India: MSMED & Arbitration Law – Interplay In Light Of Silpi Industries Judgment

INTRODUCTION

The June 2021 judgment of the Supreme Court - Silpi Industries etc. vs. Kerala State Road Transport Corporation and Anr. (2021 SCC OnLine SC 439) ("Silpi Industries/ the judgment") adjudicated, inter alia, the issue of maintainability of a counter claim filed by a non-MSME/buyer in proceedings initiated by a MSME registered seller under S.18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act/ the Act").

Silpi Industries seemingly touches upon the apparent conflict between the MSMED Act and Arbitration and Conciliation Act, 1996, ("Arbitration Act"), determination whereof is directly in question in an appeal pending before the Apex Court1 against a Bombay High Court judgment in M/s Steel Authority of India and Anr. v. MSEFC2 ("Steel Authority"). Thus, Silpi ought to be read as having settled only the question of the right of the non-MSME buyer to file a counter claim in MSMED proceedings.

BRIEF BACKGROUND

Over the years, jurisprudence has developed on the aspect of interplay between the Arbitration Act and the MSMED Act, 2006 in cases where a dispute arises between a MSME/supplier and a non-MSME/buyer.3 Briefly stating, the MSMED Act, being a special statute has been enacted for the benefit of suppliers falling in the category of micro, small and medium enterprises, registered as such, in terms of the MSMED Act. Under the Act, the MSME/ supplier can approach the Facilitation Council, established under the Ministry of Micro, Small and Medium Enterprises, to conciliate and arbitrate disputes with respect to non-payment of dues by the buyer. As is common in special enactments, the MSMED Act too provides for a non-obstante provision which lays down overriding powers over any other statute.

Section 18(1) of the MSMED Act contains, and begins with, such a non-obstante clause that seems to exclude applicability of the Arbitration Act. However, a further reading of S.18(1) of the Act also indicates that the use of the term "may", in the context of the "any party" referring a dispute to the Facilitation Council, indicates that a party may be able to avoid being subjected to the said MSMED Act. Further, reference to "..with regard to any amount due under section 17.." also suggests that only those disputes, which arise out of a pending payment, owed to the supplier, by the buyer, can be adjudicated under the MSMED Act.

The non-obstante clause of the MSMED Act has received varied, and sometimes contradictory views on the applicability of the MSMED Act in matters involving an arbitration agreement.

Steel Authority, was the first significant case on the issue of invocation of the arbitration clause by the buyer where the MSME supplier sought recourse to the MSMED Act. The Division Bench of the Bombay High Court opined that it cannot be said that the independent arbitration agreement between the parties will cease to operate when one of the parties is a MSME. It held that it was only in situations of inconsistencies that the MSMED Act will supersede the Arbitration Act.

In Principal Chief Engineer4 however, the Supreme Court clarified that the MSME can invoke the provisions of the Act and refer a dispute to the Facilitation Council, despite the existence of an arbitration clause. The court recognised that the MSMED Act was a special enactment and as such the parties to the dispute were bound by it. However, this judgment was in the context of the MSME approaching the Facilitation Council first, i.e., before the non-MSME invoked the arbitration clause.

Till Silpi Industries was delivered, Principal Chief Engineer5 was the only significant judgment of the Supreme Court that dealt with issues arising out of applicability of the MSMED Act to situations where an arbitration agreement was also in existence.

One of the grey areas, when it comes to ascertaining the applicability of the MSMED Act in cases where the MSME and non-MSME have signed up for an arbitration clause, is when the non- MSME/buyer has a dispute against the MSME. There are a lot of cases that deal with situations where the MSME raises a
dispute against the non-MSME under the Act however the non-MSME/buyer seeks to invoke the arbitration clause. In such cases the law is broadly settled in favour of the MSMEs which have been held to be within their rights to invoke the provisions of the MSMED Act. However, there is no law which bars the non-MSME entity from invoking the arbitration clause when it is the one to invoke the arbitration clause first, i.e., before the MSME entity approached the Facilitation Council.

