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Dilution of the statutory protection available to MSMEs

This article respectfully analyses the reasoning given in M/S Silpi Industries v. Kerala State Road Transport Corporation which holds that the benefit of provisions under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), the vendor should have registered under the provisions of the Act, as on the date of entering into the contract and supply of material should be beyond the registration. This case involved two appeals which were between different groups of parties that arose for consideration before the apex court of India. The Supreme Court gave a common judgment for the legal issues that were involved in the appeals by clubbing them. The two major issues that were raised before the Supreme Court was:

  • Whether the provisions particularly 15,16,17,18 of MSMED Act applies to an establishment, registered under the Act after the date of entering the contract.
  • The contract was entered into between the parties before the date of registration, but supplies were made after the registration under the Act. In such case, whether the provisions of the MSMED Act, particularly Sections 15, 16, 17, and 18 applies to the said supplies.
  • Whether the date of the agreement or the date of supply is relevant for the application of the provisions of the MSMED Act.

Court Precedent

1. The Applicability of the Limitation Act, 1963 to the arbitration proceedings initiated/referred by the Council in accordance with MSMED Act, 2006 was the first issue dealt with in this case. The Council, on receipt of a reference under the Act, shall  refer parties for conciliation. If the dispute fails to settle through Conciliation, the council would then refer the case to alternative dispute resolution services, i.e., arbitration under Section 18 of the MSMED Act. The apex court agreed with the reliance made by the High Court on the judgment of Andhra Pradesh Power Coordination Committee.

According to Section 15 of the Act, here the vendor renders services or supplies the variety of goods to the buyer, the buyer will have to complete the payment on or before the decided date in the written agreement, or in a situation where there is no agreement, then before the appointed day. Section 16 restricts the date from which the rate of interest will be payable in situations where the payment is delayed or not made. The recovery Mechanism for the due amount is covered under Section 17 and Section 18 of the mentioned Act. In cases where the dispute between the parties in respect of due amount under Section 17, it is necessary to refer to the Micro and Small Enterprises Facilitation Council. 

On such reference, the Council is empowered to conduct conciliation within the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making regard to such institution for conducting conciliation. In case, the conciliation as contemplated under Section 18(3) of the said Act is not successful, it shall be terminated. Thereafter, the Council has the option to either itself take up the dispute for arbitration or it can even refer it to any centre or institution that would provide alternate dispute resolution service and therefore the provisions of Arbitration and Conciliation Act, 1996 are made applicable as if the arbitration was in pursuance of the arbitration agreement between the parties, under Section 7(1) of the 1996 Act. Section 43 of the 1996 Act covers the applicability of Limitation Act, 1963. The apex court, while dealing with the above provisions in the case of Andhra Pradesh Power Coordination Committee & Others. Vs. Lanco Kondapalli Power Ltd. & Others have stated that, under Section 18(3) of the Act of 2006, the Limitation Act, 1963 will apply to the arbitrations. When the settlement concerning a dispute between the parties isn't received under Section 18 of the 2006 Act, necessarily, the Micro and little Enterprises Facilitation Council shall take up the dispute for arbitration under Section 18(3) of the 2006 Act or it's going to ask institution or centre to supply alternate dispute resolution services and provisions of Arbitration and Conciliation Act, 1996 are made applicable as if there was an agreement between the parties under subsection (1) of Section 7 of the 1996 Act. Insight of Section 43 of the Arbitration and Conciliation Act, 1996, the Supreme Court has rightly relied on the judgment within the case of Andhra Pradesh Power Coordination Committee and held that Limitation Act, 1963 is applicable under Section 18(3) of the 2006 Act to the arbitration proceedings. Thus, we are of the view that no further elaboration is important on this issue and that the provisions of the Limitation Act, 1963 will be covered by the provisions of Section 18(3) of the said Act.

