RESOLUTION OF DISPUTES UNDER MSMED ACT

[Mr. M. GOVINDARAJAN]

MSMED Act

A single comprehensive act for development and regulation of small enterprises had been a long outstanding demand of the Sector so as to free it from a plethora of laws and regulations and visit of inspectors, which it had to face with limited awareness and resources. The need has been emphasized from time to time by stake holders at different fora. In addition, recommendations to provide for a proper legal framework for small sector to relieve it of the requirements to comply with multiple rules and regulations were made by the Committees such as the Abid Hussain Committee (1997) and Study Group under Dr. S.P. Gupta (2000). While the small scale industries continued to be important for the economy, in the recent years the small scale services have also emerged as a significant sector contributing substantially to the economy and employing millions of workers.  In a fast growing economy like ours, the natural mobility of small enterprises to medium ones has to be facilitated through appropriate policy interventions and legal framework. With these objectives in view, the Government came with an exclusive legislation for micro, small and medium enterprises known as the Micro, Small and Medium Enterprises Development Act, 2006 (‘Act’ for short).

Liability of buyer

Section 15 of the Act provides that where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment there for on or before the date agreed upon between him and the supplier in writing which shall not exceed 45 days from the date of acceptance or deemed acceptance.  Section 16 provides that if there is a default in payment then the buyer is be liable to pay compound interest with monthly rests to the supplier on that amount  from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. 

Reference to Facilitation Council

Any party to a dispute may, with regard to any amount due  may make a reference to the Micro and Small Enterprises Facilitation Council.  On receipt of reference  the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996.

Arbitration

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 providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section(1) of section 7 of that Act.  The Arbitrator shall decided the issue within 90 days.

Issue

The Act provides resolution of the disputes between the parties to the contract by means of conciliation or arbitration if it requires.  A question arises as to whether a business entity sought the procedure of settlement in the Act has to register with MSME at the time of entering into contract. 

The Calcutta High Court in NBCC (INDIA) LTD. VERSUS THE STATE OF WEST BENGAL & ORS. [2022 (6) TMI 365 - CALCUTTA HIGH COURT] held that no such requirement is there.   Since the Act is a special Act having overriding effect the procedure adopted in the Act is strictly to be followed.

In the above case NBCC (India) Limited is a government enterprise.  This company has issued four different work orders from the period 30.07.2015 to 19.08.2016 of different values.  These work orders were granted to Saket Infra Developers Private Limited, the 4^th respondent in this case.  On 15.09.2017 the said company awarded a fifth contract MSTC Building at New Town to the 4^th respondent.

The 4^th respondent registered itself as a small enterprise under the Act on 19.11.2016.  The two contracts have been terminated due to breach done by the 4^th respondent.  The said work has been taken up by new agencies at the risk and cost of the respondent no.4.  The other two contracts have been continued by the 4^th respondent.

Disputes have arisen between the NBCC Company and the 4^th respondent on all five contracts. The 4^th respondent filed a claim in respect of all of the projects before the second respondent who is the Chairman of West Bengal Micro and Small Enterprise Facilitation Council.  The appellant objected the same.  The appellant filed an application for recalling the order for reference on jurisdictional grounds.  However the Authorities took cognizance of the claim and proceeded further.  Since the conciliation failed the Authorities sought to initiate arbitration under the Act.  

The authorities issued a notice on 22.09.2021 to the appellant and the respondent No.4 fixing the hearing date for arbitration to resolve the disputes in the five contracts made between the appellant and the 4^th respondent. 

The appellant contended that the respondent cannot proceed under the Act.  The appellant further contended that on the date of awarding four contracts by the appellant to the 4^th respondent, the 4^th respondent did not register with the MSME Authorities under the Act.  Therefore the arbitration proceedings should not be proceeded with.

The appellant, on 30.09.2021 requested the respondents not to proceed the arbitration proceedings till the impugned order has not been recalled.

The appellant filed the present writ petition before the High Court.  The following are the prayers of the appellant before High Court-

• A Writ of or in the nature of Mandamus do issue directing the respondent No.2 and 3 and each one of them, their men, agents, assigns or sub-ordinates to recall the order dated 19.01.2021 and 22.09.2021 and to set aside and/or rescind the order by which they assumed the role of arbitrator in the present case for want of requisite jurisdiction.
• A Writ of or in the nature of Certiorari do issue commanding the respondent No.2 and 3 and each one of them, their men, agents, assigns, sub-ordinates to certify and transmit all documents pertaining to the orders dated 19.01.2021  and 22.09.2021  by which the respondent authorities have tried to enter into an Arbitral reference under the said MSMED Act, 2006, before this Court so that conscionable justice may be administered by quashing the said orders and/or decisions stated in the order dated 19.01.2021 and 22.09.2021.
• A Writ of or in the nature of Mandamus do issue directing the respondents specifically respondent No.2 to decide on the preliminary objections regarding the maintainability and the jurisdictional issues as raised by the petitioner, before entering into any arbitral reference in the matter.
• A Writ of or in the nature of Prohibition do issue prohibiting the respondents especially the respondent No.2 and 3 and each one of them, their men, agents and sub-ordinates etc. from continuing with the reference of arbitration which has been sought to be commenced by the letter 19.01.2021 upon termination of the purported conciliation proceeding and further prohibit them from taking any coercive steps or passing any penal order or impose any order against the petitioner.
• A Writ of or in the nature of Mandamus do issue directing the respondent No.2 and 3 and each one of them to consider the jurisdictional issue and objection raised by the defendant before proceeding any further with the reference upon giving the petitioner an opportunity of personal hearing without taking the same as a proceeding before the Arbitral Tribunal.

The High Court passed their order on 16.12.2021.   The appellant filed a review petition before the High Court.  On 24.12.2021 the order was modified by the High Court.  The Single Judge held that without prejudice to any of the rights and contentions of the writ petitioner, the petitioner shall participate in arbitration and that the Tribunal shall decide on its jurisdiction on inter alia the questions raised by the writ petitioner before entering into other questions.

Even not satisfied with this order the appellant filed the present appeal.  In the present appeal also the appellant raised the objection that no proceeding is maintainable under the Act before the Facilitation Council.  The appellant further contended that the Act, 2006 has no manner of application apropos the ‘Work Contract’ since neither section 11 nor the Public Procurement Policy, 2012 envisages a composite and distinct category of contracts such as work contract.

The High Court held that since the Act is a special legislation and has an overriding effect, the parties governed by it are bound to follow the mechanism provided under Section 18 of the Act.  The High Court did not want to interfere with the judgment of Single Judge and dismissed the appeal filed by the appellant.