Timely payments are essential for the survival and smooth functioning of Micro and Small Enterprises (‘MSEs’), as delays can seriously disrupt their operations and finances. To address this, the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’) offers a framework for quick resolution of payment disputes.
Section 18 of the MSMED Act sets out a two-step process — conciliation followed by arbitration, both facilitated by the Micro and Small Enterprises Facilitation Council (‘MSEFC’) — providing MSEs with a faster alternative to traditional litigation.
In practice, delays or inaction by the MSEFC after conciliation often leave MSEs without a clear way forward. This raises the question of whether courts can appoint an arbitrator under Section 11 of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’) when MSEFC fails to act. The article examines the legal framework, rulings, and remedies available to MSEs in these cases.
Statutory framework
Section 18 of the MSMED Act empowers either party in a payment dispute the right to initiate the resolution process by referring the matter to the MSEFC. Under Section 18(2), the MSEFC is required to first attempt to settle the dispute through conciliation. If conciliation fails, Section 18(3) mandates that the MSEFC must either take up the arbitration itself or refer the dispute to an appropriate institution or centre offering alternative dispute resolution services. In such cases, the Arbitration Act governs the proceedings, with the arbitration being treated as if it arises from an arbitration agreement as defined under Section 7(1) of the Arbitration Act. It is well settled that the process under Section 18 is mandatory — the MSEFC is obligated to first initiate conciliation and, if that fails, to proceed with arbitration.
Separately, Section 11 of the Arbitration Act deals with the appointment of arbitrators by the courts when parties are unable to do so themselves. In particular, Section 11(6)(c) permits court intervention when a person or institution, entrusted with such an appointment function, fails to act under that procedure.
Judicial viewpoints: When can courts step in?
In Microvision Technologies (P) Ltd. v. Union of India, 2023 SCC OnLine Bom 1848, the Bombay High Court held that judicial intervention under Section 11 of the Arbitration Act is permissible when the MSEFC fails to act as required under Section 18(3) of the MSMED Act. The Court observed that Section 11(6)(c) of the Arbitration Act serves as a built-in mechanism for the appointment of an arbitrator in cases where the MSEFC does not refer the dispute to arbitration.
Building on this precedent, the Delhi High Court in Vallabh Corporation v. SMS India (P) Ltd., 2025 SCC OnLine Del 1795, affirmed that if the MSEFC does not act under Section 18, the aggrieved party is entitled to approach the court under Section 11 for the appointment of an arbitrator. In this case, the MSE had approached the MSEFC, seeking initiation of mediation under Section 18 of the MSMED Act. However, the MSEFC failed to respond or take any further action. As a result, the MSE filed an application under Section 11 seeking appointment of an arbitrator. The Court allowed the application, holding that where the MSEFC fails to act, judicial intervention is justified, and the arbitration proceedings so initiated would remain governed by the substantive provisions of the MSMED Act.
However, both these rulings were based on cases where an independent arbitration agreement existed between the parties.
A different approach was adopted by the Bombay High Court in Bafna Udyog v. Micro & Small Enterprises and Another, 2024 SCC OnLine Bom 110, where there was no separate arbitration agreement between the parties. The Court ruled that Section 11(6) of the Arbitration Act cannot be invoked in such cases. The Court held that the provisions of the Arbitration Act apply only when the MSEFC or its designate enter into reference under Section 18(3) of MSMED Act. Further, Section 11(6)(c) empowers the court to appoint an arbitrator when a person or institution fails to discharge a function assigned to it ‘under that procedure.’ The phrase ‘under that procedure’ refers to a procedure mutually agreed upon by the parties. This is evident from the opening language of the provision: ‘(6) Where, under an appointment procedure agreed upon by the parties...’. The term ‘agreed’ clearly points to the existence of an arbitration agreement, as defined under Section 7 of the Arbitration Act. Accordingly, in the absence of such an agreement, the conditions required to invoke Section 11(6)(c) are not satisfied, and the court cannot assume jurisdiction under this provision.
This view was echoed by the Delhi High Court in Shobhana Gupta v. Atlas Cycles Haryana, 2023 SCC OnLine Del 1473, which affirmed that the existence of an arbitration agreement is a prerequisite for invoking Section 11. The Court held that the legal fiction created under Section 18(3) — which treats the existence of an arbitration agreement as presumed — is triggered only after arbitration proceedings are initiated by the MSEFC and not before.
Authors’ comments
While the MSMED Act provides an important statutory framework for resolving disputes, its effectiveness is compromised when the MSEFC delays or fails to act. Courts allow MSEs to use Section 11 of the Arbitration Act if there is an independent arbitration agreement. However, without such a clause, Section 11 cannot be used, and arbitration under Section 18 of the MSMED Act can only start once the MSEFC takes formal action.
The appropriate recourse in such situations is to file a writ petition under Article 226 of the Constitution before the High Courts, seeking a direction to the MSEFC to fulfil its mandatory statutory duty and initiate arbitration — this would compromise consistency in references to arbitrations and timelines and lead to increased costs, until the decisions of Bafna Udyog and Shobhana Gupta are revisited or overcome by legislative fiat.
Thus, it is important for MSEs to incorporate a clear arbitration clause in their contracts, which will enable them to directly approach the court to appoint an arbitrator in case of delays or inaction by the MSEFC.
[The authors are Associate Partner and Principal Associate, respectively, in Commercial Dispute practice at Lakshmikumaran & Sridharan Attorneys]
