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Quandary of Time Limits in regard to the MSMED Act viz Arbitration Act and possible changes brought about by the Mediation Act in India

Advik Rijul Jha*

 

Introduction


The issue at hand is the interplay and dichotomy between the provisions regarding the timelines for the completion of the arbitration proceedings as stipulated in the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act”) and the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), and analysis into the possible impacts which the recently enacted Mediation Act, 2023 (‘Mediation Act’) is likely to have on this paradigm. 


The timelines which have been envisaged in the  MSMED Act u/s 18 are at loggerheads with those under the Arbitration Act u/s 29A. A reading of the afore-mentioned provisions would demonstrate that while the MSMED Act, which is a special legislation for the benefit of MSMEs, stipulates ninety (90) days for the completion of arbitration proceedings under its aegis, the Arbitration Act lays down a period of 18 (6+12) months for completion of the arbitration proceedings. The above-mentioned issue presents challenges before the arbitrators, counsels and institutions conducting the arbitrations, regarding which timelines are to be followed, especially as there has been a constant increase in the number of arbitrations taking place between entities registered under the MSMED Act and other parties. 


The said issue has been discussed hereunder and a potential solution to the problem has been suggested by way of a proposed interpretation of the provision. Another necessary corollary which has been delved into while analysing this issue is the plausible effects of the Mediation Act and the impact of the interpretation of the timelines stipulated thereunder with respect to this quandary. 


Existing jurisprudence qua this issue 


The High Courts of Delhi and Madras have had various occasions to look into this issue. However, there has been no uniformity in the views taken by them leading to a lack of a clear solution to the problem via an authoritative judicial precedent. While one view taken by the Madras High Court in Indian Furniture Products Limited v/s Micro Small Enterprises Facilitation Council  and Utility Powertech Limited v/s Micro Small Enterprises Facilitation Council and the Delhi High Court in Driplex Water Engineering Private Limited v/s Micro Small Enterprises Facilitation Council  is clear that the 90 days’ time-period stipulated u/s 18(5) of the MSMED Act for the completion of proceedings is to be strictly adhered to with respect to arbitration and/or conciliation proceedings, another view exists wherein Section 18(5) has been held to be merely directory and not mandatory, thereby entailing that the timelines prescribed under the Arbitration Act should be applicable, especially in view of no penalty being prescribed in the MSME legislation in the event of non-adherence to the timeline. The same is evinced from the judgment of the Madras High Court in Shintech Engineering India Pvt. Ltd. v/s Micro Small Enterprises Facilitation Council  and the Delhi High Court in Indian Highways Management Company Limited v/s Mukesh & Associates. Given the same, owing to the above-mentioned divergent views, it is imperative to look into the Supreme Court’s view in the matter in the Gujarat State Civil Supplies Corporation Ltd. v/s Mhakali Foods Pvt. Ltd. case (‘Gujarat Civil Supplies case’), to see whether any clarity has been reached on the issue.


The Hon’ble Supreme Court has analysed the interplay between the MSMED Act and the Arbitration Act in in a very detailed manner in the Gujarat Civil Supplies case. The Court has categorically held that “Chapter V of the MSMED Act, 2006 would override the provisions of the Arbitration Act, 1996”. (Para 34) The said observation has been arrived at keeping in mind the special nature of the MSMED Act and the fact that the provisions of the Act, including the one stipulating timelines for completion of conciliation and arbitration, have been given an over-riding effect not-withstanding any other law in force. However, another significant observation in the judgment is that “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”. (Para 29) This entails that while the conciliation proceedings are to be governed by the timelines stipulated in the MSMED Act i.e. 90 days, once arbitration proceedings are commenced, the timelines i.e. (6+12) months for the completion of the proceedings as stipulated under the Arbitration Act would apply. However, the time taken for conciliation proceedings was not excluded from the calculation of the limitation period for the commencement of arbitration proceedings, which was detrimental to the parties. 


The changes brought about by the Mediation Act in this regard will be discussed in the next segment along with the plausible correct interpretation of Section 18 of the MSME legislation being extrapolated upon. 


Effect of Mediation Act 2023


Another aspect which will also be relevant to keep in mind is that conciliation had been given statutory recognition in both the Arbitration Act and the MSMED Act. However, with the passing of the Mediation Act, the statutory recognition given to conciliation under the Arbitration Act has been withdrawn. This raises the question, as to whether a similar change is also necessitated with regard to the MSMED Act. The rationale for suggesting the same is that conciliation as a mode of dispute resolution has not been very successful, leading to the cases inevitably moving on to arbitration, under the MSMED Act. Therefore, as mediation has been made mandatory pre-litigation through the new Mediation Act, it may be more prudent for the legislature to contemplate incorporating mediation as a mandatory dispute resolution solution in the functioning of the MSMED Act as well. 


This would help achieve two goals. First and foremost, the time taken for conciliation under the Arbitration Act was not exempted from the applicability of the provisions of the Limitation Act, thereby entailing that the time spent by parties in pursuing conciliation would eat into the time-limit prescribed under the Arbitration Act for the completion of proceedings, to the detriment of parties. However, under the Mediation Act, 2023 the period of time spent on Mediation has been exempted from the calculation of the time-period of limitation for commencement of Arbitration proceedings, thereby giving parties more time to pursue mediation, without the sword of expiry of limitation hanging over them to initiate arbitration. Secondly, the time-limit prescribed for Mediation is 120 days under the Mediation Act, 2023 as opposed to 90 days for Conciliation under the Arbitration Act, thereby giving parties more time to pursue Mediation effectively. Such a change would also by itself provide clarity on the issue of time-limit raised u/s 18 of the MSMED Act as once the time-period for Mediation is defined in the statute, there would no longer be any confusion about the time-limit to be followed for the subsequent proceedings i.e. arbitration.  


Conclusion


Therefore, from the above case laws, it is apparent that there is no clarity as to what the time-limit for the completion of proceedings for arbitration proceedings under the MSMED Act would be, as contradictory statements are present in the Apex Court’s judgment itself. However, in the event that the view is accepted wherein the provisions of the MSMED Act would override the Arbitration Act, the time-limit of 90 days would apply for the completion of the arbitration proceedings, which in all practicality is highly impossible given the time taken for completion of pleadings, evidence and hearing in a case, even though Section 18 has been held to have an overriding effect over any other law in force as per Section 24 of the MSMED Act, 2006.


However, another view which emerges from the discussions in the judgments is that the Arbitration Act 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. This entails that the arbitration proceedings and the timelines therein would be governed by the Arbitration Act, 1996. This, in the author’s view, seems to be the right interpretation which would enable the arbitration proceedings to take place within a practical and plausible period of time, as opposed to 90 days, which is highly unlikely. The timeline of 90 days can be adhered to in the case for completion of conciliation proceedings u/s 18(2), while once the arbitration proceedings are commenced u/s 18(3), the timelines under the Arbitration Act should take effect. 


Further, with the coming of the Mediation Act, 2023 it would be interesting to see whether the legislature deems it prudent to make changes i.e. replace conciliation with mediation as a preliminary stage to arbitration under the MSMED Act. This would not only provide absolute clarity on the current quandary of time limits for completion of proceedings, but also provide a little more time for parties to pursue mediation before going on to arbitration, as they would also be free from the sword of limitation which currently hangs on their heads.


* Advik Rijul Jha is an advocate who has been practicing before the Supreme Court of India, High Court of Delhi and various Tribunals. He is currently a Law Researcher at the Delhi International Arbitration Centre (DIAC).

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