The Delhi High Court has set aside an ex parte arbitral award of over ₹48.64 crore passed by the Kerala Micro and Small Enterprises Facilitation Council against public sector undertaking WAPCOS Ltd., holding that failure to comply with the mandatory conciliation process under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 rendered the award a nullity in law.
A Division Bench of Justice V. Kameswar Rao and Justice Manmeet Pritam Singh Arora allowed WAPCOS’ appeal, set aside the orders of the Single Judge requiring a 75% pre-deposit under Section 19 of the MSMED Act and dismissing its Section 34 petition for non-compliance, and remitted the matter to the Facilitation Council for fresh adjudication in accordance with law.
The dispute arose out of five consultancy work orders awarded by WAPCOS to Virgo Aqua in connection with fisheries infrastructure projects in Andhra Pradesh and Odisha. Alleging non-payment of dues, Virgo Aqua invoked Section 18 of the MSMED Act before the Kerala Facilitation Council, which passed an ex parte award directing WAPCOS to pay ₹48.64 crore towards the principal amount along with statutory compound interest. WAPCOS challenged the award, contending that it had been passed without complying with the mandatory conciliation-arbitration framework prescribed under Sections 18(2) and 18(3) of the MSMED Act.
Examining the records summoned from the Facilitation Council, the High Court found no material showing that WAPCOS had been served with any notice of the conciliation proceedings allegedly conducted before the District Legal Services Authority (DLSA) or that the Council had passed any order formally recording the failure of conciliation before commencing arbitration. The Bench held that a mere reference to conciliation without notice to the buyer could not satisfy the statutory mandate of Section 18(2).
Relying on the Supreme Court’s decision in Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan, (2021) 19 SCC 206, the Court held that compliance with the two-stage mechanism under Section 18 of the MSMED Act is a jurisdictional prerequisite and an award passed without following it is void. It observed that the Facilitation Council had proceeded directly to arbitration without completing the statutory transition from conciliation, thereby depriving WAPCOS of a meaningful opportunity to participate in the proceedings.
The Bench further held that where an award is alleged to be a nullity on the face of the record, courts hearing challenges under Sections 34 and 37 of the Arbitration and Conciliation Act are not precluded from examining that issue merely because the mandatory pre-deposit under Section 19 of the MSMED Act has not been made. According to the Court, the requirement of pre-deposit presupposes the existence of a legally valid award and cannot compel a party to deposit substantial sums before questioning the very existence of the award in law.
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“Appellant had no notice of the initiation of conciliation proceedings before the DLSA, termination of the conciliation proceedings and initiation of arbitral proceedings before the Facilitation Council. The Facilitation Council passed the ex-parte impugned award without formally entering reference on arbitration with notice to the Appellant, rendering the award to be a nullity. We therefore find that in the facts of this case the directions for pre-deposit by the learned Single Judge were not made out as the award itself was a nullity.”
The Court also rejected Virgo Aqua’s objection to the maintainability of the appeal, holding that dismissal of the Section 34 petition for failure to make the pre-deposit had the effect of giving finality to the arbitral award and was therefore appealable under Section 37 of the Arbitration and Conciliation Act.
Accordingly, the Division Bench set aside the impugned award and remanded the matter to the Kerala MSME Facilitation Council for fresh proceedings after following the mandatory statutory procedure, including proper conciliation and arbitration with due notice to the parties. It also directed that the ₹36 crore deposited by WAPCOS pursuant to the Court’s interim order shall remain with the Registry and be transmitted to the Facilitation Council, which will decide its disbursal after passing a fresh award.
