Revisiting the Tussle between the Micro, Small and Medium Enterprises Development Act, 2006 and the Arbitration and Conciliation Act, 1996

April 10, 2023/ Harshit Yagi and Bhanu Pratap Samantaray/ Arbitration Law

 

By Harshit Tyagi, a 3rd-year student of Symbiosis Law School, Nagpur and Bhanu Pratap Samantaray, a 4th-year student of National Law University, Orissa.

INTRODUCTION

In recent times, arbitration has emerged as a popular mode of Alternate Dispute Resolution (“ADR”). With a notable increase in the number of commercial transactions, both national and international, and growing businesses around the world, parties tend to choose arbitration as a convenient mode to resolve their disputes.

In India, arbitration as a mode of ADR is governed by the Arbitration and Conciliation Act, 1996 (“A&C Act”). In addition to this, the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) also prescribes a mode of ADR. The prima facie objective of the MSMED Act was to, “reduce the interest on delayed payments for the Small Scale and Ancillary Industries and to provide a dispute resolution mechanism for the issues arising due to the non-payment of dues to the Micro and Small scale industries.”[i] 

ADR is brought to the forefront under the MSMED Act when the disputes between MSME and non-MSME entities are referred to the Micro and Small Enterprises Facilitation Council (“MSEFC”) for the process of conciliation under Section 18(1) of the MSMED Act. Subsequently, if the parties fail to reach a settlement through conciliation, the dispute is further resolved through arbitration under Section 18(2) of the Act. As per Section 18 of the Act, both conciliation and arbitration before the MSEFC are governed by the A&C Act.

However, the MSMED Act has certain requirements and procedures which differ from the A&C Act. MSMEs tends to prefer the proceedings under the MSMED Act, which grants special benefits to them such as mandatory conciliation before the arbitration process, or the mandatory pre-deposit of 75 percent of the award amount by the appellant filing to set aside the award and certain other benefits. Conversely, non-MSME entities prefer to resolve agreements through a separate arbitration agreement.

EARLIER POSITION OF LAW

Due to the conflict between the A&C Act and the MSMED Act, there have been several decisions by various High Courts regarding the interplay between the said acts. In M/s Steel Authority of India v. MSEFC[ii] the Bombay High court clearly stated that Section 18 of MSMED Act does not render an independent arbitration agreement ineffective. The overriding clause therewith will lie only when there is an inconsistency between the provisions of the MSMED Act and the arbitration agreement. In this case the Bombay High Court further held that Section 18(4) of the MSMED Act does not create any bar on any arbitration agreement independently entered between the parties.

The Gujarat High Court in the case of Indian Oil Corporation Limited v. Prayagraj Fuel Point, Through its Proprietor, clarified that provision of MSMED Act will override other law when there exists any inconsistency between the provisions of other act and provisions of MSMED Act.[iii] However, the Allahabad High Court in Bharat Heavy Electricals Limited v. State of Uttar Pradesh[iv] and the High Court of Punjab and Haryana in The Chief Administrator Officer, COFMOW v. MSEFC of Haryana[v] differed. The latter courts emphasised the importance of the non-obstante clause provided under Section 18 of the MSMED Act. The Delhi High Court in AVR Enterprises v. Union of India[vi] has also established a strong precedent stating that the mandatory provision of 75% deposit would apply only when the proceedings are initiated under Section 18 of the MSMED Act and not when proceedings are initiated under an independent Arbitration agreement.

The question regarding the overlap between the A&C Act and the MSMED Act was raised before the Supreme Court in Principal Chief Engineer v. M/s Manibhai and Brothers (Sleepers).[vii] Here the Supreme Court held that the MSMED Act was a special legislation and that Section 18 shall override an arbitration clause.[viii] This jurisprudence was further developed in Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited[ix]which has been examined in further detail hereinbelow.   

FACTS AND HISTORY OF THE CASE

The Appellant, a Government Corporation, entered into a contract with the Respondent No.1, Mahakali Foods Pvt. Ltd on 18th December, 2010 for the supply of toasted defatted soya flour (“TDSF”) at its Gandhinagar and Himmatnagar Centers. A dispute arose between the said parties and was referred to the Bhopal Facilitation Council (“BFC”), under Section 18(2) of the MSMED Act, 2006. The award passed by the abovementioned authority in terms of Section 18 was challenged before the Commercial Court, Ahmedabad, by the Appellant.  The Commercial Court, Ahmedabad confirmed the said award.

Feeling aggrieved by the same, the Appellant moved the Gujarat High Court under Section 37 of the A&C Act raising the issue of the jurisdiction of the BFC to decide the disputes between the Appellant and the Respondent No.1.

The Gujurat High Court relied on its earlier decision in Principal Chief Engineer v. M/s. Manibhai & Brothers (Sleeper)[x] and noted that Section 18 of the MSMED Act, 2006 would have an overriding effect over any other law for the time being in force, including the A&C Act. Therefore, the BFC had the requisite jurisdiction to adjudicate between the dispute. Therefore, the Appellant preferred an appeal before the Supreme Court against the abovementioned order of the Gujarat High Court.

