Q- conciliation under micro, small and medium enterprises

development act 2006.

1. Introduction
With the increasing burden on Civil Courts, the Legislature has, under
various statutes, provided that disputing parties first undergo mandatory
conciliation or mediation processes prior to initiating arbitration or
approaching Civil Courts. The effect of such provisions is that they act as
a mandatory pre-cursor to initiation of arbitration or court proceedings.
The intent behind these provisions is to reduce the burden on the Civil
Courts by filtering out disputes that can be resolved through conciliation
or mediation.
The Micro, Small and Medium Enterprises Development Act, 2006
(MSMED Act, 2006) was enacted to promote, facilitate, and enhance
the competitiveness of micro, small, and medium enterprises (MSMEs).
One of the significant aspects of this Act is the mechanism for resolving
disputes concerning delayed payments to MSMEs through conciliation
and arbitration, as provided under Section 18.
Conciliation serves as a preliminary step towards dispute resolution
before arbitration, ensuring that conflicts are resolved amicably, reducing
litigation costs and time. It provides MSMEs with an accessible and
structured approach to recovering dues without resorting to protracted
legal battles. Given the financial constraints that many small enterprises
face, conciliation plays a pivotal role in sustaining their business
operations and ensuring economic stability.
2. Importance of Conciliation in MSME Disputes
Conciliation is an effective dispute resolution mechanism that helps
MSMEs recover their dues without engaging in lengthy litigation. It
provides a structured process where a neutral third party facilitates
dialogue between disputing parties, fostering an environment conducive
to settlement. Unlike traditional court proceedings, which can be
expensive and time-consuming, conciliation offers a cost-effective and
efficient alternative.
Key Benefits:
 Cost-effective: Saves MSMEs from expensive court proceedings
and legal fees, making it an affordable alternative for small
businesses with limited financial resources.
 Time-efficient: Aims to settle disputes within 90 days, allowing
businesses to focus on growth rather than prolonged legal battles.
 This quick resolution ensures that cash flow remains uninterrupted
and operational efficiency is maintained.
 Preserves Business Relations: Encourages amicable solutions,
ensuring continued business relations between suppliers and buyers.
Unlike adversarial litigation, conciliation fosters mutual
understanding and cooperation, which is crucial for sustaining long-
term business partnerships.
 Binding Nature: If an agreement is reached, it becomes legally
enforceable, providing certainty in commercial transactions. This
legal backing offers MSMEs security and confidence in seeking
redress without fear of non-compliance from the other party.
 Flexibility: Unlike rigid legal proceedings, conciliation allows for
creative solutions tailored to the needs of both parties. The process
can accommodate unique payment structures, renegotiated terms,
and customized agreements that align with business realities.
 Confidentiality: Conciliation proceedings are private, ensuring that
business-sensitive information remains undisclosed. This aspect is
particularly beneficial for MSMEs that wish to avoid reputational risks
associated with open litigation.
 Reduced Stress and Complexity: Compared to formal litigation,
which involves lengthy legal procedures, documentation, and
compliance burdens, conciliation offers a simplified, business-
friendly approach.
 Encourages Compliance: Since conciliation results from voluntary
negotiations, compliance rates with the agreed terms are generally
higher than imposed judicial decisions.
 Boosts Investor Confidence: A structured conciliation mechanism
under the MSMED Act provides reassurance to investors and lenders
that disputes can be efficiently resolved, making MSMEs more
attractive for financial support.
3. MSMED Act, 2006 and Delayed Payment Provisions
The MSMED Act, 2006, aims to protect MSMEs from financial distress
caused by delayed payments by mandating timely payments from buyers
and prescribing stringent penalties for non-compliance. Sections 15 to 18
of the Act lay down clear legal provisions regarding payment obligations,
penal interest, and the dispute resolution process through the Micro and
Small Enterprises Facilitation Council (MSEFC).
Liability of Buyer to Make Payment (Section 15)
  Every buyer is legally bound to make payments for goods or services
procured from MSMEs within the agreed period.
 If no agreement exists, the payment must be made within 45 days
from the date of acceptance or deemed acceptance of goods or
services.
 The agreed credit period cannot extend beyond 45 days.
Penal Interest on Delayed Payment (Section 16)
 If the buyer fails to make the payment within the stipulated period,
they must pay compound interest with monthly rests.
 The penal interest rate is three times the bank rate notified by the
Reserve Bank of India.
 The interest accrues automatically from the due date or 15 days
post-acceptance, whichever is earlier.
Legal Recourse for MSMEs in Case of Delay (Section 17-18)
 The MSME supplier can file a claim before the MSEFC for recovery of
the due amount along with interest.
 The MSEFC initiates conciliation proceedings under Section 18(2)
before referring the dispute to arbitration if no settlement is
reached.
 The arbitral award is final and binding, and it can be enforced as a
decree of the court.
