The High Court of Madhya Pradesh at Jabalpur Bench has clarified that compliance with Section 18(2) of the MSMED Act is mandatory, and upon receipt of a reference, the Facilitation Council must itself conduct conciliation or refer the matter for conciliation, and such conciliation must follow the statutory framework of Sections 65 to 81 of the Arbitration and Conciliation Act. Only where such conciliation is unsuccessful and stands validly terminated, can the Council proceed to arbitration under Section 18(3).
The High Court also held that if the Council does not undertake or validly conclude conciliation in accordance with law, the initiation of arbitration under Section 18(3) is without jurisdiction and the award is liable to be set aside in writ jurisdiction notwithstanding the existence of an alternative remedy under Section 34 read with Section 19 of the MSMED Act, particularly where the challenge is founded on lack of jurisdiction and breach of mandatory procedure.
The Division Bench comprising the Chief Justice Sanjeev Sachdeva and Justice Vinay Saraf observed that although the MSMED Act has overriding effect and the Facilitation Council can entertain a supplier’s claim notwithstanding an independent arbitration agreement, the statutory scheme of Section 18 still mandates compliance with the conciliation stage before arbitration can begin.
The Bench examined the Council’s order sheets and found that the Council had neither itself conducted conciliation nor referred the matter to any institution or centre for conciliation. It had merely asked the parties to sit together and explore settlement among themselves. The Bench therefore emphasised that conciliation and arbitration are distinct processes, that proceedings for conciliation and arbitration cannot be clubbed, and that the statutory procedure under Sections 65 to 81 of the Arbitration and Conciliation Act must be followed when Section 18(2) is invoked.
The Bench further observed that termination of conciliation also has to take place in accordance with law and cannot rest merely on a unilateral statement by a party that conciliation failed. On this reasoning, the Bench found that the very initiation of arbitration proceedings under Section 18(3) of the MSMED Act was without jurisdiction and that the resulting award was a nullity.
The Bench also noted the peculiar factual position that the parties had already entered into a written settlement on Apr 04, 2023 and that the principal amounts settled thereunder had in substance been paid: Rs. 2.23 crores were paid on Sep 19, 2023 and Rs. 2.47 crores were paid on Oct 14, 2025 during the pendency of the writ proceedings. In these circumstances, although ordinarily the matter may have been remitted for fresh conciliation and further action in accordance with law, the Bench declined remand in order to give quietus to the dispute. It instead set aside the award, held that no principal amount remained due under the settlement, but directed payment of simple interest at 8% per annum on the security amount and 12% per annum on the settled unpaid invoice amount for the delayed periods specified in the judgment.
Briefly, the petitioner, Aurionpro Solutions Ltd., challenged an award passed by the Madhya Pradesh Micro and Small Enterprises Facilitation Council, Bhopal under Section 18(3) of the MSMED Act. The dispute arose out of a back-to-back arrangement under which respondent No. 2, Hypersthene IT Solutions Pvt Ltd., was to maintain and upgrade the Safe City System project for the M.P. Police.
According to the petitioner, penalties were imposed by M.P. Police on account of non-performance attributable to respondent No. 2, the arrangement between the parties was terminated, and thereafter the parties entered into a settlement agreement. Under that settlement, the petitioner agreed to return the EMD/PBG-related amount of Rs. 2.23 crores and to pay Rs. 2.45 crores as full and final settlement of unpaid invoices, subject to adjustment and escrow mechanics concerning OEM and employee dues.
Respondent No. 2 nevertheless invoked Section 18 of the MSMED Act and claimed unpaid invoice amounts before the Council, which ultimately awarded Rs. 4.56 crores with interest in its favour. The petitioner contended that the claim was no longer maintainable in that form after settlement, and in any event the Council had not conducted conciliation in the manner required by Section 18(2) before proceeding to arbitration under Section 18(3) of the MSMED Act.
