{"id":371905,"date":"2026-01-07T12:00:44","date_gmt":"2026-01-07T06:30:44","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=371905"},"modified":"2026-01-07T12:55:26","modified_gmt":"2026-01-07T07:25:26","slug":"msme-quarterly-digest-july-october-2025-msmed-act-judicial-developments","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2026\/01\/07\/msme-quarterly-digest-july-october-2025-msmed-act-judicial-developments\/","title":{"rendered":"MSME Quarterly Digest: July-October 2025"},"content":{"rendered":"<div style=\"text-align: justify; line-height: 150%;\">\n<p style=\"margin-bottom: 3%; font-style: italic;\">As enterprises increasingly turn to the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/a>&#8217;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.<\/p>\n<p style=\"margin-bottom: 3%;\">The <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">Micro, Small and Medium Enterprises Development Act, 2006<\/a> (<a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/a>) continues to be open to judicial interpretation, as courts continuously define its expanding role in India&#8217;s commercial landscape. The Act&#8217;s interaction with other powerful statutes, particularly, the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002780400\" target=\"_blank\">Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002<\/a> (<a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002780400\" target=\"_blank\">SARFAESI Act<\/a>), the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726958\" target=\"_blank\">Arbitration and Conciliation Act, 1996<\/a> and various import-export regulations has created a complex and dynamic area of law. As enterprises increasingly turn to the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/a>&#8217;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.<\/p>\n<p style=\"margin-bottom: 3%;\">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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/a>&#8216;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.<\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">Whether the public procurement policy for micro and small enterprise (MSEs) as framed under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546073\" target=\"_blank\">11<\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/a> apply to composite supply, installation and testing (SIT) projects?<\/p>\n<p style=\"margin-bottom: 3%;\">The issue was considered by the Jammu and Kashmir and Ladakh High Court in <span style=\"font-style: italic;\">Zain Electricals<\/span> v. <span style=\"font-style: italic;\">State (UT of J&amp;K)<\/span><a id=\"fnref1\" href=\"#fn1\" title=\"1. 2025 SCC OnLine J&amp;K 1335.\"><sup>1<\/sup><\/a><!-- LE to check the case and XML to hyperlink in matter and footnote --><!-- hyperlink from fn -->, where it held that the public procurement policy (issued vide S.O. 581(E)<!-- LE to check if this will be hyperlinked --><!-- no -->) is not applicable to composite SIT contracts. The Court held that such tenders are &#8220;work contracts&#8221; of an integrated nature and cannot be artificially bifurcated into separate components of &#8220;goods&#8221; and &#8220;services&#8221; to apply the procurement preferences. The Court held that the obligation under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546093\" target=\"_blank\">3<\/span><\/a> read with Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546073\" target=\"_blank\">11<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> to ensure minimum procurement from MSEs is not project specific but provides for obligation at an institutional level during a particular financial year.<\/span><\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">Whether an MSME entity can seek conciliation under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> even for claims that are barred by the statute of limitation?<\/p>\n<p style=\"margin-bottom: 3%;\">This issue fell for consideration before the Supreme Court in <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002775588\" target=\"_blank\"><span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">Sonali Power Equipments (P) Ltd.<\/span> v.<\/span> <span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">Maharashtra SEB<\/span><\/span><\/a><a id=\"fnref2\" href=\"#fn2\" title=\"2. 2025 SCC OnLine SC 1467.