MSME Act vs. Arbitration Act: Conundrum resolved!

Nishant Nigam, Partner and Aman Abbi, Associate

The Hon’ble Supreme Court, vide judgement dt. 31.10.2022, in the case of Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (Unit 2) & Anr. [SLP (C) No. 12884/2020] (“Judgement”), has finally laid to rest all the ‘grey areas’ pertaining to the applicability of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”) vis-a-vis the Arbitration and Conciliation Act, 1996 (“Arbitration Act”).

The MSME Act came about with the objective of facilitating the promotion and development, and enhancing the competitiveness of MSME’s, and for matters connected therewith or incidental thereto. It also undertook the task of filling the lacunae of its predecessor, the ‘Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993’; which failed to provide for any dispute resolution mechanism through which applicable enterprises could avail of its remedies under the said act. 

The Judgment delivered was common to seven Special Leave Petitions (“SLP”), which were clubbed and heard together by the Hon’ble Supreme Court, as all of them involved certain common questions of law pertaining to the MSME Act. Considering the varied factual positions of the seven SLP’s, the Hon’ble Supreme Court stated the following common questions of law for consideration:

“(i) Whether the provisions of Chapter-V of the MSMED Act, 2006 would have an effect overriding the provisions of the Arbitration Act, 1996? 

(ii) Whether any party to a dispute with regard to any amount due under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council under sub-section (1) of Section 18 of the said Act, if an independent arbitration agreement existed between the parties as contemplated in Section 7 of the Arbitration Act, 1996?

(iii) Whether the Micro and Small Enterprises Facilitation Council, itself could take up the dispute for arbitration and act as an arbitrator, when the council itself had conducted the conciliation proceedings under sub-section (2) of the Section 18 of the MSMED Act, 2006 in view of the bar contained in Section 80 of the Arbitration Act,1996?”

To respond to the framed questions of law, the Hon’ble Supreme Court first analysed the origins and objectives of both the MSME Act, as well as the Arbitration Act. Basis the said analysis and the arguments of all parties concerned, the Hon’ble Supreme Court at the outset, determined that the MSME Act being a special statute, and that the Arbitration Act being a general statute; the provisions of the special statute would override the provisions of the general statute; thereby clearly holding that the MSME Act will override the Arbitration Act.

Building on the above, the Hon’ble Supreme Court has further held that a valid arbitration clause in an agreement will get superseded by the provisions of the MSME Act; implying that arbitration agreement in an agreement will get superseded by the provisions contained under Section 18 of the MSMED Act, 2006. While addressing the second issue the Hon’ble Court further opined that restricting the applicability/invocation of the remedy under the MSME Act, on account of an Arbitration clause in an agreement, would frustrate the MSME Act; which cannot be allowed. 

Finally, the Hon’ble Supreme Court also addressed the aspect of sanctity and permissibility of the MSME Facilitation Council to act as an ‘arbitrator’ as also a ‘conciliator’. It has been held that as the MSME Act is a special statute, and overrides the Arbitration Act; the provisions of the Arbitration Act would only apply should the conciliation proceedings u/s 18(2) of the MSME Act fail. It was further held that like any arbitral tribunal, appointed under the Arbitration Act, is competent to rule on its own jurisdiction, as under Section 16 of the Arbitration Act, so too will the MSME Facilitation Council be competent to rule on its own jurisdiction. The said observation categorically implies that if the MSME Facilitation Council acts both as a conciliator as well as an Arbitrator; the same would not be violative of Section 80 of the Arbitration Act. 

In addition to the framed issues, the Hon’ble Supreme Court, in a stand-alone averment made before it, also clarified on the aspect of ‘suppliers’ claiming benefits under the MSME Act by registering themselves as MSME subsequent to entering into contracts. It was unequivocally held by the Hon’ble Supreme Court that “if the party Supplier was not the “supplier” within the meaning of Section 2(n) of the MSMED Act, 2006 on the date of the contract entered into between the parties, it could not have made reference of dispute to Micro and Small Enterprises Facilitation Council under Section 18(1) of the MSMED Act, 2006 and in such cases, the Council would not have the jurisdiction to decide the disputes as an arbitrator.” Simply put, the benefits under the MSME Act would be effective ‘prospectively’ to registration as a supplier under the MSME Act; and not ‘retrospectively’. 

On a separate note, the Hon’ble Supreme Court has also, although indirectly, clarified the issue of ‘territorial jurisdiction’ of appeals u/s 34 of the Arbitration Act, arising out of Awards passed by the MSME Facilitation Council. In the present SLP – the lead petition of Gujarat State Civil Supplies Corporation (supra) – the MSME Facilitation Council at Bhopal had undertaken the Arbitration between the parties, as under the MSME Act, and passed an Award. That the said Award was, thereafter, challenged in a petition u/s 34 of the Arbitration Act, before the Commercial Court, Ahmedabad; and subsequently challenged u/s 37 of Arbitration Act, before the Hon’ble High Court of Gujarat. The present SLP, challenging the order of the Hon’ble High Court of Gujarat, was dismissed by the Hon’ble Supreme Court as it did not find any infirmity in the impugned order passed by the Hon’ble High Court of Gujarat. That upholding the order of the Hon’ble High Court of Gujarat, the Hon’ble Supreme Court has implied the following:

1.    That the place where the MSME Facilitation Council undertakes the Arbitration is merely the ‘venue’ of arbitration proceedings; and the seat shall remain the same as under the contract between the parties.

2.    Accordingly, the Award passed by the MSME Facilitation Council will be challenged at the ‘seat’ of the Arbitration proceedings, and not the venue.

From the aforesaid, it can be seen that the Judgement of the Hon’ble Supreme Court has truly clarified a lot of ‘grey areas’ in the long-standing dispute between the applicability of the MSME Act over the Arbitration Act; and laid to rest most of the contentions which restricted the MSME Act in achieving its objective and purpose.