitation Council and they are liable to be dismissed.

For the reasons stated above, subject to the observations made, all the writ appeals and the writ petitions stand dismissed. There shall be no order as to costs. Interim order, if any, shall stand vacated. Consequently, the connected Miscellaneous Petitions are closed."

13. The said decision was taken note of by a subsequent

Division Bench judgment of the same Court in Refex Energy Limited Vs.

Union of India and Others [W.P. No. 17785 of 2016 and analogous case

decided on 02.06.2016], wherein it was felt that there was no need for

deviation.

14. Before proceeding further for deciding the issues

raised, it is necessary to reproduce the relevant provisions of the two

enactments as under.

Micro, Small and Medium Enterprises Development Act, 2006

" 18. Reference to Micro and Small Enterprises Facilitation Council -

(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.

(2) On receipt of a reference under sub -section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.

Patna High Court CWJC No.8077 of 2018 13 (3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the disputes as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act.

(4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.

(5) Every reference made under this section shall be decided within a period of ninety days from t he date of making such a reference.

24. Overriding effect - The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.

Arbitration and Conciliation Act, 1996

12. Grounds for challenge.--[(1) When a person is approached in connection with his possible appointment as an arbitrator, he shall disclose in writing any circumstances,--

(a) such as the existence either direct or indirect, of any past or present relationship with or interest in any of the parties or in relation to the subject -matter in dispute, whether financial, business, professional or other kind, which is likely to give rise to justifiable doubts as to his independence or impartiality; and

(b) which are likely to affect his ability to devote sufficient time to the arbitration and in particular his ability to complete the entire arbitration within a period of twelve months.

Patna High Court CWJC No.8077 of 2018 14 Explanation 1.--The grounds stated in the Fifth Schedule shall guide in determining whether circumstances exist which give rise to justifiable doubts as to the independence or impartiality of an arbitrator.

Explanation 2.--The disclosure shall be made by such person in the form specified in the Sixth Schedule.] (2) An arbitrator, from the time of his appointment and throughout the arbitral proceedings, shall, without delay, disclose to the parties in writing any circumstances referred to in sub-section (1) unless they have already been informed of them by him.

(3) An arbitrator may be challenged only if--

(a) circumstances exist that give rise to justifiable doubts as to his independence or impartiality, or

(b) he does not possess the qualifications agreed to by the parties.

(4) A party may challenge an arbitrator appointed by him, or in whose appointment he has participated, only for reasons of which he becomes aware after the appointment has been made.

[(5) Notwithstanding any prior agreement to the contrary, any person whose relationship, with the parties or counsel or the subject-matter of the dispute, falls under any of the categories specified in the Seventh Schedule shall be ineligible to be appointed as an arbitrator:

Provided that parties may, subsequent to disputes having arisen between them, waive the applicability of this sub- section by an express agreement in writing.]

13. Challenge procedure.-- (1) Subject to sub-section (4), the parties are free to agree on a procedure for challenging an arbitrator.

(2) Failing any agreement referred to in sub -section (1), a party who intends to challenge an arbitrator shall, within Patna High Court CWJC No.8077 of 2018 15

fifteen days after becoming aware of the constitution of the arbitral tribunal or after becoming aware of any circumstances referred to in sub-section (3) of section 12, send a written statement of the reasons for the challenge to the arbitral tribunal.

(3) Unless the arbitrator challenged under sub -section (2) withdraws from his office or the other party agrees to the challenge, the arbitral tribunal shall decide on the challenge.

(4) If a challenge under any procedure agreed upon by the parties or under the procedure under sub -section (2) is not successful, the arbitral tribunal shall continue the arbitral proceedings and make an arbitral award.

(5) Where an arbitral award is made under sub-section (4), the party challenging the arbitrator may make an application for setting aside such an arbitral award in accordance with section 34.

(6) Where an arbitral award is set aside on an application made under sub-section (5), the Court may decide as to whether the arbitrator who is challenged is entitled to any fees.

80. Role of conciliator in other proceedings.--Unless otherwise agreed by the parties,--

(a) the conciliator shall not act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings;

(b) the conciliator shall not be presented by the parties as a witness in any arbitral or judicial proceedings."

