Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act") was legislated, inter alia, with an object to facilitate promotion, development and enhancement of competitiveness of micro, small and medium enterprises. At the time of its enactment, the legislatures were cognizant of the fact that except for the provisions under Sections 11B and 29B of the Industries (Development and Regulation) Act, 1951 and the notification(s) issued, pursuant thereto in relation to small scale industries, there was1, "no legal framework for this dynamic and vibrant sector of the country's economy." Simultaneously, while appreciating the worldwide transition from "industries" to "enterprises" based model of operation; requirement for extension of policy support for small enterprises; absence of any definition for medium industry or enterprise; etc., the law makers felt an imminent need for the enactment of a comprehensive legislation to address these concerns. Accordingly, MSMED Act was brought into force, inter alia, to provide for the classification2 of micro, small and medium enterprises; empowerment Central Government to notify programmes, guidelines or instructions for facilitating the promotion, development3 and enhancement of competitiveness of small and medium enterprises; ensure timely and smooth flow of credit to small and medium enterprises, etc. Significantly, one of the startling features of MSMED Act is the existence of explicit provisions under Section 15 thereof, prescribing a specific time schedule4 for the compliance of payment obligation by buyer5 towards a supplier6 of goods and services; failure of which may entail an enhanced liability in the form of compound interest/ interest, as enunciated under Section 16 of the said enactment. Simultaneously, MSMED Act delineates an ingenious method for expeditious resolution of disputes between a buyer and supplier by means of mandatory conciliation, followed by arbitration; in the event of parties' failure to resolve their disputes by mutual discussions. Notably, though, the provisions dealing with dispute resolution mechanism under the MSMED Act are quite explicit, however, certain incertitude frequently emanate, inter alia, in relation to the invocation, scope, manner and form, etc., of arbitration, as envisaged therein. Fortunately, Courts have been extremely proactive in expediently identifying these concerns and providing authoritative verdicts thereupon.
Remarkably, Section 17 of the MSMED Act iterates a significant obligation of buyer, that is, to "pay the amount with interest thereon as provided under Section 16" against the goods supplied or services rendered by any supplier. However, in the event of non-compliance of such payment obligations, as per Section 18(1) of the said enactment, "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 ("Council"). Sub-section (2) of Section 18 MSMED Act further stipulates that on receipt of a reference under Section 18(1), the Council shall either itself conduct conciliation in the matter or seek the assistance from any institution or centre providing services of alternate dispute resolution for conciliation. Subsequently, in the event of failure of such conciliation proceedings, mechanism of resolution of disputes by means of arbitration is stipulated. Considerably, Section 18(3) of the MSMED Act in this regard clarifies that in the event of initiation of arbitration proceedings, the provisions under the Arbitration and Conciliation Act, 1996 ("Arbitration Act") shall, "apply to the disputes as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of Section 7 of that Act." Conspicuously, in this regard, the Hon'ble Calcutta High Court7, inter alia, while dealing with the provisions under Section 18 of the MSMED Act, observed, "[t]he Act of 2006 allows a party that is governed by it to apply to the Council constituted under the Act of 2006 to first conciliate and then arbitrate on the disputes between it and the other parties." Similarly, the Hon'ble High Court of Gujarat in Yamuna Cable Accessories Pvt. Ltd. v. Gujarat Chamber of Commerce and Industries8, noted, "If the conciliation conducted by the respondent Council is not successful and terminated without any settlement between the parties, the respondent Council is empowered to take up the dispute for arbitration itself or refer the same to any institution or centre providing alternate dispute resolution services for such arbitration." Clearly, a catalyst to arbitration under the MSMED Act is a reference of a dispute to the Council, followed by a failure/ termination of conciliation proceeding.