\"><sup>2<\/sup><\/a>, wherein it held that an MSME entity can seek conciliation under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18(2)<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> even for claims that are time-barred. The Court held that though conciliation under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18(2)<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726959\" target=\"_blank\">Limitation Act, 1963<\/span><\/a> to such conciliation makes the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726959\" target=\"_blank\">Limitation Act, 1963<\/span><\/a> non-applicable to conciliation under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18(2)<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a>. 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001527419\" target=\"_blank\">25(3)<\/span><\/a>, <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726954\" target=\"_blank\">Contract Act, 1872<\/span><\/a>. 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)<\/span><\/span><!-- XML to hyperlink --><\/span><\/span> MSMED Act. Therefore, while the Council can attempt to conciliate a time-barred dispute, it cannot arbitrate the same if the conciliation fails.<\/span><\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">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?<\/p>\n<p style=\"margin-bottom: 3%;\">This issue fell for consideration before the Calcutta High Court in <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002767079\" target=\"_blank\"><span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">BESCO Ltd.<\/span> v.<\/span> <span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">Hindcon Chemicals (P) Ltd.<\/span><\/span><\/a><a id=\"fnref3\" href=\"#fn3\" title=\"3. 2025 SCC OnLine Cal 5628.\"><sup>3<\/sup><\/a>, wherein the Court held that the Council under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18(3)<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> 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.<\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">Can an MSEFC consist of even number of arbitrators?<\/p>\n<p style=\"margin-bottom: 3%;\">This issue fell for consideration before the Calcutta High Court in the <span style=\"font-style: italic;\"><a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002767079\" target=\"_blank\">BESCO<\/span> <\/a>case<\/span><a id=\"fnref4\" href=\"#fn4\" title=\"4. 2025 SCC OnLine Cal 5628.\"><sup>4<\/sup><\/a>, wherein the Court held that the mandate of Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001544909\" target=\"_blank\">10<\/span><\/a>, <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726958\" target=\"_blank\">Arbitration and Conciliation Act, 1996<\/span><\/a> 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a>. 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001544909\" target=\"_blank\">10<\/span><\/a>, <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002726958\" target=\"_blank\">Arbitration and Conciliation Act, 1996<\/span><\/a>.<\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">Are MSMEs engaged in wholesale and retail trade entitled to claim all regulatory exemptions applicable to non-trading MSMEs?<\/p>\n<p style=\"margin-bottom: 3%;\">The Kerela High Court in <span style=\"font-style: italic;\">Luxe Panel Distributors<\/span> v. <span style=\"font-style: italic;\">Additional Commr. of Customs<\/span><a id=\"fnref5\" href=\"#fn5\" title=\"5. 2025 SCC OnLine Ker 14967.\"><sup>5<\/sup><\/a><\/span><\/span><!-- LE to check the case and XML to hyperlink in matter and footnote --><\/span><\/span><\/span><!-- Hyperlink from FN --><\/span>, 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.<\/span><\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">Is compliance with RBI&#8217;s &#8220;Framework for Revival and Rehabilitation of Micro, Small and Medium Enterprises&#8221; mandatory for a bank before it classifies an MSME&#8217;s account as a non-performing asset (NPA) and initiates recovery under the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002780400\" target=\"_blank\">SARFAESI Act, 2002<\/span><\/a>?<\/p>\n<p style=\"margin-bottom: 3%;\">The Bombay High Court in <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002930710\" target=\"_blank\"><span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">Ray Projects (P) Ltd.<\/span> v.<\/span> <span style=\"font-style: italic;\">Board of Directors of Canara Bank<\/span><\/span><\/span><\/a><a id=\"fnref6\" href=\"#fn6\" title=\"6. (2025) 260 Comp Cas 198 : 2025 SCC OnLine Bom 3789.\"><sup>6<\/sup><\/a> 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.<\/p>\n<p style=\"font-weight: bold; font-size: 12.5pt;\">Does a private arbitration clause in a contract supersede the statutory remedy available to an MSME under Section <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a>, and what determines the territorial jurisdiction of the Facilitation Council?