15. I have given my careful consideration to the rival

submissions on behalf of the parties. The core issue that arises for Patna High Court CWJC No.8077 of 2018 16

decision in the present case concerns the jurisdiction of the Council to

act in the capacity of Arbitrator, having already acted in the capacity of

Conciliator in a failed attempt to resolve the dispute between the

parties.

16. The MSMED Act was enacted as a special law for

facilitating the promotion and development, and enhancement of the

competitiveness of micro, small and medium enterprises, and contains

detailed provisions for the benefit of such enterprises. Chapter V of the

MSMED Act comprises Sections 15 to 25 and deals with "delayed

payments to micro and small enterprises". Section 18(1) of the MSMED

Act begins with a non obstante clause and provides for reference to the

Facilitation Council of a dispute for payment for goods supplied and

services rendered by the supplier, together with interest. Section 18(2)

contemplates the conduct of conciliation for resolving the dispute

either by the Council itself or by seeking assistance of any institution or

centre providing alternate dispute resolution services. For purposes of

such conciliation proceedings, Sections 65 to 81 (including Section 80)

of the Arbitration Act are applied. Section 18(3) makes a provision for

arbitration in the event of unsuccessful conciliation terminated without

any settlement, either by the Council itself or by reference to any

institution or centre for providing alternate dispute resolution

services. To such arbitration, the provisions of the Arbitration Act in its

entirety are made applicable, with the assumption of the existence of Patna High Court CWJC No.8077 of 2018 17

an arbitration agreement referred to Section 7(1) of the Arbitration

Act. Section 24 of the MSMED Act gives an overriding effect to Sections

15 to 23, thus including Section 18, of the MSMED Act in cases of

inconsistencies with any other law.

17. It is significant to note that the jurisdiction to act as

Conciliator or Arbitrator has been vested in the Council and in any

other institution or centre for providing alternate dispute resolution

services to which reference may be made. The question is whether the

application of Section 80 of the Arbitration Act, which, inter alia,

contains a prohibition against a conciliator acting as arbitrator unless

otherwise agreed by the parties, is ousted, as sought to be contended

on behalf of the respondents. It is noteworthy that Section 18(2) of the

MSMED Act dealing with conciliation proceeding specifically applies

only certain provisions, including Section 80, of the Arbitration Act to

the dispute. Section 18(3) of the MSMED Act dealing with arbitration

proceedings applies the entire Arbitration Act to the dispute. There is

thus nothing in Section 18 of the MSMED Act to suggest that the bar

contained in Section 80 of the Arbitration Act is not intended to apply.

It is however to be considered whether Section 24 of the MSMED Act

has overriding effect so as to negate the effect of Section 80.

18. The respondents have sought to contend that

ordinarily a conciliator is prohibited from acting as an arbitrator in

view of the bar contained in Section 80 of the Arbitration Act. This is Patna High Court CWJC No.8077 of 2018 18

however subject to a contrary agreement between the parties. It has

been submitted that such an agreement has been presumed to exist

under Section 18(3) of the MSMED Act, which creates an exception to

the ordinary bar contained in Section 80 of the Arbitration Act. There is

thus no impediment for the Council to act as a conciliator as well as

arbitrator, more so as Section 24 of the MSMED Act has an overriding

effect over Section 80 of the Arbitration Act.

19. I am unable to agree with the aforesaid submission of

the respondents, which, no doubt, appears attractive at first blush. On

close scrutiny, I find that it suffers from a fundamental flaw. The

existence of an arbitration agreement is assumed through the deeming

fiction in Section 18(3) of the MSMED Act with reference to Section

7(1) of the Arbitration Act, and must be understood as being merely for

the purpose of statutorily fulfilling the foundational requirement of an

arbitration agreement for proceeding under the Arbitration Act. This is

the extent of the deeming fiction which does not go on to suggest the

existence of any further agreement between the parties for the purpose

of Section 80 of the Arbitration Act to the effect that they have agreed

that a conciliator would also be competent to act as arbitrator. As

stated above, Sections 18(2) and 18(3) of the MSMED Act both seek to

adopt the provisions of Section 80 of the Arbitration Act. Further,

Section 24 of MSMED Act with its overriding effect comes into play

only in cases of inconsistencies between the two enactments. A Patna High Court CWJC No.8077 of 2018 19

harmonious reading of these provisions clearly indicates that Section

80 of the Arbitration Act has been adopted and requires to be given full

effect to. Accordingly, the Council may act either as Conciliator or as

Arbitrator or it may choose to refer the disputes at either or both

stages to any centre or institution providing alternate dispute

resolution services, but it cannot act as both conciliator and arbitrator

itself. Viewed from this angle, there is no inconsistency between the

provisions of Section 18 of the MSMED Act and the provisions of

Section 80 of the Arbitration Act. Accordingly, I am of the view that

Section 24 of the MSMED Act would not have any application in such

circumstances inasmuch as it comes into play only in cases of

inconsistencies between the two enactments.

