Delhi High Court dismisses S. 11 Arbitration petition due to Debit Notes issued after MSMED registration in arbitration proceedings

Delhi High Court

Delhi High Court: A petition was filed under Section 11(6) of the Arbitration and Conciliation Act, 1996 seeking appointment of an arbitrator for adjudication of disputes inter-se between the parties. Dinesh Kumar Sharma, J., dismissed the petition since arbitration has been started before MSME and the debit notes on which the present application has been filed are after the registration of the supplier under MSME.

The case arises from a dispute between the petitioner and the respondent regarding compliance with the terms of an agreement. The petitioner, through various work orders issued between 2013 and 2022, engaged the respondent for services related to slag recovery material and slag crushing and processing plant. However, the respondent allegedly failed to fulfill its obligations under these agreements, particularly regarding the disposal of non-metallic dust material and payment for services rendered. The petitioner, aggrieved by the respondent’s alleged defaults, filed a petition under Section 11(6) of the Arbitration and Conciliation Act, 1996, seeking the appointment of an arbitrator to resolve the disputes between the parties. The petitioner claimed that despite nominating an arbitrator as per the agreement, the respondent failed to appoint its arbitrator, thus necessitating court intervention.

Counsel for petitioner submitted that the respondent’s continual default led to significant costs incurred by the petitioner for disposing of non-metallic dust material. They argued that the respondent failed to respond to demands for payment, resulting in a substantial outstanding amount of Rs. 25 crores. The petitioner contended that the arbitration clause in the agreement allowed for the appointment of an arbitrator by the court, given the respondent’s failure to appoint one.

Counsel for respondents argued that the disputes raised by the petitioner were barred by limitation since the initial work orders did not contain arbitration clauses, and such clauses only came into existence in an amended work order dated 09-03-2017. The respondent further asserted that the petitioner’s claims were manufactured to frustrate proceedings under the Micro, Small & Medium Enterprises Development Act, 2006 (MSME Act), under which arbitration had already commenced.

The Court examined the submissions and the relevant legal framework, particularly focusing on the provisions of the MSME Act and the Arbitration and Conciliation Act, 1996. The Court noted the fundamental differences between the settlement mechanisms under these Acts, emphasizing the MSME Act’s statutory arbitration process following failed conciliation attempts.

The Court remarked that “The overall scheme of the MSMED Act makes it clear that it is beneficial legislation for Micro Small & Medium Enterprises. The scheme also provides that a buyer can also raise counter claims before the statutory arbitrator under the MSMED Act. Moreover, the scope of the Act as stated therein is to the extent that even if there is an agreement for arbitration between the parties, the MSMED Act will have overriding effect. There is no doubt that the supply of the goods and services are prior to the registration of the supplier firm under the MSMED Act. It is evident that this court may appoint an arbitrator upon its jurisdiction being invoked under Section 11 of Act.”

The Court further remarked that “However, in the present case, the debit notes on the basis of which claim have been raised are after the registration of the supplier firm under the MSMED Act. The jurisdiction of the Court at the stage of making reference under section 11 of the A & C Act is very limited and it cannot enter into a roving enquiry or meticulous appreciation of the facts. However, prima facie fact is that the debit notes are issued after the registration of respondent under MSMED. Further, except a statement, there is no document on record to show that any such claim has been made prior to the registration of the respondent firm with the MSMED Act.”

After thorough consideration, the Court dismissed the petitioner’s application under Section 11(6) of the Arbitration and Conciliation Act, 1996. The Court based its decision on arbitration proceedings already commenced under the MSME Act, and the debit notes forming the basis of the petitioner’s claims were issued after the respondent’s registration under the MSME Act. Since there was no evidence of claims made prior to the respondent’s registration, the Court found the petitioner’s application to be not maintainable.

[Prakash Indutries Limited v. Sumeet International Limited, 2024 SCC OnLine Del 3036, decided on 23-04-2024]

Advocates who appeared in this case :

Mr. J. P. Sengh, Senior Advocate with Mr. Niklesh R, Mr. Rohit Choudhary, Mr. Preeti Kohli and Mr. Shashank Sharma, Advocates for petitioner

Mr. Kartik Kurmy, Mr. Piyush Kumar, Mr. Raghwendra Tiwari and Ms. Mamta Tiwari, Advocates for respondents

Buy Arbitration and Conciliation Act, 1996   HERE

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