<\/p>\n<p style=\"margin-bottom: 3%;\">In <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002878647\" target=\"_blank\"><span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">GEA Westfalia Separator India (P) Ltd.<\/span> v.<\/span> <span style=\"font-style: italic; text-decoration: none; text-underline-style: none; text-underline-mode: continuous;\">SVS Aqua Technologies LLP<\/span><\/span><\/a><a id=\"fnref7\" href=\"#fn7\" title=\"7. 2025 SCC OnLine Bom 3157.\"><sup>7<\/sup><\/a>, 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a> is a special law and by virtue of the non obstante clauses which gives the <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a><a id=\"fnref8\" href=\"#fn8\" title=\"8. Micro, Small and Medium Enterprises Development Act, 2006, Ss. 18(1) and 24.\"><sup>8<\/sup><\/a> overriding effect over any private contract. Therefore, even if an agreement contains a specific arbitration clause, an MSME &#8220;supplier&#8221; 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 <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18(2)<\/span><\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">MSMED Act<\/span><\/a>, which is &#8220;where the supplier is located&#8221;. In this case, since the supplier was based in Pune, the Council in Pune had jurisdiction, irrespective of the contract&#8217;s clause stipulating some other jurisdiction.<\/p>\n<\/div>\n<hr\/>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><strong><span style=\"color: #000080;\">*Partner, Khaitan &amp; Co.<\/span><\/strong><\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><strong><span style=\"color: #000080;\">**Principal Associate, Khaitan &amp; Co.<\/span><\/strong><\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><strong><span style=\"color: #000080;\">***Senior Associate, Khaitan &amp; Co.<\/span><\/strong><\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><strong><span style=\"color: #000080;\">****Associate, Khaitan &amp; Co.<\/span><\/strong><\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn1\" href=\"#fnref1\">1.<\/a> 2025 SCC OnLine J&amp;K 1335.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn2\" href=\"#fnref2\">2.<\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002775588\" target=\"_blank\">2025 SCC OnLine SC 1467<\/a>.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn3\" href=\"#fnref3\">3.<\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002767079\" target=\"_blank\">2025 SCC OnLine Cal 5628<\/a>.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn4\" href=\"#fnref4\">4.<\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002767079\" target=\"_blank\">2025 SCC OnLine Cal 5628<\/a>.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn5\" href=\"#fnref5\">5.<\/a> 2025 SCC OnLine Ker 14967.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn6\" href=\"#fnref6\">6.<\/a> (2025) 260 Comp Cas 198 : <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002930710\" target=\"_blank\">2025 SCC OnLine Bom 3789<\/a>.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn7\" href=\"#fnref7\">7.<\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-9002878647\" target=\"_blank\">2025 SCC OnLine Bom 3157<\/a>.<\/p>\n<p style=\"margin-left: 18pt; text-indent: -18pt;\"><a id=\"fn8\" href=\"#fnref8\">8.<\/a> <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0002942157\" target=\"_blank\">Micro, Small and Medium Enterprises Development Act, 2006<\/a>, Ss. <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546080\" target=\"_blank\">18(1)<\/a> and <a href=\"https:\/\/www.scconline.com\/DocumentLink.aspx?q=JTXT-0001546087\" target=\"_blank\">24<\/a>.<\/p>\n","protected":false},"excerpt":{"rendered":"<p>by Abhisaar Bairagi*, Milind Sharma**, Suhel Qureshi*** and Ausaf Ayyub****<\/p>\n","protected":false},"author":67011,"featured_media":371923,"comment_status":"open","ping_status":"open","sticky":false,"template":"","format":"standard","meta":{"_jetpack_memberships_contains_paid_content":false,"footnotes":""},"categories":[20271,47404],"tags":[96372,96377,96370,96375,96376,96368,96369,96374,96373,96371],"class_list":["post-371905","post","type-post","status-publish","format-standard","has-post-thumbnail","hentry","category-experts_corner","category-khaitan-co","tag-facilitation-council-arbitration","tag-insolvency-and-msme-law","tag-msme-judicial-developments-india","tag-msme-limitation-conciliation","tag-msme-procurement-policy","tag-msme-quarterly-digest-2025","tag-msmed-act-case-law","tag-rbi-msme-revival-framework","tag-sarfaesi-and-msme-conflict","tag-section-18-msmed-act"],"yoast_head":"<!-- This site is optimized with the Yoast SEO Premium plugin v26.4 (Yoast SEO v26.4) - https:\/\/yoast.com\/wordpress\/plugins\/seo\/ -->\n<title>MSME 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