20. The observations of this Court made in paragraph 25

of the judgment dated 11.04.2017 passed in CWJC No. 14884 of 2 016

cannot be read in a manner to mean that this Court had directed the

Council to take up the responsibility of the Arbitrator, as sought to be

contended by the respondents. The observation must be read as a

whole and it was duly indicated that the Council itself would take up

the responsibility of the Arbitrator or refer the matter to the third

party according to the provisions of the Act for arbitration. The course

of action to be adopted by the Council was therefore mandated to abide

by the provisions of the Act for arbitration.

21. The Division Bench of the Madras High Court in M/s Patna High Court CWJC No.8077 of 2018 20 Eden Exports Company Vs. Union of India (supra) has affirmed the

judgment of the learned Single Judge which contains detailed reasons

for the view taken therein. It would therefore be apposite to refer to

the judgment of the learned Single Judge from which the relevant

paragraphs may be extracted hereinbelow -

"34. The other argument made by the learned Advocate General and by Mr. T. Mohan was that under the provisions of Sections 18(2), 18(3) and 18(4), the Facilitation Council was given dual role of conciliator in terms of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 and thereafter it was conferred with the jurisdiction to act as Arbitrators. This goes against the norms of fairness. Under Section 80 of the Arbitration and Conciliation Act, 1996, it has been made clear that conciliator cannot act as an arbitrator. Section 80(a) reads as follows:

"80. Role of conciliator in other proceedings. - Unless otherwise agreed by the parties,-

(a)the conciliator shall not act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings;"

35. Having incorporated the said provision under Section 18(2), it is not open to the Facilitation Council to act an conciliator as well as arbitrator. They have not agreed for the council to discharge the dual role. If they decide to act as conciliators, then they must relegate the parties to an outside arbitrator. In alternative, if they decide to arbitrate the matter, then they should send the parties for conciliation by an outside authority to do conciliation. The argument addressed by the counsel in this regard is not Patna High Court CWJC No.8077 of 2018 21

based upon any legal foundation. It can be stated that it may be based on the principle of fairness. Even a regular civil court, by 1976 amendment, has been made to conciliate in cases of matrimonial disputes and they are not prohibited by the CPC from deciding the lis between the parties.

36. Section 18(2) only borrows the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act for the purpose of conducting conciliation. It is not a bar for the same council to arbitrate on the matter. But however if there is any allegation of bias is made out, certainly such issues can be gone into in a judicial review based on concrete materials. In order to avoid the allegation of lack of fairness in other higher forums, it is open to the council to evolve its own rule of business by which members who had participated in the Conciliation may not sit in the Arbitral proceedings. But it is entirely for the Facilitation Council to evolve such a rule of business in future. On that ground, no direction can be issued by this Court.

37. In this context, it is necessary to refer to the judgment of the Supreme Court in Institute of Chartered Accountants of India Vs. L.K. Ratna reported in 1986 (4) SCC 537. In that case, the Supreme Court held that members of Chartered Accountants who sit in the disciplinary Tribunal should not participate in the council meeting to approve their own decision and it may hit on grounds of bias. It is for the Facilitation Council to keep in mind such principle so as to avoid future attacks against their orders in other legal forums.

38. The last attack was against the power being vested Patna High Court CWJC No.8077 of 2018 22

with the Facilitation Council to arbitrate the matter and finally to determine the rights of parties can cause prejudice to the buyers. That argument overlooks the fact that the MSMED Act do not foreclose judicial review by any other judicial forum notwithstanding the overriding effect given under Section 24. At the maximum, the Facilitation Council acts as arbitrators at the first instance. It does not foreclose the parties from further agitating the matter to establish their rights in an appropriate legal forum."

