Conundrum between Arbitration Act and MSME Act — An Analysis

   

Introduction

The fundamental rule laid out by the Arbitration and Conciliation Act, 1996 (hereinafter “Arbitration Act”) requires the existence of an arbitration agreement between the parties to put forward the dispute before an arbitrator than a court. However, this fundamental rule is being challenged by the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter “MSME Act”).

In order to inscribe guidelines impacting MSMEs besides the sector’s limits and fundings, the MSME Act was notified in 2006. The MSME Act aims to accelerate these businesses’ growth and raise their level of competitiveness. It offers the first-ever legal framework for recognising the idea of an “enterprise”, which includes businesses that provide both goods and services. The Act seeks to protect the interests of both sellers (MSME parties) and the buyers (the non-MSME parties) in a business transaction. Section 18 of the Act states that regardless of the existence or non-existence of an arbitration agreement, sellers recognised under the MSME Act can readdress the matter to conciliation before the Micro and Small Enterprises Facilitation Council. Further on non-resolution of the dispute, it can be referred to arbitration.

Interplay between Arbitration Act and MSME Act

In circumstances when a disagreement develops between an MSME/supplier and a non-MSME/buyer, precedents have evolved on the interplay between the MSMED Act, 2006 and the Arbitration Act. Further some rules so developed are:

  1. In accordance with provision of Section 18(3) of the MSME Act, Limitation Act applies to such cases pari materia to the Arbitration under the Arbitration Act.3

  2. Any award passed by the MSME Facilitation Council will be deemed as an award under the Arbitration Act.4

  3. MSME parties are relieved of the obligation to deposit 75% at the time of filing Section 34 of the Arbitration Act.5

Analysis of judicial pronouncements

The judgment in SAIL v. Micro, Small Enterprise Facilitation Council6 ruled that no provision of MSME Act negate the arbitration agreement between the parties. Additionally, it validated the existence of arbitration agreement after conciliation. The judgment in Silpi Industries v. Kerala SRTC7 in addition to deciding upon the issue of where a non-MSME party can pursue a claim, lays down non-MSME party's right to counterclaim before the Facilitation Council when the claim of the MSME is already pending before it. Though the Silpi Industries8 case does not contradict the Steel Authority case9, yet it 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, which can leave the confusion among the applicants unresolved. It further added that owing to the special nature of MSME Act, the general provision of Arbitration Act shall not apply (applied the doctrine of generalia specialibus non derogant).

While some previous judgments10 tried to avert the uncertainty by stating that since the Arbitration Act’s provisions apply to both arbitrations conducted under individual clauses and arbitrations conducted by the Council under Section 18, there is no question that an independent arbitration agreement will no longer be enforceable because the overriding clause only supersedes laws that are in conflict with it yet it could not clear the air as it faced withdrawal from various High Courts.11 This position was settled by the High Court of Bombay’s ruling in Porwal Sales v. Flame Control Industries,12 which exposed an inconsistency in the MSME Act and held that, in the event of a dispute between parties, the provisions of the MSME Act would apply if the supplier first invokes the Council’s jurisdiction. However, the rules of the MSME Act might not apply to such arbitration proceedings if the buyer first initiates arbitration under the parties’ contract.

This effectively implies that, before the supplier uses the Council’s jurisdiction, the buyer only needs to pull the trigger and seek arbitration under the contract in order to avoid having to arbitrate disputes under the MSME Act.

Reigniting the ongoing debate surrounding the position of arbitration agreements with MSME parties, the Punjab and Haryana High Court held that even if the parties had an agreement for arbitration of issues, if the seller was covered by the MSME Act, the MSME Act’s dispute resolution provisions would take precedence over the parties' agreement. It has further laid down that even in absence of an arbitration agreement statutory arbitration can be proceeded with under the MSME Act, this clearly rules out the party autonomy object of the Arbitration Act making the laws inconsistent. This order is in consistency with the previous 2011 judgment of Punjab and Haryana High Court13 ruled that Section 24 of the MSMED Act contains an explicit referral that outlines an abrogating outcome of the Act. The same position has been upheld by the Madras High Court.14

Conclusion

According to information held by the Ministry of MSMEs, just 9381 of the 90,906 cases brought before the Council have been resolved. A total of 24,309 crores are at stake in the ongoing cases.15 It is obvious that the Councils are already overloaded with cases and lack adequate resources to handle them effectively. These stats lead us to believe that the uncertainty surrounding the interplay of Arbitration Act with MSME has led to defeating the purposes of both the Acts. This may have been the ideal time for the Supreme Court to lay down the guidelines for streamlining the Council’s operations under the Act, as well as to clarify the numerous concerns and lessen needless, ancillary litigation centred around the Council’s authority.


† Advocate-on-Record, Supreme Court of India.

†† 6th semester BBA LLB (Hons.), NMIMS School of Law, Bengaluru.

3. Maharashtra State Electricity Distribution Co. Ltd. v. Deltron Electronics, 2016 SCC OnLine Bom 9521.

4. State of Rajasthan v. Sigma Engg., 2017 SCC OnLine Raj 2939.

5. Ravindranath Ge Medicate Associate (P) Ltd. v. Clean Coats (P) Ltd., 2016 SCC OnLine Bom 5068.

6. 2010 SCC OnLine Bom 2208.

7. 2021 SCC OnLine SC 439.

8. 2021 SCC OnLine SC 439.

9. 2010 SCC OnLine Bom 2208.

10. BSNL v. Maharashtra Micro and Small Scale Enterprises Facilitation Council, 2015 SCC OnLine Bom 4145.

11. Bharat Heavy Electricals Ltd. v. Micro and Small Enterprises Facilitations Centre, 2017 SCC OnLine Del 10604; GE T&D India Ltd. v. Reliable Engg. Projects and Mktg., 2017 SCC OnLine Del 6978 : (2017) 238 DLT 79.

12. 2019 SCC OnLine Bom 1628.

13. Welspun Corp. Ltd. v. Micro and Small, Enterprises Facilitation Council, 2011 SCC OnLine P&H 16956.

14. Madurai Kamaraj University v. Chairman, W.A (MD) No.1002 of 2021 and C.M.P (MD) Nos.4539 and 6834 of 2021, (Mad).

15. <https://www.financialexpress.com/industry/sme/msme-eodb-applications-for-clearing-over-rs-24k-crore-worth-msme-payments-filed-since-launch-of-msme-samadhaan-portal/2342813/>.

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