ANALYSING GUJRAT STATE CIVIL SUPPLIES CORPORATION LIMITED

The Supreme Court (“SC”) provided more clarity on the interplay between the MSMED Act, 2006 and A&C Act. The SC relied upon the observations in Silpi Industries v. Kerala State Road Transport Corporation,[xi] wherein it held as under,

“…to seek the benefit of provisions under MSMED Act, the seller should have been registered under the provisions of the Act, as on the date of entering into the contract. Further, any subsequent registration obtained successfully would have the prospective effect on the party and would apply for the supply of goods and rendering services subsequent to the registration…”

By relying on this judgement, the court has very rightly stipulated the pre-requisites required to be satisfied in order to claim benefit of provisions under MSMED Act. The court mandates registration of the seller under the provisions of the Act as on the date of entering into the contract, in order to claim the benefit of the Act. Thus, any subsequent registration obtained by the seller would generally have a prospective effect on the party while supplying goods & rendering services subsequent to the registration.

FUNDAMENTAL RULE OF CONSTRUCTION

Gujarat State relied on the fundamental rule of construction. Two Latin maxims must be considered: Firstleges posteriors priores contrarias abroganti.e., laws which are enforced recently intend to overturn the prior ones; Second: generalia specialibus non derogant i.e. special laws shall prevail over special laws.

SPECIAL LAWS AND GENERAL LAWS

The judgment has considered the meaning of special laws in its wider purport. A special law is a law which comes into force for a special reason and is applicable in special circumstances contra to a general law which is applicable in all general situations.[xii] The judgment determines which Act, between the MSMED Act and the A&C Act, is a special law.

THE MSMED ACT AND A&C ACT

Gujarat State held that the very object of the MSMED Act is to protect the interests of micro, small and medium enterprises (“MSME”).[xiii]Further the MSMED Act ensured the smooth flow of credit to the MSME sector along with reducing the interest in the delayed payment to the MSME sector. Lastly, the MSMED Act also provides an effective ADR mechanism to MSMEs.

The language of Section 18 of the MSMED Act, ex-facie clarifies that the MSMED Act will prevail over all other laws for the time being in force[xiv]. In case the conciliation process under Section 18 fails, the MSEFC may refer the matter to any other form of ADR, including arbitration. At that instance, the provisions of the A&C Act are triggered[xv].The MSEFC acts as an arbitrator pursuant to the MSMED Act.[xvi] The Court concluded that the main objective of the A&C Act is to provide and govern an arbitral body as per its Statements of Object and Reason.

Unlike the MSMED Act, the A&C Act does not pertain to a specific type of dispute arising between specific groups of people through a specific forum[xvii]Per contra the A&C Act provides for a general procedure. Therefore, it was concluded that the MSMED Act is a special law and the A&C Act is a general law.[xviii]

The court placed reliance on Silpi Industries, where the SC had held that[xix],

“…as far as the issue regarding the maintainability of and counter claim in arbitration proceedings initiated under Section 18(3) of the MSMED Act are concerned, the latter being a special legislation to protect MSME’s by setting out a statutory mechanism for the payment of interest on delayed payments, the said Act would override the provisions of the Arbitration Act, 1996 which is a general legislation.”[xx]

WAY FORWARD

Gujarat State resolved the conundrum regarding the overriding effect of the MSMED Act over the A&C Act to a great extent. This judgment further proves to be beneficial for MSME entities due to the fact that they have the option of protecting their interests by invoking the procedure under MSMED Act over the A&C Act. Further it clarified that the sole purpose of the MSMED Act is to protect the interest of MSME entities.

REFERENCES

[i] Aparna Devkart, MSMED Act, 2006, Public Procurement Policy, 2012 and its Relevance during the 4th Industrial Revolution, SCC Online Blogs (Aug. 24, 2022) https://www.scconline.com/blog/post/2022/08/24/msmed-act-2006-public-procurement-policy-2012-and-its-relevance-during-the-4th-industrial-revolution/.

[ii] AIR 2012 Bom 178.

[iii] AIR 2016 Guj 57.

[iv] (2014) (4) ALJ 52.

[v] CWP 277/2015 High Court of Punjab & Haryana.

[vi] CM(M) 769/2018.

[vii] AIR 2016 Guj 151.

[viii] Id.

[ix] 2022 SCC Online SC 1492.

[x] Id.  

[xi] 2021 SCC Online SC 439.

[xii] Kaushalya Rani Vs. Gopal Singh AIR 1964 SC 260.

[xiii] Supra note 9 ¶ 20.

[xiv] Supra note 9 ¶ 22.

[xv] Supra Note 9 ¶ 27.

[xvi] The MSME Act, 2006, § 18(4), No. 27, Acts of Parliament, 2006 (India).

[xvii] Supra Note 9 ¶ 24.

[xviii] Supra Note 9 ¶ 25.

[xix] Supra Note 9 ¶ 25.

[xx] 2021 SCC Online SC 439.