MSME Council ordered payment on first date — no arbitration, no conciliation. Supreme Court: nullity.

The Council summoned him. He didn't show up. On the very first date, it ordered him to pay ₹1.66 crore — without a single conciliation or arbitration hearing.

That order, the Supreme Court would later rule, was not an arbitral award. It was a nullity. A legal nothing.

Jharkhand Urja Vikas Nigam Limited had a contract with Anamika Conductors Ltd., a Jaipur-based supplier of ACSR Zebra Conductors (heavy-duty cables for power transmission). The supplier claimed unpaid bills. It approached the Rajasthan MSME Facilitation Council — a body created by the Micro, Small and Medium Enterprises Development Act, 2006 to help small businesses recover dues quickly.

The Council sent notices. The paper felt thin, official — a summons that demanded presence. Jharkhand Urja did not appear. On the first date, the Council's room held the silence of an empty chair. On that day — August 6, 2012 — the Council passed an order directing full payment of ₹78.74 lakh as principal and ₹91.59 lakh as interest. Total: over ₹1.66 crore. A single-page order, crisp and final.

No conciliation meeting. No arbitration hearing. No evidence recorded. Just an order.

When the supplier got paid — and then wanted more

Jharkhand Urja Vikas Nigam Limited (the successor to Jharkhand State Electricity Board) had contracted with Anamika Conductors for the supply of conductors. The supplier claimed it had delivered the goods but was not paid in full. It approached the Rajasthan MSME Facilitation Council in Jaipur under Section 18 of the MSMED Act (the provision that allows small enterprises to refer payment disputes to a council for conciliation and, if needed, arbitration).

The Council issued summons. Jharkhand Urja did not appear. On the first date, the Council passed an ex parte order (a decision made by hearing only one side because the other side did not show up) directing payment of the full claimed amount.

Then came the strange turn. After the order was passed, Jharkhand Urja verified its records — a stack of old invoices, each one a claim against the company — and paid ₹63.43 lakh to Anamika Conductors. The supplier accepted this payment — no protest, no legal challenge.

But Anamika Conductors then tried to execute the Council's order (enforce it through court proceedings) in Ranchi, Jharkhand. A civil judge dismissed that attempt for lack of territorial jurisdiction — the order was passed in Rajasthan, so enforcement had to happen there. The dismissal was simple, a brief order citing the wrong forum.

Meanwhile, Jharkhand Urja challenged the Council's order before the Rajasthan High Court. A single judge dismissed the writ petition. A Division Bench confirmed that dismissal on December 11, 2017. The company appealed to the Supreme Court.

What the MSMED Act actually requires

The core of the dispute was simple: what procedure must the Facilitation Council follow before it can order payment?

Section 18 of the MSMED Act lays out a clear two-step process. First, the Council must attempt conciliation (a facilitated negotiation where a neutral third party helps the sides reach a settlement). This conciliation is governed by Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 — the same rules that apply to any conciliation proceeding in India.

If conciliation fails — meaning the parties cannot agree on a settlement — only then does the second step begin. The Council must move to arbitration (a formal adjudication where the arbitrator hears evidence and passes a binding decision). At this stage, the remaining provisions of the Arbitration and Conciliation Act kick in: Section 20 (place of arbitration), Section 23 (filing of statements of claim and defence), Section 24 (hearings and written proceedings), Section 25 (consequences of a party's default).

The Rajasthan MSME Facilitation Council did none of this. It clubbed conciliation and arbitration into a single proceeding. It passed a determinative order on the first date. It never gave Jharkhand Urja an opportunity to present its case.

Why the Supreme Court called it a nullity

The bench — Justice R. Subhash Reddy and Justice Indira Banerjee — examined the Council's order and found it fundamentally flawed.

Under Section 18(3) of the MSMED Act, the Council can only proceed to arbitration after conciliation has failed. The two stages cannot be merged. The Council cannot skip conciliation and jump straight to a determinative order.

The court held that the Council's order was passed "without initiating arbitration proceedings in accordance with the Arbitration and Conciliation Act, 1996." It was, the court said, "a nullity and not an arbitral award in the eye of law."

This had an important consequence. Normally, if a party receives an arbitral award it disagrees with, it must challenge that award under Section 34 of the Arbitration and Conciliation Act (the provision that allows a court to set aside an award on limited grounds like fraud, bias, or violation of natural justice). Failure to do so within the prescribed time usually bars any further challenge.

But the Supreme Court said Section 34 did not apply here. When an order is passed "without recourse to arbitration and in utter disregard of the provisions of the Arbitration and Conciliation Act, 1996," the party's failure to challenge under Section 34 does not prevent judicial review. You cannot be expected to challenge a nullity through a procedure designed for valid awards.

The court cited its earlier decision in Rajkumar Shivhare v. Asst. Director, Directorate of Enforcement & Anr. — (2010) 4 SCC 772 — for the principle that an order passed without jurisdiction is a nullity and can be challenged at any stage. In that case, the court had examined a similar jurisdictional overreach, reinforcing that procedural mandates are not optional. Here, the Council's failure to follow the two-stage process was not a minor error — it was a fundamental defect that stripped the order of any legal force.

What the court ordered

The Supreme Court allowed Jharkhand Urja's appeal. It set aside the Rajasthan High Court's judgment and quashed the Council's order of August 6, 2012.

But the court did not end the dispute there. It granted the Council liberty to take up the matter afresh — either conduct a proper arbitration itself or refer the dispute to an Alternative Dispute Resolution (ADR) institution — following the Arbitration and Conciliation Act, 1996 from start to finish. The merits of Anamika Conductors' claim were left entirely open for the arbitral tribunal to decide.

The slate was wiped clean. The Council had to begin again, properly this time.

THE PLAY: If you receive an adverse order from an MSME Facilitation Council that was passed without conciliation or arbitration, challenge it directly — do not assume Section 34 of the Arbitration Act is your only remedy, because an order passed in violation of the mandatory two-stage process is not an arbitral award at all.

When speed becomes a trap

The MSMED Act was designed for a noble purpose: to help small businesses recover dues quickly without getting trapped in years of litigation. The Facilitation Council is supposed to be a fast, efficient forum. But speed cannot come at the cost of procedure.

The Rajasthan Council's mistake was understandable — it wanted to resolve the dispute in one hearing. But the law requires two distinct stages: first conciliation, then arbitration. Skipping the first stage and passing an order on the first date is not efficiency. It is a jurisdictional error that makes the entire proceeding void.

For MSME suppliers, the lesson is clear: the Council's power to order payment exists only if it follows the correct process. For buyers who receive a Council notice, the lesson is equally clear: ignoring the summons does not make the problem go away — but if the Council bypasses the mandatory procedure, the resulting order may be challengeable even years later.

The Council must now start over. Anamika Conductors must prove its claim again. Jharkhand Urja must defend itself again. And the entire process — conciliation first, then arbitration — must run its course from the beginning.