 No appeal against the arbitral award is allowed unless 75% of the
awarded amount is deposited by the buyer.
By incorporating stringent penalties and an effective dispute resolution
framework, the MSMED Act ensures timely payments to MSMEs, enabling
their financial sustainability and reducing dependency on litigation.
4. Statutory Provisions Related to Conciliation
Section 18. Reference to Micro and small Enterprises Facilitation
Council.
(1) Notwithstanding anything contained in any other law for the time
being in force, any party to a dispute may, with regard to any amount due
under section 17, make a reference to the Micro and Small Enterprises
Facilitation Council.
(2) On receipt of a reference under sub-section (1), the Council shall
either itself conduct conciliation in the matter or seek the assistance of
any institution or centre providing alternate dispute resolution services by
making a reference to such an institution or centre, for conducting
conciliation and the provisions of sections 65 to 81 of the Arbitration and
Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the
conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful
and stands terminated without any settlement between the parties, the
Council shall either itself take up the dispute for arbitration or refer
ittoany institution or centre providing alternate dispute resolution services
for such arbitration and the provisions of the Arbitration and Conciliation
Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration
was in pursuance of an arbitration agreement referred to in sub-
section(1) of section 7 of that Act.
(4) Notwithstanding anything contained in any other law for the time
being in force, the Micro and Small Enterprises Facilitation Council or the
centre providing alternate dispute resolution services shall have
jurisdiction to act as an Arbitrator or Conciliator under this section in a
dispute between the supplier located within its jurisdiction and a buyer
located anywhere in India.
(5) Every reference made under this section shall be decided within a
period of ninety days from the date of making such a reference.
From above definition it has following aspect:
1. Reference by MSME: Any MSME can refer a dispute regarding
delayed payments to the MSEFC under Section 18(1).
2. Conciliation Process: The Council initiates conciliation either by
itself or through a recognized institution under the Arbitration and
Conciliation Act, 1996 (Section 18(2)).
3. Failure of Conciliation: If conciliation fails, the Council proceeds
with arbitration (Section 18(3)).
4. Enforceability: Any arbitral award is enforceable as a court order
(Section 18(4)).
5. Timeframe: The entire process must be completed within 90 days
(Section 18(5)).
These provisions ensure that MSMEs have a structured path for
recovering unpaid dues while safeguarding their financial health.
5. Judicial Precedents on Section 18:
Silpi Industries v. Kerala State Road Transport Corporation (2021
SCC OnLine SC 439)
Background:
The case of Silpi Industries v. Kerala State Road Transport
Corporation (KSRTC) revolved around the issue of whether a buyer
(KSRTC) could bypass the mandatory dispute resolution mechanism under
the MSMED Act, 2006, which requires conciliation and arbitration before
litigation.
Key Issues:
1. Applicability of the MSMED Act – Whether the provisions of the
MSMED Act override other contractual agreements between parties.
2. Mandatory Nature of Conciliation and Arbitration – Whether
buyers can directly challenge claims in court instead of following the
conciliation and arbitration process under Section 18.
3. Binding Nature of Arbitration Awards – Whether the arbitration
award under the MSMED Act can be directly enforced as a decree of
the court.
Supreme Court’s Observations & Ruling:
1. No Bypassing of MSME Conciliation & Arbitration Mechanism
o The Supreme Court held that the provisions of the MSMED Act
are mandatory, and any dispute regarding payments to
MSMEs must first undergo conciliation under Section 18. If
conciliation fails, the matter proceeds to arbitration.
o Buyers cannot bypass this statutory framework and directly
approach the courts, as the Act is aimed at protecting MSMEs
from financial distress caused by delayed payments.
2. MSMED Act Overrides Contractual Agreements
o The Court ruled that even if the parties have a pre-existing
arbitration clause in their contract, the MSMED Act
prevails over such agreements.
o This is because the Act is a special legislation intended to
promote and protect MSMEs, ensuring they receive payments
on time.
3. Finality and Enforceability of Arbitration Awards
o The Supreme Court emphasized that arbitration awards granted
under the MSMED Act are binding and can be enforced as a
decree of the court.
 o A buyer challenging the award must deposit 75% of the
awarded amount before filing an appeal, reinforcing the Act’s
intent to ensure MSMEs receive their dues promptly.
Legal Precedents Cited:
 Gujarat State Civil Supplies Corporation Ltd. v. Mahakali
Foods Pvt. Ltd. (2022 SCC OnLine SC 1492) – Affirmed that the
MSMED Act has overriding effect on other contractual arrangements.
 Sundaram Finance Ltd. v. NEPC India Ltd. (1999) 2 SCC 479 –
Emphasized that arbitration, once initiated, must be honored and
enforced.
Significance of the Judgment:
 Strengthened MSME protection by preventing buyers from
delaying payments through court proceedings.