The Supreme Court further observed that the High Court correctly placed reliance on the judgment within the case of Andhra Pradesh Power Coordination Committee which addressed the difficulty of the applicability of the Limitation Act to arbitrations under Section 18 of the MSMED Act and answered an equivalent within the affirmative. The Supreme Court further held that a perusal of Section 43 of the Limitation Act reveals that it applies to arbitrations, which the provisions of the 1996 Act apply in the same order the arbitrations are initiated under the MSMED Act, in a way that shows there is an agreement that exists between the parties under Section 7(1) of the 1996 Act. Thus, considering the above observations, the Supreme Court unambiguously held that the provisions of the Limitation Act apply to arbitrations initiated under Section 18 of the MSMED Act.

2. The next issue that arose, in this case, was whether the counter-claim in the Arbitration proceeding will be maintainable under the MSMED Act. Here, the court held that Section 23 that deals with the claim and defence of the 1996 Act will apply. Along with this, Section 23 (2A), which was inserted through the 2016 amendment, will also be applicable. This section gave the Respondent right to plead set-off or submit a counter-claim regarding the claims, till the time the claims and pleas were within the scope of the respective Arbitration Agreement. It was further observed by the apex court that, if it would not allow the buyers to file counter-claims in proceedings then it might lead to conflicting opinions and even multiplicity of proceedings.

MSMED Act was special beneficial legislation, whereas the 1996 Arbitration Act was a general law and the statutory arbitration that is prescribed under MSMED Act, prevails over the 1996 Act. In the first instance, MSMED Act prescribes compulsory conciliation and if those proceedings fail, the designated Council will administer the arbitration. If the award is received by the vendor and then he is challenged to deposit 75% of the award amount. The Court also perceived that the benefits of the alternative dispute resolution mechanism of the MSMED Act should not be deprived on the mere ground that the counter-claim submitted by the buyer is not maintainable. 

3. In this case the next question that arose was whether the date of the agreement or the date of supply is relevant for the application of the provisions of the MSMED Act. In any event, no benefit can be sought by an entity for the supplies that may be pursuant to the contract made before the registration under the provisions of the MSMED Act. To interpret the provisions related to Interest charged on Delayed Payments on Small Scale and Ancillary Industrial Undertakings Act, 1993, the court has stated in the case of Shanti Conductors Private Ltd. & Anr. V. Assam State Electricity Board & Others, that the date of supply of goods or rendering of services will be considered as a relevant date on which contract for the supply of goods/services was entered when it comes to the applicability of the above mentioned Act. Even with the applicability of the said ratio, the appellant will not be entitled to seek the benefit of the Act. One cannot assume the legal status of classification under MSMED Act, 2006 to claim any benefit from the day on which both the parties had entered into a contract, by mere recourse to file the memorandum under Section 8(1) of the mentioned Act.


The Court Finally held that to pursue the benefit of provisions of MSMED Act, the registration under the provisions of the mentioned Act, should be done by the seller, as on the date of entering into the contract. In case the supplies pursuant to a contract is made before the registration under the provisions of the MSMED Act, no benefit can be pursued by the respective entity.  If any registration is somehow obtained, the same will be applied to the supply of goods and rendering of services succeeding the registration but it will not be able to act retrospectively.  Any further interpretation of the provision would lead to absurdity and would give unwarranted benefit to the party that was not intended by the legislation. Thus with the above-mentioned observations, the Court held that, under the MSMED Act of 2006, the appellant cannot seek reference to Arbitration.

This judgment satisfies the issues that created a challenge with respect to the interplay of the MSMED Act. The claims will be exiled that reposes faith in the ease of doing business in India curbs the statutory arbitration process in the enforcement of Contracts. The small and medium Enterprises include a major chunk of economic activity and many other entities will finally be able to write off claims from their books. By upholding the nature of the Dispute resolution Mechanism under the MSMED Act, 2006, it will protect the interests of buyers from circumventing the statutory forum's jurisdiction. Thus by permitting them to the buyer to plead set-off or counter-claim the apex court has met the objectives of both the MSMED Act and the 1996 Act since thereon there will be less multiplicity of proceedings, dispute resolution will be speedy, and the rights of the sellers can be protected. However, this judgement can affect the rights of unregistered entities adversely since it lays down mandatory registration, prior to the supply, to avail the benefits under the MSMED Act.