India: An Interplay Between MSME-D Act And Arbitration Act

Arbitration is undoubtedly the most popular mode of dispute resolution in the 21^st century. With increasing cross-border transactions, numerous parties are opting to adjudicate their disputes through an arbitral tribunal instead of the time-consuming traditional route of approaching courts. Party autonomy is the ethos of arbitration, which makes it the most attractive alternate dispute resolution mechanism.

In India conciliation and arbitration is governed by the Arbitration and Conciliation Act, 1996 (Arbitration Act). Since its enactment in 1996, the Arbitration Act has undergone several amendments, with the end goal of making India a global hub of arbitration. Despite such amendments, there exists one tenet of arbitration which remains unchanged under the Arbitration Act - the existence of an arbitration agreement between the parties to submit their disputes to arbitration.

In a country like India with a burgeoning population, the micro, small and medium enterprises (MSME) sector contribute significantly to its economic evolution. Ten years after the enactment of the Arbitration Act, with the aim of facilitating the promotion, development and enhancement of competitiveness inter se between micro, small and medium enterprises, the Parliament of India enacted the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The MSMED Act classifies enterprises as micro, small or medium based on their investment in plant and machinery or equipment.

Intriguingly, while the MSMED Act is promulgated for the development and promotion of micro, small and medium enterprises, it restricts the mechanism for recovery of "delayed payments"¹ solely to those supplier entities who fall within the category of "micro" and "small" enterprises. The MSMED Act also specifically imposes a liability on the buyer to pay for the goods supplied or services rendered by a micro and small enterprise. In the event of any delay or failure to make such payment, the MSMED Act permits the micro and small enterprise to refer 'disputes' pertaining to the "amount due"² to the adjudicating authority contemplated constituted under the Act – The Micro and Small Enterprises Facilitation Council (MSEFC).³

Upon reference of a dispute by a supplier pertaining to any "amount due" to the MSEFC, Section 18 of the MSMED Act inter alia mandates that – (i) the MSEFC shall either itself conduct conciliation or seek assistance of any institution or centre providing alternate dispute resolution services as if the conciliation was initiated under Part III of the Arbitration Act⁴; and (ii) where the conciliation has been unsuccessful, the MSEFC shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of the Arbitration Act.⁵

Effectively, the MSMED Act has put the MSEFC at par with an arbitral tribunal and has made the entire Arbitration Act applicable to any disputes which arise on account of outstanding dues to be recovered by a micro and small enterprise. A twofold question thus arises – (i) does the MSMED Act override the provisions of an arbitration agreement already executed between the parties? and (ii) in the absence of an arbitration agreement between the parties, can a statutory provision under Section 18 of the MSME-D Act compel a party to resolve the disputes through the Arbitration Act?

Additionally, there are fundamental differences under the Arbitration Act and the MSME-D Act.⁶ First, the MSEFC constituted under the MSME-D Act is mandatorily required to attempt to conciliate the disputes between the parties prior to initiation of arbitration proceedings. This is not the requirement under the Arbitration Act. Second, in the event of the failure or termination of the conciliation proceedings under the MSME-D Act, the MSEFC or any institution or centre so identified by it must proceed with arbitration contemplated under Section 18(3) of the MSME-D Act. Contrary to this, the Arbitration Act allows adjudication of disputes by an arbitral tribunal agreed between by the parties. Third, in order to challenge the award passed in favour of the supplier under the MSME-D Act, it is mandatory for the buyer to pre-deposit 75% of the amount so awarded. There is no such analogous provision under the Arbitration Act.

Acknowledging the possibility of such potential conflicts or discrepancies between the provisions of the Arbitration Act and the MSMED Act, the MSMED Act itself stipulates that the "provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."⁷ In other words, in the event, Section 18 of the MSME-D Act contains a particular procedure for an arbitration, the said provisions override and take precedence over those stipulated under the Arbitration Act.