 Confirmed that conciliation and arbitration under Section 18 of
the MSMED Act are mandatory, ensuring a structured and
time-bound dispute resolution.
 Ensured that arbitration awards are not easily challengeable,
maintaining the integrity of MSME dispute resolution
mechanisms.
This judgment serves as a landmark ruling for MSMEs, reinforcing their
right to timely payments and efficient dispute resolution
6. Composition of MSEFC
The Micro & Small Enterprises Facilitation Council (MSEFC),
established under Section 20 of the MSMED Act, 2006, plays a pivotal
role in ensuring timely dispute resolution for MSMEs facing delayed
payments. The MSEFC operates at the state level and is responsible for
overseeing conciliation and arbitration proceedings related to such
disputes.
The MSMED Act of 2006 requires the state government to establish Micro
and Small Enterprise Facilitation Councils. This is how the State
Government must define the Council’s jurisdiction. The Council has the
jurisdiction to settle disputes between suppliers and buyers from all over
India within their territory (as determined by the State Government).
The Council can have a minimum of 3 and a maximum of 5 members,
appointed from amongst the following categories:
Chairman- Director of Industries, or any other officer not below the rank
of such Director, who is having administrative control of small-scale
industries
Members-
1- One or more persons with expertise in the field of industry, commerce
finance, trade or law
2- One or more office- bearers or representatives of associations of micro
and small industries
3- One or more representatives from banks and financial institutions
involved in lending to micro, small or medium enterprises
7. Detailed Procedure for Conciliation under Section 18
The conciliation process under Section 18 of the MSMED Act, 2006,
provides a structured mechanism for resolving disputes related to
delayed payments to MSMEs. The process is designed to be swift, cost-
effective, and business-friendly, avoiding lengthy litigation.
Step 1: Filing of Complaint
 The MSME (supplier) submits a formal complaint to the Micro &
Small Enterprises Facilitation Council (MSEFC) of the
respective state.
 The complaint must contain essential documents, such as:
o Invoice copies with due payment details.
o Purchase orders and agreements (if available).
o Correspondence regarding payment reminders sent to the
buyer.
o Bank statements reflecting non-payment.
 The Council verifies the authenticity of the complaint and ensures
that the MSME is eligible under the MSMED Act.
 A reference number is assigned, and both parties (supplier and
buyer) are notified.
Step 2: Initiation of Conciliation Proceedings
 Upon registration, the MSEFC sends a formal notice to the buyer,
requesting their response within a stipulated period.
 If the buyer acknowledges the claim, conciliation is scheduled for an
amicable resolution.
  If the buyer contests the claim, additional documentation may be
sought for verification.
 A neutral conciliator is appointed by the MSEFC to facilitate
discussions.
Step 3: Conducting Conciliation Sessions
 The conciliator organizes meetings, ensuring both parties have equal
opportunities to present their case.
 Discussions focus on:
o Reviewing outstanding payment details.
o Assessing reasons for non-payment or disputes regarding the
amount.
o Exploring possible settlements, such as staggered payments,
partial payments, or revised agreements.
 The conciliator actively encourages a voluntary settlement, avoiding
unnecessary arbitration.
Step 4: Drafting and Signing of Settlement Agreement
 If both parties reach a mutually acceptable resolution, a
Conciliation Settlement Agreement is drafted.
 The agreement specifies:
o The final settlement amount.
o Mode and timeline of payment.
o Any additional terms agreed upon.
 Both parties sign the agreement, making it legally binding.
 The MSEFC ensures that the buyer complies with the agreed terms
within the prescribed timeframe.
Step 5: Monitoring and Compliance
 The MSEFC monitors the implementation of the conciliation
agreement to ensure adherence.
 If the buyer defaults on the settlement, the MSME can seek
enforcement through the Council.
 The agreement can be enforced as a decree of a civil court,
ensuring legal protection for the MSME.
Step 6: Transition to Arbitration (If Conciliation Fails)
  If conciliation fails, the MSEFC refers the case to arbitration under
Section 18(3) of the MSMED Act.
 The arbitration proceedings are conducted under the Arbitration
and Conciliation Act, 1996.
 The arbitral award is legally binding and can be enforced like a court
decree.
Timeframe for Conciliation
 The entire conciliation process should ideally be completed within
90 days from the date of filing the complaint.
 This timeline ensures speedy dispute resolution, preventing
undue financial hardship for MSMEs.

Conclusion
Conciliation under the MSMED Act, 2006, plays a critical role in resolving
disputes related to delayed payments to MSMEs. By providing a
structured, time-bound, and cost-effective resolution mechanism, the Act
ensures that MSMEs can recover their dues without engaging in lengthy
legal proceedings. The involvement of the MSEFC in conciliation and
arbitration offers MSMEs an accessible legal framework that safeguards
their financial interests while promoting a business-friendly dispute
resolution process.