Significantly, though, the machinery for dispute resolution envisaged under the MSMED Act may ostensibly appear to be perspicuous and comprehensive, however, disputes often arise regarding the applicability of Section 18 of MSMED Act, especially in a situation where a contract between buyer and supplier encompasses an arbitration clause. Noticeably, under such circumstances, arguments favoring arbitration as per contractual terms are usually premised on the fact that an arbitration clause under contract would not stand nullified merely for the reason that one of the parties to such contract falls within the definition of a supplier under the MSMED Act. In fact, the proponents favouring contractual arbitration endeavor to further strengthen their argument by proclaiming that since there is no conflict between the provisions under Sections 15 to 23 of the MSMED Act and the Arbitration Act, there can be no bar to the invocation/ initiation of such arbitration by even taking recourse to Section 24 of the MSMED Act. Significantly, Section 24 of the MSMED Act, provides, "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." Pertinently, in this regard, the Hon'ble High Court of Bombay in Steel Authority of India Ltd. v. Micro, Small Enterprise Facilitation Council9, being convinced with arguments of similar nature, inter alia, observed, "there is no provision in the Act, which negates or renders an arbitration agreement entered into between the parties ineffective. Moreover, Section 24 of the Act ... would not have the effect of negating an arbitration agreement since that section overrides only such things that are inconsistent with Sections 15 to 23... There is no question of an independent arbitration agreement ceasing to have any effect because the overriding clause only overrides things inconsistent therewith and there is no inconsistency between an arbitration conducted by the Council under Section 18 and arbitration conducted under an individual clause since both are governed by the provision of the Arbitration Act, 1996." Similarly, the Hon'ble Court in Porwal Sales v. Flame Control Industries10, while negating an argument that 18(4) of MSMED Act creates a bar on the jurisdiction of Courts to entertain any application under Section 11 of the Arbitration Act, opined that had the intention of the legislatures been to bar a party's invocation of the said provision under the Arbitration Act, "then the legislation would have so expressly provided, namely that in case one such party falls under the present Act, the arbitration agreement, as entered between the parties would not be of any effect and the parties would be deemed to be governed under the MSMED Act in that regard. However, subsection (4) of Section 18 of the MSMED Act does not provide for such a blanket consequence in the absence of any reference made by a party to the Facilitation Council."
Contrastingly and diametrically opposed to the aforestated observations, the Hon'ble Allahabad High Court in Paper & Board Convertors through partner Rajeev Agarwal v. U.P. State Micro and Small Enterprise11, set aside the order of the Council directing/ referring the buyer and seller/ parties before it to a sole arbitrator appointed by one of said parties by holding, "Once the jurisdiction of the Facilitation Council has been validly invoked, the Council has exclusive jurisdiction to enter upon conciliation in the first instance and after conciliation has ended in failure, to refer the parties to arbitration. The Facilitation Council could either have conducted the arbitration itself or could have referred the parties to a centre or institution providing alternate dispute resolution services. The Facilitation Council was clearly in error in entertaining the objection filed by the respondents and referring the petitioner to the sole arbitrator so designated by the respondents." Further, the Hon'ble High Court of Delhi12, while considering reciprocity and interplay between the provisions under the MSMED and Arbitration Acts, observed, "Section 24 of the Act contains a non-obstante provision and, expressly provides that the provisions of Section 15 to 23 of the Act will have an overriding effect. Thus, the provisions of Section 18(3) of the Act cannot be diluted and must be given effect to notwithstanding anything inconsistent, including the arbitration agreement in terms of section 7 of the A&CAct" Similarly, the Hon'ble Calcutta High Court in National Projects Construction Corporation Limited v. West Bengal State Micro Small Enterprises Facilitation Council13, observed, "In view of Sections 18(4) and 24 of the Act of 2006 read with Section 2(4) of the Act of 1996, the arbitration clause contained in the agreement between the parties stands superseded by the statutory rights granted by the Act of 2006." Clearly, in all the said decisions of the High Courts and in several other precedents14 to comparable effect(s), Courts have consistently opined that in view of a non-obstante clause existing under Section 18 of the MSMED Act and the overriding effect of the provisions under the said enactment by virtue of Section 24 thereof, "if there is any dispute between the parties governed by the Act, 2006, the said dispute is required to be resolved only through the procedure15 as provided under Section 18 of the Act, 2006."