22. With utmost respect, I am unable to persuade myself

to subscribe to the aforesaid view for my reasons stated hereinafter -

(a) The legal foundation for the prohibition to act both as

Conciliator and Arbitrator on the part of the Council is to be found in

Section 80 of the Arbitration Act. This section has been adopted in

Sections 18(2) and 18(3) of the MSMED Act and thus I am unable to

agree that it is a mere question of fairness to be left at the discretion of

the Council whether or not to act in both capacities. Reference to the

1976 Amendment by which a regular civil court was made to conciliate

in cases of matrimonial suit and not prohibited by the CPC from

deciding the lis between the parties, is presumably to Order XXXII-A of

the Code of Civil Procedure. I may even take note that similar provision

has been made in Section 9 of the Family Courts Act, 1984 which is

almost in paria materia with corresponding provision under Order

XXXII-A of the CPC. The essence of the distinction here is that while

such procedure for settlement between the parties has been so enacted Patna High Court CWJC No.8077 of 2018 23

specifically in CPC and Family Courts Act. Section 80 of Arbitration Act

on the other hand, provides for just the contrary and prohibits the

Council from acting in dual capacity. It is also relevant to take note of

the change in approach effected by the Code of Civil Procedure

(Amendment) Act, 1999 by which Section 89 was inserted in the CPC

after its earlier repeal in 1940, and reads as follows --

"89. Settlement of disputes outside the Court.

(1) Where it appears to the court that there exist elements of a settlement which may be acceptable to the parties, the court shall formulate the terms of settlement and give them to the parties for their observations and after receiving the observation of the parties, the court may reformulate the terms of a possible settlement and refer the same for -

(a) arbitration;

(b) conciliation

(c) judicial settlement including settlement through Lok Adalat; or

(d) mediation.

(2) Where a dispute has been referred-

(a) for arbitration or conciliation, the provisions of the Arbitration and Conciliation Act, 1996 shall apply as if the proceedings for arbitration or conciliation were referred for settlement under the provisions of that Act.

(b) to Lok Adalat, the court shall refer the same to the Lok Adalat in accordance with the provisions of sub-section (1) of section 20 of the Legal Services Authority Act, 1987 and all other provisions of that Act shall apply in respect of the dispute so referred to the Lok Adalat;

Patna High Court CWJC No.8077 of 2018 24 (c) for judicial settlement, the court shall refer the same to a suitable institution or person and such institution or person shall be deemed to be a Lok Adalat and all the provisions of the Legal Services Authority Act, 1987 shall apply as if the dispute were referred to a Lok Adalat under the provisions of that Act;

(d) for mediation, the court shall effect a compromise between the parties and shall follow such procedure as may be prescribed."

Corresponding changes were also made by inserting

Rules 1-A, 1-B and 1-C in Order X of the CPC as follows -

"1-A. Direction of the Court to opt for any one mode of alternative dispute resolution.

After recording the admissions and denials, the Court shall direct the parties to the suit to opt either mode of the settlement outside the Court as specified in sub -section (1) of section 89. On the option of the parties, the Court shall fix the date of appearance before such forum or authority as may be opted by the parties.

1-B. Appearance before the conciliatory forum or authority.

Where a suit is referred under rule 1A, the parties shall appear before such forum or authority for conciliation of the suit.

1-C. Appearance before the Court consequent to the failure of efforts of conciliation.

Where a suit is referred under rule 1-A and the presiding officer of conciliation forum or authority is satisfied that it Patna High Court CWJC No.8077 of 2018 25

would not be proper in the interest of justice to proceed with the matter further, then, it shall refer the matter again to the Court and direct the parties to appear before the Court on the date fixed by it."

These rules provide for alternate dispute resolution by

outside agencies and not by the court itself. It thus depends on what is

contemplated by the specific provisions enacted in the law and in the

present case, Section 80 of the Arbitration Act prohibits dual function

by the Council.

(b) If Section 18(2) of the MSMED Act borrows the

provisions of Sections 65 to 81 of the Arbitration Act, I do not perceive

any reason for inferring that Section 80 of Arbitration Act is intended

to be excluded and that it would not constitute a bar for the Council to

arbitrate on the matter.