SILPI INDUSTRIES

As mentioned above, one of the issues that Silpi Industries adjudicates is whether the non-MSME has a right to file a counter claim before the Facilitation Council when the claim of the MSME is already pending before it. This is different from determining as to where the non-MSM buyer should pursue its claim against the MSME supplier when its own claim against the supplier is independent of the dispute that the supplier has raised against it. Para 5 of the judgement records that the claimant/ MSME approached the Supreme Court "..Primarily aggrieved by the findings recorded by the High Court on the applicability of Limitation Act, 1963 and maintainability of counter claim..." (Emphasis supplied)

It is further pertinent to note that para 5 of the judgement points out that the impugned order, while holding in favour of the right of the non-MSME to file its counter claim before the Facilitation Council, relies upon B.H.P. Engineers Pvt. Ltd. v. Director, Industries, U.P. (Facilitation Centre), Kanpur and the Division Bench judgment of the High Court of Bombay at Nagpur in the case of Steel Authority of India Ltd. v. Micro, Small Enterprise Facilitation Council. Silpi Industries does not delve into the aspect of whether, or not, the non-MSME has a right to choose jurisdiction with respect to its own claims against the MSME. The judgment ultimately affirms the right of the non-MSME to file its counter claim before the Facilitation Council. Thus, Silpi Industries does not contradict Steel Authority, which determines the broader issue of the rights of the non-MSMEbuyers to invoke arbitration agreement with the MSME.

Silpi Industries, factually deals with two sets of appeals. In the first batch of appeals the primary question is of maintainability of the non-MSME's right to file a counter claim in an on-going proceeding under the Act. The second batch of appeals are those where the High Court dealt with the aspect of maintainability of an application under S.11 of the Arbitration Act (seeking appointment of second arbitrator) since filing of counter claim by the buyer was disallowed.

Paras 20 and 21 of the judgment deal with the first batch of appeals, i.e., on the issue of the right of the non- MSME to file counter claim before the Facilitation Council. The relevant portion of the paras as under:

20. "......When there is a provision for filing counter-claim and setoff which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.

21. It is also further to be noted that if we do not allow the counterclaim made by the buyer in the proceedings arising out of claims made by the seller, it may lead to parallel proceedings before the various fora...."

The aforesaid paras indicate that the judgment specifically deals only with the situation where the buyer seeks to file a counter claim before the Facilitation Council where the claim of the supplier is already pending. Thus, once the non- MSME/buyer submits to the jurisdiction of the Facilitation Council and consequently to the procedure as laid down under Section 18(3) of the MSMED Act, then it is entitled to all benefits/ opportunities that may be available to it in terms of the prescribed procedure.

Thus, in terms of S.18(3) of the MSMED Act, even before the Facilitation Council, the procedure to be adopted is that as provided under the Arbitration Act. Once the matter proceeds for arbitration, the provisions of the Arbitration Act come into play and in terms of Section 23 (2A) of the Arbitration Act, the participating buyer also gets a right to file its counter claim before the same forum, i.e., the before the Facilitation Council. This is the context in which the court concludes that the non-MSME has a right to file its counter claim.

Paras 22 -24 of the Judgment deal with the second batch of appeals, where the High Court allowed the non-MSME's application for appointment of second arbitrator under S.11 of the Arbitration Act on the ground that a counter claim is not maintainable before the Facilitation Council. While rejecting the finding on the aspect of counter claim of the buyer not being maintainable before the Facilitation Council, Silpi Industries holds that:

"Thus, it is clear that out of the two legislations, the provisions of MSMED Act will prevail, especially when it has overriding provision under Section 24 thereof. Thus, we hold that MSMED Act, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act. 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 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. Further, apart from the provision under Section 23(2A) of the 1996 Act, it is to be noticed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and the "75% pre-deposit" contemplated under Sections 16 and 19 of the MSMED Act..."