Understandably, these conflicting opinions proved to be a persistent source of misperception amongst Courts and litigants, alike, besides aggravating the uncertainty in law. However, quite recently, the Hon'ble Apex Court, in M/s. Silpi Industries v. Kerala State Road Transport Corporation, had an occasion to delve, inter alia, into the issue of preeminence of statutory arbitration under the MSMED Act over the contractually agreed mechanism and, eventually, reach a conclusion, "MSMED Act, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act." As per the Hon'ble Court, "if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act." Notably, the said observations were rendered in the context wherein one of the issues before the Hon'ble Court was regarding the maintainability of counter-claims by a buyer in arbitration initiated by a supplier in terms of Section 18 of the MSMED Act. Significantly, in this regard, the Hon'ble Court out rightly observed that by virtue of the provisions under Section 18(3) of the MSMED Act, "the provisions of 1996 Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in sub-section (1) of Section 7 of the 1996 Act." Accordingly, in light of the provisions under Section 23(2A)16 of the Arbitration Act, conferring a right to non-claimant/ respondent to submit counter claim or plead set-off, within the scope of an arbitration agreement, and noting the beneficial nature of the provisions17 under the MSMED Act, the Hon'ble Court resolutely avowed, "counter claim is maintainable before the statutory authorities under MSMED Act." The Hon'ble Court further clarified that in the event of impermissibility of buyer to seek its counter claims in statutory arbitration, initiated in terms of Section 18 of the MSMED Act, the same may lead to parallel proceedings and conflicting decisions. In fact, the Hon'ble Supreme Court in the instant case went on to an extent to opine, "even the buyer, if any claim is there, can very well subject to the jurisdiction before the Council and make its claim/ counter claim as otherwise it will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises." Significantly, on a reading of the said observation, it seems that as per the Hon'ble Court even a buyer may approach the Council for its claim, in contrast with filing of mere counter claim in a proceeding initiated at the behest of a supplier. Indeed, the said perspective may be further fortified by the appreciation of the words "any party to a dispute may", existing under Section 18(1) of the MSMED Act. However, considering the 'pro-supplier/ supplier-benefit' approach of the MSMED Act and the fact that the 'recovery' provided under Section 17 of the MSMED Act pertains to, "any goods supplied or services rendered by the supplier", clarity on the said aspect would be greatly appreciated. Nevertheless, conundrum to the extent of maintainability of concurrently or subsequently initiated arbitration proceeding by a buyer based on contractual terms along with statutory arbitration, initiated at the behest of a supplier in terms of the provisions under Section 18 of the MSMED, stands largely resolved by the instant decision of the Hon'ble Apex Court.
Palpably, the Hon'ble Apex Court in M/s. Silpi Industries case, while appreciating the provisions under Section 18(3) of the MSMED Act and Section 43 of the Arbitration Act, further clarified that the provisions of Limitation Act, 1963 would be applicable to the statutory arbitration under the MSMED Act. As per the Hon'ble Court, "In view of the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation Act, 1996, we are of the view that the High Court has rightly relied on the judgment in the case of Andhra Pradesh Power Coordination Committee v.Lanco Kondapalli Power Ltd. & Ors., (2016) 3 SCC 468 and held that Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the 2006 Act." However, interestingly, in the instant case, the Hon'ble Court refused to grant any order in favour of the supplier on the ground that it was not registered under/ in terms of Section 8 of the MSMED Act on the date of entering of contract with the buyer. As per the Hon'ble Court, "to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the Act, as on the date of entering into the contract. In any event, for the supplies pursuant to the contract made before the registration of the unit under provisions of the MSMED Act, no benefit can be sought by such entity, as contemplated under MSMED Act." Notably, similar views were earlier expressed by Hon'ble High Court of Bombay in Scigen Biopharma Pvt. Ltd. v. Jagtap Horticulatuer Pvt. Ltd.18, inter alia, under an observation, "by taking recourse to sub-section (1) of Section 8, the respondent merely filing at its discretion an entrepreneurs memorandum, could not have assumed a legal status of being classified under the MSMED Act as a small enterprise, retrospectively from the day on which the appellant entered into a contract with the respondent. The respondent thus could not have become a small enterprise or a supplier within the purview of MSMED Act, 2006 by such prospective filing of an entrepreneurs memorandum which on the face of it had a consequence from a prospective date and not retrospectively so as to enable the respondent to take benefit of Chapter V and more particularly of Section 18."