(c) It is most significant to note that the learned Single

Judge has expressed his view that in order to avoid the allegation of

lack of fairness, it would be open to the Council to evolve its own rule

of business by which members who had participated in the conciliation

may not sit in the arbitral proceedings. I am of the view, however, that

MSMED Act contemplates the conciliation proceedings to be conducted

by the Facilitation Council as a body and not by its members acting in

their individual capacity. Besides, in my view, such a situation may

become unworkable in view of Section 21 of the MSMED Act which

mandates that the Council shall consist of not less than three but not Patna High Court CWJC No.8077 of 2018 26

more than five members. As such, a quorum of three members is

necessary for the Council to be validly constituted, whether for the

purposes of conciliation or for arbitration. Considering that the Council

can consist of a maximum of only five members, it would not be even

possible to constitute the Council with the minimum quorum of three

members for conducting arbitration, none of whom had participated

earlier in the conciliation process.

(d) I am of the view that, if at all, the judgment of the

Supreme Court in Institute of Chartered Accountants of India v. L.K.

Ratna (supra) supports the case of the present petitioner as it

recognizes the need to dissociate a decision making body from the

approving body.

(e) I am also of the view that mere availability of judicial

review would not validate the Council act as arbitrator if it is otherwise

disqualified from doing so, having already conducted the conciliation.

The Council would inherently lack jurisdiction to act as arbitrator and

any order passed by it would be non est and a nullity as in the present

case. The initiation of the arbitration proceeding by the Council in such

circumstances would itself be a matter which causes the prejudice to

the petitioner.

23. In Harshad Chiman Lal Modi vs. DLF UNIVERSAL Ltd.

and another, (2005) 7 SCC 791, it has been held as follows -

"Ms. Malhotra, then contended that Section 21 of the Code, requires that the objection to the jurisdiction must be taken Patna High Court CWJC No.8077 of 2018 27

by the party at the earliest possible opportunity and in any case where the issues are settled at or before settlement of such issues. ...

We are unable to uphold the contention. The jurisdiction of a court may be classified into several categories. The important categories are (i) Territorial or local jurisdiction;

(ii) Pecuniary jurisdiction; and (iii) Jurisdiction over the subject matter. So far as territorial and pecuniary jurisdictions are concerned, objection to such jurisdiction has to be taken at the earliest possible opportunity and in any case at or before settlement of issues. The law is well settled on the point that if such objection is not taken at the earliest, it cannot be allowed to be taken at a subsequent stage. Jurisdiction as to subject matter, however, is totally distinct and stands on a different footing. Where a court has no jurisdiction over the subject matter of the suit by reason of any limitation imposed by statute, charter or commission, it cannot take up the cause or matter. An order passed by a court having no jurisdiction is nullity."

24. It is thus evident from the above that if an authority

inherently lacks jurisdiction, the resultant order can be challenged at

any stage and a person cannot be non-suited merely because he failed

to raise an objection at the earliest point of time. The petitioner has

submitted that no such objection was raised with regard to the

Council's jurisdiction for want of any legal provision for doing so. I am

of the view that if an authority or body lacks inherent jurisdiction,

mere participation in the proceedings by the parties cannot confer

jurisdiction whether by consent or otherwise. It is therefore not Patna High Court CWJC No.8077 of 2018 28

necessary to test whether or not the petitioner was entitled to question

the Council's jurisdiction under the provisions of Sections 12 or 34 of

the Arbitration Act or any other legal provisions. It would also not be

necessary to adjudicate whether or not the arbitration award passed

by the Council could be challenged under Section 34 of the Arbitration

Act as a non est order can well be quashed in judicial review.

25. In these circumstances, the impugned order dated

06.02.2018 passed by the Council (Annexure-6 in both these writ

petitions) must be held to be without jurisdiction and non est in law

and is accordingly quashed. The matter is remitted back to the Micro,

Small and Medium Enterprises Facilitation Council, Patna to make an

appropriate reference as contemplated in Section 18(3) of the MSMED

Act for arbitration of the disputes between the parties in accordance

with law.

26. Both these writ petitions st and allowed.

(Vikash Jain, J) Md. Ibrarul/BT

AFR/NAFR AFR CAV DATE N.A. Uploading 21.06.2018 Date Transmission N.A. Date Patna High Court CWJC No.8077 of 2018 29