Until recently, divergent views had been adopted by the Indian High Courts which further led to the contested issue of maintainability of an arbitration clause as against the MSME-D Act.⁸ While some High Courts in India held that the provisions of the MSME-D Act would prevail over the arbitration clause, others differed by restraining the MSEFC from proceeding with arbitration under the MSEFC Act giving priority to the pre-existing arbitration agreement between the parties.

Till date, the Supreme Court of India has had only two occasions to deal with what appears to be a burning question of law. In the case of Principal Chief Engineer v. Manibhai & Bros (Sleeper),⁹ the Supreme Court of India held that despite the existence of an arbitration clause, an entity protected under the MSME-D Act can nevertheless invoke provisions of the MSME-D Act. More recently, in M/s. Silpi Industries, etc. v. Kerala State Road Transport Corporation & Anr. etc.,¹⁰ the Supreme Court of India was presented with yet another opportunity to address this conundrum, albeit in the context of ascertaining whether a buyer could be permitted to file its counterclaims in the absence of any such provision under the MSME-D Act. In this case, the Supreme Court of India held that even in cases where there is no arbitration agreement between the parties, if a supplier who is covered under the MSME-D Act approaches the MSEFC for resolution of dispute, the parties would be bound by the provisions under the MSME-D Act. The Supreme Court noted that even in instances where a specific arbitration agreement exists the same ought not to be considered, thereby paving way for the precedence of the MSME-D Act.

It appears that the underlying premise for such reasoning primarily lies in the statutory provision contained under Section 24 of the MSME-D Act which gives an overriding effect over any other inconsistent or conflicting legal provision. In addition to this, the Supreme Court of India has also regarded the MSME-D Act as a special statute intended to benefit the micro, small and medium enterprises covered under the MSME-D Act. In keeping with the Supreme Court of India's decision,¹¹ a special statute (which is also a beneficial one) must be preferred over a general one.

Statutes are enacted for specific purposes. Each statute then has its own objects and reasons. Taking measures to constructively work towards the same is crucial. Inconsistency or any conflicts between statutes may defeat the very reasons for their enactment. As can be seen from the above, and specifically in light of the Supreme Court of India's decisions, the effective realisation of the MSME-D Act and the inconsistencies between the MSME-D Act and Arbitration Act can be resolved by giving precedence to a special statute over a general one. This will facilitate the elimination of any probable conflict(s) arising between the two statutes. Since the MSME-D Act is a special beneficial statute, as opposed to the Arbitration Act, which is generic in nature, any inconsistency between the two should be resolved harmoniously by usually by applying the principles of purposive construction and allowing the provisions of the special law to prevail. This will reduce ambiguities, unnecessary conflicts, and delays in justice delivery mechanism specifically for micro and small enterprises.

Footnotes

1. Chapter V, MSMED Act.

2. Section 18(1) of the MSEMD Act.

3. Section 18 of the MSMED Act.

4. Section 18(2) of the MSMED Act.

5. Section 18(3) of the MSMED Act.

6. M/s. Silpi Industries, etc. v. Kerala State Road Transport Corporation & Anr. etc., (2021) SCC OnLine SC 439, ¶ 23.

7. Section 24, MSMED Act.

8. Steel Authority of India and Anr v. MSEFC, (2010 SCC Online Bom 2208); Bharat Heavy Electricals Limited v State of U.P. (2014 SCC Online All 2895); The Chief Administrator Officer, COFMOW v MSEFC of Haryana (CWP 277/2015 High Court of Punjab & Haryana); Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers), (2016 SCC Online Guj 10012), Ge T&D India Limited v Reliable Engineering Projects (Delhi High Court, (OMP (Comm) 76/2016); Bharat Heavy Electricals Limited v The Micro and Small Enterprises Facilitation Centre (2017 SCC Online Del 10604);

9. Order dated July 5, 2017 in Diary No(s).16845/2017, Supreme Court of India.

10. Supra note 6.

11. Edukanti Kistamma (Dead) through LRs v. S. Venkatareddy (Dead) through LRs and Ors, (2010) 1 SCC 756.

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