The Supreme Court recently decided certain important issues pertaining to the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) in Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited, [SLP (C) No. 12884/2020]. The Supreme Court, inter-alia, held that, arbitration proceedings under the MSMED Act shall prevail over the parties’ arbitration agreement and Chapter V (Delayed payments to Micro and Small Enterprises) of the MSMED Act shall override the provisions of the Arbitration and Conciliation Act, 1996 (“A&C Act”).

Issue:

The Supreme Court was hearing a clutch of matters and framed the following common questions for consideration:

1. Whether the provisions of Chapter-V of the MSMED Act would effectively override the provisions of the A&C Act?

2. Whether any party to a dispute with regard to any amount due under section 17 of the MSMED Act would be precluded from making a reference to the Council under section 18 (1) of the MSMED Act though an independent arbitration agreement existed between the parties as per section 7 of the A&C Act?

3. Whether the Council under the MSMED Act itself could take up the dispute for arbitration and act as an arbitrator, when the council itself conducted conciliation proceedings under section 18 (2) of the MSMED Act considering the bar under section 80 of the A&C Act? 

Findings/ observations of the Supreme Court:

1. The MSMED Act being a special law and A&C Act being a general law, the provisions of the MSMED Act would prevail over the A&C Act. The A&C Act in general governs the law of arbitration and conciliation, however the MSMED Act governs the specific nature of disputes arising of specific persons to be resolved by following a specific process and through a specific forum.

2. A private agreement between parties cannot obliterate the statutory provisions. If the statutory mechanism under section 18 (1) of the MSMED Act is triggered then it would override any other agreement independently entered between the parties in view of the non-obstante clause in section 18 (1) and (4) of the MSMED Act. Also, sections 15 to 23 of the MSMED Act have an overriding effect as per section 24 of the MSMED Act as it clarifies when anything inconsistent is contained in any other law for the time being in force. If a party entitled to avail a remedy under section 18 (1) of the MSMED Act but cannot because of an independent arbitration agreement between the parties then the purpose of MSMED Act would get frustrated.

3. The Council which initiated the conciliation proceedings under section 18 (2) of the MSMED Act would be entitled to act as an arbitrator despite the bar under section 80 of the A&C Act. This is because a bar under section 80 of the A&C Act stands superseded by section 18 read with 24 of the MSMED Act.

4. Proceedings before the Council/ institute/ centre acting as an arbitrator/ tribunal under section 18 (3) of the MSMED Act would be governed by the A&C Act. Such Council/ institute/ centre would be competent to rule on its own jurisdiction like any other arbitral tribunal appointed under the A&C Act.

5. The Court relied on its judgment in Silpi Industries v. Kerala State Road Transport Corporation, [2021 SCC Online SC 439], and held that a party who was not a ‘supplier’ as per the definition in section 2 (n) of the MSMED Act on the date of entering into contract cannot seek any benefit as the ‘supplier’ under MSMED Act. If any registration is obtained subsequently, the same shall operated only prospectively and apply to supply of goods/ rendering of services after the registration.

6. The Supreme Court in Vidharbha Ceramics Private Limited v. Messrs Steel Authority of India, [Civil Appeal No. 6167 of 2013], set aside an order dated August 27, 2010 passed by the Bombay High Court, Nagpur Bench in writ petition no. 2145 of 2010 [AIR 2012 Bom. 178]. The Bombay High Court earlier held that the Council under the MSMED Act was not entitled to proceed as per section 18(3) of the MSMED Act because an independent arbitration agreement existed between the parties. In light of the above findings, the Supreme Court came to the conclusion that the Council under the MSMED Act shall be entitled to proceed further with the reference under section 18 (1) of the MSMED Act.

Comment:

7. This judgment has provided much needed clarity for some questions arising out of the MSMED Act. As such, this may be one of the few judgments that considers the A&C Act to be a general legislation vis-à-vis another statute, in this case the MSMED Act. Also, it is relevant that proceedings under the MSMED Act may result in a common person being the conciliator and arbitrator. As a consequence, it is possible that parties may be hesitant during conciliation proceedings in the fear that failure to arrive at a resolution shall result in arbitration proceedings before the same Council/ institute/ centre. 

8. Given the law laid down by the Supreme Court in this judgment, the position of law enumerated by the Bombay High Court in the case of, Microvision Technologies Private Limited v. Union of India, [2020 SCC Online Bom 642], is no longer good law.

Please find a copy of the judgment, here.

This update has been contributed by Ranjit Shetty (Senior Partner) and Yuvraj Choksy (Principal Associate).

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