Pertinently, these observations regarding the prospective applicability of registration under MSMED Act have proved to be a source of criticism, inter alia, on the ground that the denial of benefits accruing pursuant to registration to a supplier solely for the reason that at the time of entering into contractual relationship with a buyer such supplier was not registered under the said enactment does not appear to coincide with the welfare objective of the MSMED Act. Nevertheless, until the law is reviewed or clarified further on this aspect, in light of the decision of the Hon'ble Apex Court in M/s. Silpi Industries case, it stands settled as on date that by filing memorandum under sub-section (1) of Section 8 of the MSMED Act, "subsequent to entering into contract and supply of goods and services, one cannot assume the legal status of being classified under MSMED Act, 2006, as an enterprise, to claim the benefit retrospectively from the date on which appellant entered into contract with the respondent."
Decisively, with the recent decision of the Hon'ble Apex Court in M/s. Silpi Industries case, certain degree of tranquility is yielded to the tempestuous seas of litigation/ proceedings emanating from the MSMED Act. Appreciably, on one hand, the Hon'ble Court while acknowledging the hallowed objectives and 'supplier welfare/ centric' approach of the said legislation, leaned in favour of the supremacy of statutory arbitration emanating therefrom over contractual arbitration. However, on the other hand, adopting an extremely technical approach on Section 8 of the MSMED Act, the Hon'ble Court, effectively denied the benefits under the said enactment to unregistered or belatedly registered micro, small and medium enterprises against the transactions existing prior to their registration. Understandably, such a mechanical approach is bound to not only create certain impediments, rather render nugatory, the benefits accruing from the MSMED Act to certain unfortunate entities. At the same time, lack of coherence on the aspect of buyers' initiation of proceedings under Section 18 of the MSMED Act for their claims may accentuate the plight of litigants by creating disorientation and uncertainty in law. Consequently, it is hoped that in the coming times, the Hon'ble Apex Court would provide further lucidity on these issues, which, regrettably, persist unresolved and appear to be manifestly unreasonable in view of the scope and object of the MSMED Act. In fact, the same would prove to be quite imminent so that the possibility of wrangles arising out of/ under the said enactment are minimized and eventually annihilated with time.
1. Refer to the Statement of Objects and Reasons of the MSMED Act.
2. Chapter III of the MSMED Act.
3. Refer to Chapter IV of the MSMED Act.
4. "Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day." (Refer also to Section 2(b) of the MSMED Act).
5. Section 2(d) of the MSMED Act, '"buyer" means whoever buys any goods or receives any services from a supplier for consideration;"
6. Section 2(n) of the MSMED Act, '"supplier" means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of Section 8, and includes.."
7. National Projects Construction Corporation Limited v. West Bengal State Micro Small Enterprises Facilitation Council, (2017) 3 Cal LJ 253
8. MANU/GJ/1181/2018: Special Civil Application No. 17925 of 2018 (dated 11.12.2018)
9. AIR 2012 Bom 178
10. 2019 SCC OnLine Bom 1628
11. (2014) 6 All LJ 89
12. Bharat Heavy Electricals Ltd. v. The Micro and Small Enterprises Facilitations Centre, 2017 SCC OnLine Del 10604
13. 2017 SCC OnLine Cal 263: (2017) 3 Cal LJ 253
14. Refer to GE T&D India Ltd. v. Reliable Engineering Projects and Marketing, 2017 SCCOnline Del 6978; BHEL v. Micro and Small Enterprises Facilitation Centre, 2017 SCC OnLine Del 10604; Mangalore Refinery & Petrochemicals Ltd. v. Micro and Small Enterprises Facilitation Council, 2019 SCC OnLine Del 6860; etc.
15. Refer to Principal Chief Engineer v. M/S Manibhai And Bros (Sleeper), AIR 2016 Guj 151
16. "The respondent, in support of his case, may also submit a counter claim or plead a set-off, which shall be adjudicated upon by the arbitral tribunal, if such counter claim or set-off falls within the scope of the arbitration agreement."
17. "The first difference is, the Council constituted under the 2006 Act to undertake mandatory conciliation before the arbitration which is not so under the 1996 Act. Secondly, in the event of failure of conciliation under the 2006 Act, the Council or the centre or institution is identified by it for arbitration. The 1996 Act allows resolution of disputes by agreed forum. The third difference is that, in the event of award in favour of seller and if the same is to be challenged, there is a condition for predeposit of 75% of the amount awarded. Such is not the case in the 1996 Act. When such beneficial provisions are there in the special enactment, such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council."
18. 2019 SCC OnLine Bom 4542
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