On 29 June 2021, in Silpi Industries v Kerala State Road Transport Corporation1 and Khyaati Engineering v Prodigy Hydro Power Pvt Ltd2, the Supreme Court laid rest to a teething issue, which invariably occurs in the proceedings commenced before the Facilitation Council (Council) under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), namely (a) whether the Limitation Act, 1963 applies to arbitral proceedings commenced under section 18 (3) of the MSMED Act; and (2) whether a Counter Claim could be made by a 'buyer' in the arbitral proceedings initiated at the instance of 'supplier'.

Facts

In Silpi Industries (supra), the Appellant i.e. the 'supplier' under the MSMED Act, entered into a contract with the Respondent, to supply thread rubber for tyre rebuilding. The contract provided that the balance 10% of the consideration was to be paid to Appellant after the final performance report, which the Respondent had failed to pay. The Appellant filed a reference to the Council under section 18 of the MSMED Act to recover the amounts. The Council initially attempted to resolve the dispute through conciliation, which failed and thereafter referred the dispute to arbitration under section 18 (3) of the MSMED Act. In the arbitration, an award came to be passed in favour of Appellant. The initial challenge to the award by the Respondent failed, however in appeal, the High Court of Kerala, held that (a) law of limitation applied to the arbitral proceedings under the MSMED Act; and (b) a counterclaim could have been made by the Respondent in the arbitral proceedings before the Council under the MSMED Act and therefore proceeded to set aside the award.

In Khyaati Engineering (supra), a contract for the supply of hydro-mechanical equipment was executed between the Appellant i.e. 'supplier' under the Act and Respondent. It was alleged that the Appellant had completed its performance under the contract and yet was unpaid. The Appellant made a reference to the Council under the Act. The Respondent on other hand, invoked the arbitration clause under the contract and filed an application under section 11 of the Arbitration and Conciliation Act, 1996 (Arbitration Act) for appointment of an arbitrator. The Appellant opposed the said application on the ground that it had already invoked jurisdiction of the Council under the MSMED Act and the claim of the Respondent if any, ought to be adjudicated before the Council. The High Court however held that provisions of MSMED Act, was only for the benefit of 'supplier' and the 'buyer' has no other remedy but to exercise its rights before a civil court or commence arbitration, if applicable. In other words, the buyer, cannot prefer a counter claim before the Council in the arbitration proceedings commenced at the instance of the 'seller'.

Both orders were challenged. The Supreme Court framed following questions:

  1. Does the law of limitation apply to arbitration proceedings held under the MSMED Act?
  2. Whether a counter claim is maintainable in the arbitration proceedings held under MSMED Act?

Answering both questions favourably, the Supreme Court held that:

Section 18(3) of the MSMED Act, clearly applied the provisions of the Arbitration Act to an arbitration initiated pursuant to a reference to the Council 'as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of section 7 of that Act'3. Further, section 43 of the Arbitration Act, expressly applied the Limitation Act, 1963 to the arbitrations. The Supreme Court also affirmed its judgement in AP Power Coordination Committee v Laco Komdapali Power Ltd & Ors [(2016) 3 SCC 468], which held that the provisions of the Limitation Act, 1963 applied to proceedings under section 86(1) (f) of the Electricity Act, 2003 before the Electricity Regulatory Commission. In this background, the Supreme Court held that the provisions of the Limitation Act, 1963 applied to arbitral proceedings under section 18(3) of the MSMED Act.

As regards maintainability of the counter claim, the Court noted that the provisions of the MSMED Act, in particular sections 15, 16 and 17 and held they were enacted for the benefit of the 'supplier' and that the 'buyer' could not defeat the proceedings by insisting on filing, perhaps a specious counter claim. However, the Court also noted the wordings of section 18 of the MSMED Act which enables 'any party to a dispute' to make a reference to the Council. It further held that, if section 18(3) expressly permits application of the Arbitration Act, there is no reason to curtail the right of the 'buyer' to bring a counter claim before the Council, especially when section 23(2A) of the Arbitration Act enables a party to bring a counter claim and plead a set off in arbitration proceedings, so long as the counter claim falls within the scope of the arbitration agreement.

In addition to above, the Court observed an anomaly in restricting the 'buyer' to bring a counter claim in the arbitral proceedings under the MSMED Act. It noted that though the provisions of the MSMED Act, allow a 'seller' to approach the Council under a beneficial legislation i.e. MSMED Act, the 'buyer' is left to avail independent remedies i.e. either approaching a civil court or invoke arbitration under its agreement. Thus, there is every likelihood of contrary findings being rendered by different forums. It was therefore held that, a counter claim could be made before the Council under the MSMED Act.

In the facts of Khyaati Engineering (supra), the Court held that, the MSMED Act, has overriding effect over other laws, by virtue of section 24 thereof. It further noted the objects and reasons of the MSMED Act and held that it is a beneficial legislation for the benefit of micro, small and medium enterprises and is also a special law whereas, the Arbitration Act is a general legislation. In the circumstances, the provisions of beneficial and special enactments must be respected and given full effect and therefore provisions of the MSMED Act will prevail over the Arbitration Act.

Conclusion

The Supreme Court's observation that 'even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterpreses Development Act, 2006, the seller can certainly approach the competent authority to make its claims' is crucial. The Supreme Court has clearly given the beneficial legislation its full effect while curtailing the mischief by the 'buyer' in commencing parallel legal proceedings which would otherwise deprive the 'seller' of the benefits of the MSMED Act. At the same time, the interest of the 'buyer' is safeguarded while allowing the 'buyer' to bring a counter claim or set off before the Council under the MSMED Act.

Footnotes

1. Civil Appeal nos. 1570-1578 of 2021

2. Civil Appeal nos. 1620-1622 of 2021

3. Section 18 (3) of MSMED Act

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