Unraveling the Impact of MSMEs on Arbitration: A Comprehensive Analysis
Abhishek Bhushan Singh
(Advocate Litigation & Disputes Resolution)
The Micro Small Medium Enterprises act 2006 (MSME Act) was enacted for the very purpose to foster and enhance the growth of small and medium enterprises by providing a supportive legal environment as the MSME sector plays a pivotal role in economic progress of the India.[1] By creating a large number of job opportunities, ensuring that industries are spread equally, and encouraging entrepreneurship among women from disadvantaged backgrounds, the MSME sector helps to promote inclusive growth in India. Initiatives like “Digital India,” “Make in India,” and others have opened up new opportunities for the MSME sector to expand rapidly over the next ten years.
In the intricate realm of legal frameworks governing commercial disputes in India, a nuanced interplay exists between various legislative acts, each designed to address specific facets of trade and commerce. Among these, the MSME Act and the Arbitration and Conciliation Act, 1996[2] hold significant prominence. The former aims to foster and enhance the growth of small and medium enterprises by providing a supportive legal environment, while the latter seeks to offer a streamlined and efficient mechanism for the resolution of disputes through arbitration. However, the coexistence of these two acts has given rise to a jurisdictional tug-of-war, where the supremacy of one over the other becomes a point of contention. This article delves into the overriding effect of the MSME Act on the Arbitration and Conciliation Act, 1996, exploring the legislative intent, judicial interpretations, and practical implications of this legal dichotomy.
Section 18 of the MSMED Act[3] states that any party may make a reference to the Facilitation Council in case of a dispute for recovery of amount due for any goods supplied or services rendered by the supplier. This provision has an overriding authority over the Arbitration and Conciliation Act, 1996. The judgement in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Food Private Limited[4] states that MSMEs have a right to approach the Facilitation Council regardless of a mutual arbitration agreement present. Chapter V of the MSMED Act is the special law and hence, has the overriding authority. The Bench deduced this by focusing on the obstante clauses under sub-section (1) and (4) that the legislature drafted consciously, being aware of the previously enacted Arbitration and Conciliation Act, 1996.
The parties holding the right to make the reference must be mentioned in the contract on the date of execution. If any registration is done subsequently, it will have effect prospectively. The judgement states that the parties may choose to either go for arbitrating the dispute or make a reference to the Facilitation Council. However, if they make a reference, the MSMED Act will override the Arbitration and Conciliation Act.
The Hon’ble Allahabad High Court in the case of Marsons Electrical Industries v. Chairman, Madhya Pradesh Electricity Board (Madhya Pradesh State Electricity Board) And Another,[5] after relying on the decision of the Hon’ble Supreme Court in M/s Silpi Industries vs. Kerala State Road Transport Corporation,[6] held that MSMED Act being a special and beneficial legislation will override the 1996 Act.[7]
The Hon’ble Court further held that “The parties to an arbitration have an autonomy to decide not only on the procedural law to be followed but also on the substantive law. The private agreement between the parties cannot obliterate the statutory provisions. Once the statutory mechanism under Section 18(1) of the MSMED Act, 2006 is triggered by any party it would override any agreement entered into between the parties.”
The Hon’ble Bombay High Court in the case of Bajaj Electricals Ltd. v. Chanda S. Khetawat[8] had held that, “The ongoing dispute filed under the provision of Micro, Small, and Medium Enterprises Development Act, 2006 (“MSMED Act, 2006”) shall supersede over the private agreement between the parties for arbitration and thereby refused to grant the relief of appointment of arbitrator under section 11 of the Arbitration and Conciliation Act, 1996.”
The Hon’ble court relied on the judgment of Gujrat State Civil Supplies Corporation (Supra) observed that as soon as the statutory mechanism under section 18 (1) of MSMED Act[9] is activated, it will supersede the arbitration agreement between the parties. In the said decision of the Hon’ble Supreme Court, it was ruled that a private agreement between the parties cannot obliterate the statutory provisions contained in the MSMED Act.
