The Supreme Court of India recently examined a critical procedural issue under the Micro, Small and Medium Enterprises Development Act of 2006. The central question before the Court was whether a writ petition under Article 226 of the Constitution of India is maintainable against an order passed by the Micro and Small Enterprises Facilitation Council, and under what specific circumstances such a petition can be entertained.
The dispute originated from a tender issued by the Tamil Nadu Cements Corporation Limited for the design and commissioning of Electrostatic Precipitators at its Ariyalur unit. The contract was awarded to M/s Unicon Engineers. Following allegations of poor performance and delays, Unicon Engineers approached the Facilitation Council under Section 18 of the MSMED Act. The Council eventually recorded a failure of conciliation and directed Tamil Nadu Cements to pay the disputed amount along with heavy interest.
Tamil Nadu Cements faced a significant hurdle when attempting to challenge this award. Section 19 of the MSMED Act mandates a pre-deposit of seventy five percent of the awarded amount to entertain an application for setting aside the award under Section 34 of the Arbitration and Conciliation Act. Facing this stringent financial condition, the appellant filed a writ petition challenging the vires of the MSMED Act provisions and the validity of the award itself.
While reviewing the matter, the Supreme Court identified a direct conflict between previous judgments of coordinate benches. One earlier ruling held that conciliation and arbitration proceedings cannot be clubbed by the Council, rendering an award passed without following mandatory arbitration procedures a nullity. Conversely, another ruling stated that the Council could lawfully act as both a conciliator and an arbitrator, effectively overriding the general prohibitions found in the Arbitration and Conciliation Act.
Furthermore, the Court expressed reservations about a prior three judge bench decision which held that a writ petition is never maintainable against a Facilitation Council award because the statute provides a specific remedy requiring the seventy five percent pre-deposit. The Court noted that statutory arbitration under the MSMED Act is mandatory and imposes an exceptionally high compound interest rate pegged at three times the Reserve Bank of India rate. Restricting the right to challenge such severe awards strictly to the onerous pre-deposit condition raised serious questions about access to justice.
The Court emphasized that the power to issue prerogative writs under Article 226 is plenary and forms part of the basic structure of the Constitution. While writ courts generally require parties to exhaust alternative statutory remedies, this rule is a matter of discretion and policy rather than an absolute compulsion. Exceptions exist where there is a violation of fundamental rights, a complete lack of jurisdiction, or a challenge to the vires of legislation. The Court highlighted that an alternative remedy must be equally efficacious. When a statutory requirement like a massive pre-deposit becomes excessively burdensome, it could render the right to appeal almost illusory.
Given the conflicting precedents and the substantial questions of law involved, the Court decided to refer the matter to a larger bench of five judges. The larger bench will determine whether the previous ruling completely barring writ petitions against Facilitation Council awards holds true. It will also decide the specific circumstances under which the restriction of an adequate alternative remedy might not apply. Finally, the five judge bench will clarify whether Council members who fail to resolve a dispute through conciliation can legally transition to act as arbitrators for the very same dispute.