This para, if read in isolation may be construed to imply that the court has decided the overall aspect of applicability of the MSMED Act in supersession of the Arbitration Act. However, para 23 clarifies that these findings are in the context of the rights of the buyer to file a counter claim and the ill effects of not allowing the same. Para 24 of the judgment sums this up further:

"..24. For the aforesaid reasons and on a harmonious construction of Section 18(3) of the 2006 Act and Section 7(1) and Section 23(2A) of the 1996 Act, we are of the view that counter-claim is maintainable before the statutory authorities under MSMED Act..." (emphasis supplied)

ISSUES PENDING ADJUDICATION BEFORE SUPREME COURT

Steel Authority which is the first in the line of judgments that hold in favour of recognition of the arbitration agreement despite one of the parties being a MSME and covered by the MSMED Act, was challenged in Supreme Court SLP (C)4414/2011. The broader challenge of the conflicts arising out of the MSMED Act and the Arbitration is pending adjudication in the said matter.

In 2016, a writ petition being M/s Refex Energy Ltd. vs. Union of India (W.P. No.17785/2016) was filed in the High Court of Madras wherein the vires of S.18 of the MSMED Act was challenged on the ground that a party to an arbitration cannot be forced to participate in unilateral arbitration proceedings at the instance of the other party, under the MSMED Act. It was contended that at the time of entering into a specific agreement with an arbitration clause, the MSME waives its rights under S.18 of the MSMED Act. The petition was however dismissed, and impugned order of the Madras High Court was challenged before the Supreme Court in Civil Appeal No.2788-2789/2018 titled M/s Refex Energy Ltd. vs. Union of India & Anr. ("Refex Energy")

CONCLUSION

Even as the Apex Court is seized of the aforesaid crucial questions of law, a list of permutations of facts along with the currently applicable caselaw may be useful to understand the applicability of the MSMED Act in cases where there is also an arbitration agreement signed between the parties:

i. When the MSME is the first to raise a dispute before the Facilitation Council and the non-MSME has counter claims against the MSME: This situation is squarely covered by Silpi Industries as discussed in detail in the present article. The non-MSME/buyer has a right to file a counter claim before the Facilitation Council with respect to its own claims against the supplier.

However, Bharat Heavy Electricals Limited vs. State of UP by Allahabad High Court, The Chief Administrator Officer, COFMOW v MSEFC of Haryana by Punjab and Haryana High Court and Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers) by the Gujarat High Court diverged from the Bombay High Court in Steel Authority of India by holding that the provisions of the MSMED Act shall prevail over the Arbitration clause.

Since the Steel Authority judgment is now before the Supreme Court, the law is likely to be settled on all related aspects whenever the judgment is delivered.

iii. When both the MSME and the non-MSME invoke the arbitration clause, but the MSME then approaches the Facilitation Council and insists for adjudication under the MSMED Act: Steel Authority (on facts)

iv. When the non-MSME raises claims against the MSME entity and invokes the arbitration clause before the MSME raises a dispute under the MSMED Act: Porwal Sales vs. Flame Control Industries8 which held that since the jurisdiction of the Council had not yet been invoked, there was nothing barring the court from appointing an arbitrator in terms of the arbitration agreement between the parties. However, as mentioned above at point ii., High Courts other than the Bombay High Court have taken a divergent view on the aspect of MSMED Act having an overriding effect over the Arbitration Act. Therefore, Powal Sales is most likely to have persuasive value within the jurisdiction of Bombay High Court alone.

Silpi Industries settles one more important permutation arising out of the many arising out of the MSMED & Arbitration Act interplay. However, the broader issue of applicability of the Act during the subsistence of an arbitration agreement, remains to be settled. This aspect is likely to get finally settled once the Supreme Court decides the pending appeals in the matters arising out of challenge to Steel Authority and Refex Energy as mentioned above.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.