In the case of M/S Biotech International Limited v. Municipal Corporation of Delhi,[10] the Gujarat State Civil Supplies case was reiterated and it was held that the judgement clearly states that no party to a dispute is precluded from making a reference to the Micro and Small Enterprises Facilitation Council. Thus, it is a matter of right for the class governed under the MSMED Act to seek services of the Facilitation Council, and it has a simultaneous jurisdiction to act as the arbitrator or mediator to the dispute. The terminology used in Section 18(1) also gives an option to the supplier to approach the Facilitation Council.[11] Furthermore, the Biotech International case lays out that the provisions of Section 18 of MSMED Act will only be triggered if the party regardless of the arbitration clause approaches the Council. Since, the petitioner in the case did not choose to approach the Facilitation Council, the mechanism envisaged under section 18 has not been triggered. The Bench concluded that it does not seem to be suggested that in case a Micro, Small and Medium Enterprises chooses not to trigger Section 18 of MSMED Act then the party is precluded from initiating arbitration under the Arbitration and Conciliation Act, 1996. In furtherance to this, in the case of TBEA (India) Transformer Private Limited versus UP Micro and Small Enterprises & Ors.,[12] the Allahabad High Court explicitly stated that even if an arbitration agreement exists between the parties, it will not prevail over Section 18 of the Arbitration Act. This implies that it is the discretion of the parties involved in commercial disputes which forum to resort to for the resolution of the same.[13]
According to a latest data from the MSME Samadhaan portal, around 1,90,000 applications have been filed, however, it is staggering to learn that a mere 19% of the cases have been disposed off by the Facilitation Council.[14] These statistics indicate that the centres are facing a significant backlog.
The aforementioned rulings and data press the need for a harmonious interpretation between the two acts because the judicial decisions can lead to ambiguity and uncertainty for the parties involved in the MSME disputes. The same can be achieved through a liberal interpretation of Section 18(3) of the MSMED Act,[15] which will ensure that the proceedings of the Facilitation Council and party’s arbitration agreement, if any to co-exist in harmony.[16] Furthermore, the phrase “where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the council shall either itself take up the dispute for arbitration or refer it to any institution or centre” must be read to include arbitrators chosen by the parties to the dispute in the arbitration agreement.
Conclusion
The interaction between the Arbitration and Conciliation Act, 1996 and the MSMED Act, 2006 underscores our complicated legal system, especially when it comes to the resolution of commercial disputes outside the court. In order to promote the expansion of small and medium sized enterprises, the special act vide Section 18 establishes a dispute resolution process through Facilitation Council. This mechanism takes precedence over any pre-existing arbitration agreement between the parties.
The Supreme Court, in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Food Private Limited, it was held that MSMED Act being a beneficial legislation holds precedence over the Arbitration Act. Furthermore, there have been precedents to suggest that irrespective of an arbitration agreement, the disputes can be resolved by the council.
A liberal interpretation of Section 18(3) of the MSMED Act could facilitate the harmony between the two laws. By recognizing the possibility of integrating arbitrators chosen by the parties into the arbitration process following unsuccessful conciliation attempts, the law can better accommodate the diverse needs of MSMEs while upholding principles of fairness and efficiency.
Thus, I align with the words of Oliver Wendell Holmes Jr.,
“In the realm of law, harmony between statutes ensures justice prevails, guiding the disputing parties.”
References:
[1] The Micro, Small and Medium Enterprises Development Act, 2006, No. 27, Acts of Parliament, 2006 (India).
[2] The Arbitration and Conciliation Act, 1996, No. 26, Acts of Parliament, 1996 (India).
[3] The Micro, Small and Medium Enterprises Development Act, 2006, §18, No. 27, Acts of Parliament, 2006 (India).
[4] Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Food Private Limited, (2022) ibclaw.in 131 SC
[5] Marsons Electrical Industries v. Chairman, Madhya Pradesh Electricity Board (Madhya Pradesh State Electricity Board) And Another, 2023 SCC OnLine All 2675.
[6] M/s Silpi Industries v. Kerala State Road Transport Corporation, (2021) ibclaw.in 202 SC.
[7] Apoorva, Can MSMED Act have an overriding effect over Arbitration and Conciliation Act and agreement between parties? Allahabad HC answers, SCC Online (2023).
[8] Bajaj Electricals Ltd. v. Chanda S. Khetawat, 2023 SCC OnLine Bom 183.
[9] The Micro, Small and Medium Enterprises Development Act, 2006, §18(1), No. 27, Acts of Parliament, 2006 (India).
[10] M/S Biotech International Limited v. Municipal Corporation of Delhi, ARB.P. 754/2023 (January 24, 2024).
[11] Id. at 8.
[12] TBEA (India) Transformer Private Limited v. UP Micro and Small Enterprises & Ors., 2020 SCC OnLine All 2150.
[13] Id. at 3.
[14] MSME Samadhaan, https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx (last visited June 10, 2024).
[15] The Micro, Small and Medium Enterprises Development Act, 2006, §18(3), No. 27, Acts of Parliament, 2006 (India).
[16] Ameya Sharma and Tassawar Ali, Revisiting the ‘Settled’ Law on MSMED and Arbitration Acts: An Alternative Way Forward, India Corp Law (2024).
