Court Finds Non-Compliance with Mandatory Conciliation Proceedings Under MSMED Act, Declares Award Null and Void
In a significant judgment, the Madhya Pradesh High Court has set aside an arbitration award issued by the Madhya Pradesh Micro and Small Enterprises Facilitation Council, finding that the council failed to comply with mandatory conciliation proceedings as required under the Micro, Small and Medium Enterprises (Development) Act, 2006 (MSMED Act). The decision was made in the case titled "Aurionpro Solutions Ltd. v. Madhya Pradesh Micro and Small Enterprises Facilitation Council."
The bench, comprising Chief Justice Sanjeev Sachdeva and Justice Vinay Saraf, delivered the judgment on May 22, 2026, in response to a writ petition filed under Article 226 of the Constitution of India by Aurionpro Solutions Ltd. The petitioner challenged the council's award, issued under Section 18(3) of the MSMED Act, which directed them to pay Rs. 4,56,18,888/- along with interest to respondent Hypersthene IT Solutions Pvt. Ltd.
The case originated from a dispute related to a contract for maintaining and upgrading a Safe City System for the M.P. Police Department. The petitioner had entered into a back-to-back agreement with the respondent, Hypersthene IT Solutions, who later claimed unpaid invoices despite a settlement agreement being in place.
Key to the court's decision was the council's failure to conduct conciliation proceedings as mandated by Section 18(2) of the MSMED Act. The court emphasized that the council neither conducted conciliation itself nor referred the matter to any institution for alternative dispute resolution. The judgment noted that the council merely directed the parties to attempt a settlement on their own, without fulfilling the statutory requirements of conciliation.
The court underscored that conciliation is a prerequisite before proceeding to arbitration under the MSMED Act. The absence of properly conducted conciliation renders any subsequent arbitration award null and void. The High Court's ruling highlighted that the council's actions violated principles of natural justice and the statutory mandate, thereby justifying the setting aside of the award.
The judgment also addressed the maintainability of the writ petition despite the availability of alternative remedies under Section 34 of the Arbitration & Conciliation Act, 1996. It was held that a writ petition is maintainable when proceedings suffer from jurisdictional defects or violate natural justice principles.
Ultimately, the court decided against remitting the matter back to the council for fresh conciliation, given that the parties had already acted upon their settlement agreement to a significant extent. Instead, the court directed the petitioner to pay interest on certain amounts due under the settlement agreement, thereby providing a final resolution to the dispute.
Bottom line:-
Micro, Small and Medium Enterprises (Development) Act, 2006 - MSE Facilitation Council must conduct conciliation proceedings as mandated by Section 18(2) of MSMED Act before initiating arbitration under Section 18(3). Failure to comply renders the arbitration proceedings and award null and void.
Statutory provision(s): Micro, Small and Medium Enterprises (Development) Act, 2006 - Sections 18(2), 18(3); Arbitration & Conciliation Act, 1996 - Sections 65 to 81, Section 34; Constitution of India, Article 226
