[Shakti is a student at National Law University Odisha.]
Since their inception, the micro, small and medium enterprises (MSMEs) have proven to be the torchbearer of equitable employment development and economic growth of the country. The significance of MSMEs is not just in providing huge employment at a lower capital cost but also their important contribution in bridging the urban-rural divide by establishing units in rural areas. MSMEs are ancillary entities to large industries and are one of the most significant factors contributing to the economic and social growth of the country.
Need for Specialized Arbitration
Being the backbone of the economy, it is very crucial for MSMEs to function effectively. MSMEs are classified as manufacturing and servicing enterprises and their investments, structure and functioning vary as per their respective areas. However, one thing that is common among all of them is the absence of optimum monetary capacity. Adding to this, unlike large multi-national companies, MSMEs cannot even readily afford legal aid. Hence, a distinct legal framework is required to meet their special needs by resolving their disputes through specialized arbitration.
MSMEs face numerous hardships due to delayed payments and since they serve as suppliers and manufacturers operating on a limited scale, even the slightest of delays in payments can lead to huge challenges for them in the long run, often resulting in insolvency.
Previous Arbitration Framework and its Limitations
Disputes related to delayed payments to MSMEs are resolved through conciliation and arbitration as stated in Section 18 of the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act). The provision provides that the Micro and Small Enterprises Facilitation Council (MSEFC) shall conduct conciliation proceedings itself or through any other institution and in case it turns out to be unsuccessful, the MSEFC shall conduct arbitration in the same manner.
The Arbitration and Conciliation Act 1996 (A&C Act) governs all kinds of arbitration proceedings across the country. However, the MSMED Act and the A&C Act have some contradictory provisions which have raised question as to which one of the two legislations would govern the arbitration of MSMEs. In Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods (Private) Limited, the Supreme Court has finally elucidated on the issue and has held that the MSMED Act has an overriding effect on the A&C Act as it is a beneficial legislation. Therefore, any arbitration agreement among the parties is rendered dysfunctional once Section 18(1) of the MSMED Act is invoked.
Although the law is more or less settled on how the arbitration of payment-related disputes of MSMEs has to be carried out, the mechanism under the MSMED Act is full of flaws. One such major loophole is the unbridled power given to the MSEFC over the whole process of conciliation and arbitration, especially the appointment of arbitrator. Here, arbitration is not governed by an arbitration agreement and thus, mutual consent of both the parties is not mandatory.
As held in Bafna Udyog v. MSMED by the Bombay High Court, the parties do not even have a recourse to appeal against any delay caused in arbitration proceedings by the MSEFC as the Court’s power to appoint an arbitrator under Section 11 of the A&C Act exists only when an arbitration agreement exists to that power. Thus, there is a serious dearth of options to hold the MSEFC accountable without an arbitration agreement. However, parties with an arbitration agreement encounter a similar issue due to the precedence of Section 18 over the A&C Act as held in the case of Gujarat State Civil Supplies Corporation Limited.
Another major drawback is the possibility of bias by the arbitrator. The protection against such bias enshrined under Section 80 of the A&C Act, providing that the same person cannot act as both the conciliator and the arbitrator does not apply to arbitration under the MSMED Act. This poses a serious risk to the fairness and effectiveness of the whole mechanism, when the same person may conduct both the proceedings.
All these challenges with the existing arbitration mechanism for MSMEs necessitated concrete and reformative regulations to guide the process. Thus, the Indian International Arbitration Centre (IIAC) has introduced the Indian International Arbitration Centre (Conduct of Micro and Small Enterprises Arbitration) Regulations 2024 (IIAC Regulations) on 7 June 2024 to ensure more effective and expedited resolution of MSME disputes.
An Analytical Perspective Towards the New Regulations
The IIAC Regulations have addressed several limitations encountered by MSMEs in the previous arbitration mechanism. One of the most important ways to deal with such limitations is eliminating the uncertainty on the governing statute. The IIAC Regulations provide that arbitration referred to the MSEFC under Section 18(3) of the MSMED Act will be governed in accordance with the provisions of the A&C Act and these regulations. This means that now, the bias of the arbitrator can be kept in check with Section 80 of the A&C Act, preventing the same person from acting as both the conciliator and the arbitrator.
There are few other important changes ensuring impartiality in the arbitration procedure. One such change is providing mandatory full disclosure of existence of any interest of arbitrator with either of the parties in past or present, facilitating transparency of the process. Unlike earlier where the arbitrator or arbitration institution was either the MSEFC itself or was chosen by it, the appointment of a sole arbitrator would be now done by the Chairperson, from the panel of arbitrators maintained by the Centre while ensuring that the arbitrator is independent, impartial and available throughout the arbitration proceedings.
The IIAC Regulations also provide the parties with an option to challenge the appointment of the arbitrator based on justifiable doubt on impartiality, unavailability or incompetency. All these ways of keeping a check on the arbitrator will prove to be very effective for the arbitration proceedings especially when compared to the previous mechanism. The uncontrolled power given to the MSEFC led to inordinate delays and unfair outcome which will be properly dealt with now through the IIAC Regulations.
As stated earlier, one major objective of referring a dispute to arbitration is its benefit of being more time effective, as compared to litigation. Especially for MSMEs, time is of essence given their limited resources which increases their vulnerability to insolvency. Thus, the fast-track procedure introduced by these regulations provide the MSMEs with a relief from unreasonable delay in the arbitration proceedings.
In this fast-track procedure, all the submissions and pleadings are presented in writing and oral hearing is conducted only when considered necessary by the Arbitral Tribunal or requested by the parties. Even when oral proceedings are being conducted, technical formalities may be dispensed with in order to expedite the whole process. The IIAC Regulations also provide that the award shall be made within six months from the date of intimation of the constitution of the Arbitral Tribunal by the Registrar to the parties. While the earlier procedure provided for a period of ninety days from the date of making reference to the MSEFC for deciding such a reference, the 2023 Amendment to the MSMED Act had removed the time constraint requirement from Section 18 leading to even more prolonged proceedings.
Another important change that we witness is the provision of legal aid for MSMEs for arbitration proceedings. Up to 50% of the administration fees may be waived off and a counsel at no cost basis may also be provided to aid and assist the claimant. This puts the eligible MSMEs at a much-needed advantage and saves them from the risk of insolvency. Earlier, due to no such provision or waiver, they were extremely prone to shut down. There is also no filing fee for claim or counter claim and the arbitrator fees is also minimal, as compared to the one in the A&C Act.
Way Forward and Conclusion
While the introduction of these regulations is surely a commendable step towards facilitating dispute resolution for MSMEs, there are still some areas where the procedure has scope for improvement.
One such lacunae which is absence of a time limit for referring the dispute to arbitration. None of the existing provisions deal with a time limit for referring a dispute to the MSEFC for arbitration after an unsuccessful conciliation. If such a cut off is also set, the whole procedure could be completed even more expeditiously.
Other challenges that still need some focus include creating awareness about the IIAC Regulations among the smallest of MSMEs with their units in rural areas. Implementation of the procedure and enforcing the award are additional challenges, often exacerbated by the non-cooperation of the non-MSME party, hindering smooth enforcement of awards. The IIAC Regulations are surely a leap forward towards facilitating dispute resolution for MSMEs but there is still a long way to go to ensure smooth, quick and effective arbitration for MSMEs.
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