Failure to transition from conciliation to arbitration under MSMED Act Section 18 renders resultant award a nullity.

The Appellant (WAPCOS), a Government of India undertaking, awarded five work orders to the Respondent (Virgo Aqua) for consultancy services.

Alleging non-payment, the Respondent invoked Section 18 of the MSMED Act, 2006, before the Facilitation Council, Kerala.

The Council passed an ex-parte award on 02.12.2022, directing a payment of approx. ₹48.64 crores plus compound interest.

WAPCOS challenged this under Section 34 of the Arbitration Act. The Single Judge directed a pre-deposit of 75% of the awarded amount as per Section 19 of the MSMED Act.

Upon WAPCOS's failure to deposit the full amount (including interest), the Section 34 petition was dismissed on 22.08.2024.

WAPCOS appealed, contending the award was a nullity due to procedural violations of Section 18 and principles of natural justice.

The court applied Section 37(1)(c) of the Arbitration and Conciliation Act, 1996, regarding appealable orders.

It relied on Chintels India Ltd. v. Bhayana Builders Pvt. Ltd. to establish that orders attaining finality for the award are appealable.

Regarding the MSMED Act, it applied Section 18, which mandates conciliation before arbitration, and Section 19 regarding the 75% pre-deposit.

The court followed Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan, which holds that an award passed in violation of Section 18 is a nullity and the Section 34 remedy (or pre-deposit) should not bar relief in such cases.

It also applied the principles of natural justice and Section 34(2) of the Arbitration Act concerning the right to be heard.

The Court first held the appeal maintainable, reasoning that the dismissal of the Section 34 petition attached finality to the award, leaving no other remedy.

On the merits of the nullity plea, the Court examined the Council's record and found no evidence that WAPCOS was served notice for the conciliation proceedings before the DLSA.

It observed that the Council failed to record a formal termination of conciliation or a commencement of arbitration, which is a jurisdictional prerequisite under Section 18.

The Court noted that the Council proceeded ex-parte with "undue haste" following a High Court of Kerala direction passed without notice to WAPCOS.

Crucially, the Court held that while Section 19 is mandatory, it presupposes a valid award; where an award is a patent nullity (violating statutory sequence and natural justice), the court can examine the challenge, especially when the party shows bona fides by depositing 75% of the principal amount (₹36 crores).

The award was held to be a nullity for non-compliance with the mandatory procedure under Sections 18(2) and 18(3) of the MSMED Act and violation of natural justice.

The matter was remitted to the Facilitation Council for fresh adjudication on merits under Section 18(3), with the deposited ₹36 crores remaining with the Registry.