The Bombay High Court has reaffirmed that compliance with the mandatory conciliation process under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 is not optional but a statutory precondition to any arbitration. The judgment invalidates a Facilitation Council’s summary dismissal of a dispute without any record of conciliation proceedings, reinforcing procedural integrity in MSME dispute resolution.
Background & Facts
The Dispute
The petitioner, M/s Priest Pharmaceuticals, Amravati, supplied goods to a buyer and claimed an outstanding amount of Rs. 12,45,000 under a purchase order dated 12.01.2016. Despite repeated demands, the buyer failed to make payment. On 15.03.2016, the petitioner issued a legal notice demanding settlement. No response was received. On 05.07.2016, the petitioner filed Reference No. 10/2016 before the Micro, Small Enterprises Facilitation Council, Amravati (Respondent No. 1), invoking Section 18 of the MSME Act for recovery of the dues.
Key Facts
- The petitioner is a registered micro enterprise under the MSME Act
- The buyer is located in Mumbai, Maharashtra
- The claim arose from a supply transaction dated 12.01.2016
- The amount claimed was Rs. 12,45,000, supported by invoices and delivery challans
- No prior litigation or arbitration was initiated before the reference
- The petitioner submitted all documents including invoices, delivery records, and the legal notice dated 15.03.2016
Procedural History
- 12.01.2016: Supply of goods made by petitioner to buyer
- 15.03.2016: Legal notice issued demanding payment of Rs. 12,45,000
- 05.07.2016: Reference No. 10/2016 filed before the Facilitation Council
- 07.09.2018: Impugned order passed by the Council, stating in one line: "Due to the stand taken by both the parties, conciliation is not possible."
- 28.11.2018: Writ Petition No. 7606/2018 filed before the Bombay High Court, Nagpur Bench
- 26.03.2026: Hearing concluded before Justices Anil L. Pansare and Nivedita P. Mehta
The Parties' Positions
Petitioner: Contended that the Council failed to follow the mandatory procedure under Section 18(2) of the MSME Act. No conciliation was initiated, no statements were sought from either party, no conciliator was appointed, and no attempt was made to facilitate settlement. The one-line order was arbitrary and violated statutory mandates.
Respondent No. 1 (Council): Did not file a written reply. Respondent No. 2 (Director) argued that the Council’s decision was based on oral submissions and that documentary evidence was not required to show non-conciliation.
Relief Sought
The petitioner sought quashing of the order dated 07.09.2018, restoration of Reference No. 10/2016, and direction to the Council to process the reference strictly in accordance with Section 18 of the MSME Act.
The Legal Issue
The central question was whether the Micro and Small Enterprises Facilitation Council can summarily dismiss a reference under Section 18 of the MSME Act without initiating conciliation as mandated by Section 18(2), and whether such a dismissal renders the order legally unsustainable.
Arguments Presented
For the Petitioner
Counsel relied on Vijeta Construction v. Indus Smelters Ltd. (2021 SCC OnLine SC 3436), where the Supreme Court held that Section 18(2) imposes a mandatory obligation on the Council to attempt conciliation before proceeding to arbitration. The petitioner argued that the Council’s one-line order lacked any procedural record, violated the principles of natural justice, and ignored the statutory framework requiring submission of statements, appointment of conciliators, and attempts at settlement under Sections 65 - 81 of the Arbitration and Conciliation Act, 1996. The absence of any documentation or reasoning rendered the order arbitrary and ultra vires.
For the Respondent
The Advocate for Respondent No. 2 contended that the Council’s decision was based on oral submissions by the parties and that the lack of documentary evidence did not invalidate the outcome. He argued that the Council had the discretion to determine that conciliation was not feasible and that strict compliance with procedural formalities was not essential in every case. This submission was unsupported by any precedent or statutory provision.
The Court's Analysis
The Court examined the language of Section 18(2), which mandates that upon receipt of a reference, the Council "shall either itself conduct conciliation... or seek the assistance of any institution..." and that the provisions of the Arbitration and Conciliation Act, 1996, including Sections 65 to 81, shall apply. The Court emphasized that the use of the word "shall" renders these steps mandatory, not directory.
"The Council cannot bypass the conciliation process merely by stating that conciliation is not possible without any record of attempts made, submissions received, or parties consulted."
The Court noted that the impugned order contained no indication that any conciliator was appointed, no statement of claim or defense was sought from either party, no meeting was held, and no effort was made to explore settlement. The reference to "stand taken by both parties" was vague and unsubstantiated. The Court held that such a summary dismissal defeats the very purpose of Section 18 - to provide a swift, accessible, and structured mechanism for MSMEs to recover dues.
The Court distinguished Vijeta Construction, which had upheld the mandatory nature of conciliation, and rejected the Respondent’s argument that oral proceedings suffice without documentation. The Court observed that the absence of a record undermines accountability and violates the principles of natural justice. It further held that jurisdiction under Section 18(4) cannot be exercised without compliance with the procedural safeguards in Section 18(2).
The Verdict
The petition was partly allowed. The impugned order dated 07.09.2018 was quashed and set aside. Reference No. 10/2016 was restored to the file of the Facilitation Council for processing in strict accordance with Section 18 of the MSME Act. The parties were directed to appear before the Council on 01.04.2026. No order as to costs was made.
What This Means For Similar Cases
Conciliation Is Not Optional
- Practitioners must now insist on documentary proof of conciliation attempts in all MSME references
- Any order dismissing a reference without evidence of compliance with Sections 65 - 81 of the Arbitration and Conciliation Act is liable to be quashed
- Legal notices and filings must explicitly demand compliance with Section 18(2) as a precondition to arbitration
Documentation Is Non-Negotiable
- Oral submissions alone cannot substitute statutory procedures
- Facilitation Councils must maintain case diaries, minutes of meetings, and records of communications
- Petitioners should file applications for production of records if no documentation is provided
- Courts will not presume compliance - the burden lies on the Council to prove adherence to Section 18(2)
Arbitration Cannot Precede Conciliation
- Any attempt to proceed directly to arbitration under Section 18(3) without prior conciliation renders the arbitral award voidable
- This principle applies even if parties claim mutual unwillingness to conciliate - the Council must still make a formal attempt
- Future references must be accompanied by affidavits confirming compliance with Section 18(2) to avoid procedural challenges
