MSME Quarterly Digest: July-October 2025

As enterprises increasingly turn to the MSMED Act’s protective mechanisms, the judiciary is frequently called upon to strike a balance between safeguarding micro, small, and medium enterprises (MSME) interests and upholding the mandates of other legislative frameworks.

The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) continues to be open to judicial interpretation, as courts continuously define its expanding role in India’s commercial landscape. The Act’s interaction with other powerful statutes, particularly, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), the Arbitration and Conciliation Act, 1996 and various import-export regulations has created a complex and dynamic area of law. As enterprises increasingly turn to the MSMED Act’s protective mechanisms, the judiciary is frequently called upon to strike a balance between safeguarding micro, small, and medium enterprises (MSME) interests and upholding the mandates of other legislative frameworks.

The third quarter of 2025 has been particularly active, producing several noteworthy rulings that address these precise conflicts. Key decisions have centred on the procedural and substantive rights of MSMEs, including the mandatory nature of the revival framework of Reserve Bank of India (RBI) and the critical timing of its invocation during SARFAESI proceedings. Simultaneously, courts have reinforced the strict procedural integrity of the MSMED Act‘s dispute resolution mechanism, issuing definitive rulings on the mandatory 75 per cent predeposit and the clear separation of roles required of a Facilitation Council.

Whether the public procurement policy for micro and small enterprise (MSEs) as framed under Section 11 MSMED Act apply to composite supply, installation and testing (SIT) projects?

The issue was considered by the Jammu and Kashmir and Ladakh High Court in Zain Electricals v. State (UT of J&K)¹, where it held that the public procurement policy (issued vide S.O. 581(E)) is not applicable to composite SIT contracts. The Court held that such tenders are “work contracts” of an integrated nature and cannot be artificially bifurcated into separate components of “goods” and “services” to apply the procurement preferences. The Court held that the obligation under Section 3 read with Section 11 MSMED Act to ensure minimum procurement from MSEs is not project specific but provides for obligation at an institutional level during a particular financial year.

Whether an MSME entity can seek conciliation under Section 18 MSMED Act even for claims that are barred by the statute of limitation?

This issue fell for consideration before the Supreme Court in Sonali Power Equipments (P) Ltd. v. Maharashtra SEB², wherein it held that an MSME entity can seek conciliation under Section 18(2) MSMED Act even for claims that are time-barred. The Court held that though conciliation under Section 18(2) MSMED Act is mandatory, the same is not coercive since the process is not binding on the parties, therefore, the non-adjudicatory nature of the conciliation coupled with the fact that there is no provision under the MSMED Act which extends the applicability of the Limitation Act, 1963 to such conciliation makes the Limitation Act, 1963 non-applicable to conciliation under Section 18(2) MSMED Act. The Court also held that recourse to conciliation should not be shut since limitation only bars the remedy but does not extinguish the underlying right and if the parties so consent, they can enter into an agreement after conciliation which would be an agreement akin to one under Section 25(3), Contract Act, 1872. However, the Court clarified that this exception does not extend to arbitration. It held that the law of limitation would apply to any subsequent arbitration proceedings under Section 18(3) MSMED Act. Therefore, while the Council can attempt to conciliate a time-barred dispute, it cannot arbitrate the same if the conciliation fails.

Can the Micro and Small Enterprises Facilitation Council (MSEFC) pass an arbitral award merely upon failure of the conciliation proceedings without starting the arbitral proceedings?

This issue fell for consideration before the Calcutta High Court in BESCO Ltd. v. Hindcon Chemicals (P) Ltd.³, wherein the Court held that the Council under Section 18 MSMED Act cannot pass an award merely upon failure of the conciliation proceedings. It held that upon failure of the conciliation proceedings, the Council must initiate arbitration proceedings as provided under Section 18(3) MSMED Act and give parties opportunity to file their claims/counterclaims and an opportunity to present their case before giving the final award. The Court set aside the award since the Council in a composite order while recording failure of conciliation allowed the claim and passed the final award without commencing the arbitration proceedings.

Can an MSEFC consist of even number of arbitrators?

This issue fell for consideration before the Calcutta High Court in the BESCO case⁴, wherein the Court held that the mandate of Section 10, Arbitration and Conciliation Act, 1996 which provides that arbitration must be conducted by a Tribunal consisting of an odd number of arbitrators does not strictly apply to arbitrations under Section 18 MSMED Act. The Court held that an award passed by MSEFC consisting of an even number of arbitrators cannot be set aside merely on the ground of its composition being in violation of Section 10, Arbitration and Conciliation Act, 1996.

Are MSMEs engaged in wholesale and retail trade entitled to claim all regulatory exemptions applicable to non-trading MSMEs?

The Kerela High Court in Luxe Panel Distributors v. Additional Commr. of Customs⁵, held that the limited benefit that is available to MSMEs that are engaged in trading is only to avail priority sector lending and they cannot claim general benefits that are given to non-trading MSME entities.

Is compliance with RBI’s “Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises” mandatory for a bank before it classifies an MSME’s account as a non-performing asset (NPA) and initiates recovery under the SARFAESI Act, 2002?

The Bombay High Court in Ray Projects (P) Ltd. v. Board of Directors of Canara Bank⁶ held that while RBI framework is binding on the banks, it is incumbent upon the respective MSME entity to produce authenticated and verifiable documents to substantiate its status as an MSME entity and claim exemption under the framework. The Court held that failure of the MSME entity to claim exemption at an appropriate stage would deprive it from challenging the recovery process later.

Does a private arbitration clause in a contract supersede the statutory remedy available to an MSME under Section 18 MSMED Act, and what determines the territorial jurisdiction of the Facilitation Council?

In GEA Westfalia Separator India (P) Ltd. v. SVS Aqua Technologies LLP⁷, the Bombay High Court held that the statutory remedy available with the MSME entity would override the contractual arbitration clause in the agreement between the parties. The Court held that the MSMED Act is a special law and by virtue of the non obstante clauses which gives the MSMED Act⁸ overriding effect over any private contract. Therefore, even if an agreement contains a specific arbitration clause, an MSME “supplier” is not precluded from invoking the statutory remedy before the Facilitation Council. Furthermore, the Court confirmed that the territorial jurisdiction for filing a reference is determined by Section 18(2) MSMED Act, which is “where the supplier is located”. In this case, since the supplier was based in Pune, the Council in Pune had jurisdiction, irrespective of the contract’s clause stipulating some other jurisdiction.