‘MSMED ACT’ OVERRIDES ARBITRATION AND CONCILIATION ACT, 1996

[DR.MARIAPPAN GOVINDARAJAN]

MSMED Act

The ‘Micro, Small and Medium Enterprises Development Act, 2002’ (‘Act’ for short) was enacted to promote and develop micro, small, and medium enterprises (MSMEs) in India and enhance their competitiveness. It provides a legal framework for the growth and development of these enterprises, covering aspects like registration, financial assistance, and dispute resolution. Chapter V of the Act provides for the treatment of delayed payments to micro and small enterprises.  Section 18 of the Act provides for the reference of the dispute to the MSE Facilitation Council (‘Facilitation Council’ for short).  The said section provides that-

• Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, (recovery of amount due) make a reference to the Micro and Small Enterprises Facilitation Council.
• On receipt of a 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  shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
• Where the conciliation initiated 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.
• Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.
• Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.

Issue

The issue to be discussed in this article is as to whether the provisions of the Act override the provisions of Arbitration and Conciliation Act with reference to decided case laws.

Case laws

In M/S. SILPI INDUSTRIES ETC. AND M/S. KHYAATI ENGINEERING VERSUS KERALA STATE ROAD TRANSPORT CORPORATION & ANR. ETC. AND PRODIGY HYDRO POWER PVT. LTD. - 2021 (6) TMI 1119 - SUPREME COURT, the Supreme Court observed  while considering the issue with regard to the maintainability and counter-claim in arbitration proceedings initiated as per Section 18(3) of the Act that the Act being a special legislation to protect MSMEs by setting out a statutory mechanism for the payment of interest on delayed payments, the said Act would override the provisions of the Arbitration Act, 1996 which is a general legislation.  Even if the Arbitration Act, 1996 is treated as a special law, then also the Act having been enacted subsequently in point of time i.e. in 2006, it would have an overriding effect, more particularly in view of Section 24 of the Act which specifically gives an effect to the provisions of Sections 15 to 23 of the Act over any other law for the time being in force, which would also include the Arbitration Act, 1996.  Further the specific non obstante clauses contained in sub-sections (1) and (4) of Section 18 which have an effect overriding  any other law for the time being in force.

In GUJARAT STATE CIVIL SUPPLIES CORPORATION LTD. VERSUS MAHAKALI FOODS PVT. LTD. (UNIT 2) & ANR., M/S. RAMKRISHNA ELECTRICALS LTD. VERSUS MAHARASHTRA STATE ELECTRICITY DISTRIBUTION COMPANY LTD. & ANR., M/S VIDARBHA CERAMICS PVT. LTD. VERSUS M/S STEEL AUTHORITY OF INDIA & ORS, GUJARAT STATE PETRONET LTD. VERSUS KRUNAL ENGINEERING WORKS & ORS., BHARAT ELECTRONICS LTD. &ANR. VERSUS IBEX INTEGRATED BUSINESS EXPRESS PRIVATE LTD. & ORS., UNION OF INDIA VERSUS M/S SIRUS GLOBAL PVT. LTD. AND JITF WATER INFRASTRUCTURE LIMITED VERSUS MSME COMMISSIONERATE & ORS. - 2022 (11) TMI 91 - SUPREME COURT, the Supreme Court differentiated between the Act and Arbitration and Conciliation Act, 1996.  The Supreme Court observed that the Arbitration Act, 1996 in general governs the law of Arbitration and Conciliation, whereas the MSMED Act, 2006 governs specific nature of disputes arising between specific categories of persons, to be resolved by following a specific process through a specific forum. The Act being a special law and the Arbitration Act, 1996 being a general law, the provisions of the MSMED Act would have precedence over or prevail over the Arbitration Act, 1996.

In M/S HARCHARAN DASS GUPTA VERSUS UNION OF INDIA - 2025 (5) TMI 1121 - SUPREME COURT, the Indian Space and Research Organisation (‘respondent’ in this case) invited bids for construction of staff quarters at Delhi.  The respondent issued a tender notice on 16.01.2017.   The appellant was selected as a successful bidder for the said work.  An agreement was made in this behalf between the appellant and the respondent on 16.01.2017. 

Disputes arised between the parties.  The appellant invoked the jurisdiction of Facilitation Council at Delhi under Section 18 of the Act. The Facilitation Counsil issued a notice to the respondent on 30.03.2022 for conciliation.  The respondent refused to attend the conciliation proceedings.  Since the respondent did not co-operate, the Facilitation Council referred the disputes under Section 18(3) of the Act to be conducted by the Institutional through Delhi Arbitration Centre.  The Centre also appointed an arbitrator to decide the dispute. 

The Arbitrator commenced its proceedings on 08.06.2022.  The Arbitrator took the claim petition filed by the appellant and directed the respondent to file its defence statements within 4 weeks.  The respondent did not file any reply to the claim petition.  Instead, it filed a writ petition before the High Court, Karnataka challenging the assumption of jurisdiction by the Delhi Arbitration Centre and also the conduct of the arbitration proceedings.  The High Court, on 07.12.2023 stayed the further proceedings of arbitration.  The High Court held that the Delhi Arbitration Centre, at the instance of the Facilitation Council, Delhi could not have assumed jurisdiction as it is contrary to the agreement between the parties.  The High Court also held that as per the agreement the seat of the arbitration shall be at Bengaluru.  The proceedings conducted by the Arbitration Centre is without jurisdiction and as such it is illegal and contrary to law.

Against the order of the High Court, the appellant filed the present appeal before the Supreme Court.  The Supreme Court considered the submissions of both the parties.  The respondent contended that The Supreme Court relied on its own judgment in ‘Mahakali’ (supra). 

The Supreme Court observed that the issue relating to ‘seat of arbitration’ in all cases covered under the MSMED Act is settled in view of the pronouncement of the Supreme Court in ‘Mahakali’ (supra).  Further the Supreme Court held that according to Section 18(4) of the Act the jurisdiction for arbitrator in the facilitation Council where the supplier is located.  Accordingly, the Delhi is the right place for the conduct of arbitration.  The Supreme Court further held that it had no touched the merits of the case.  The Supreme Court directed the arbitrator to permit the parties to raise and argue all questions of law and facts legally.

The Supreme Court allowed the appeal and set aside the order passed by the High Court and restored the arbitral proceedings under the aegis of Delhi Arbitration Centre.

Conclusion

Once the statutory mechanism under Section 18(1) of the Act is triggered by any party, it would override any other agreement independently entered into between the parties, in view of the non obstante clauses contained in sub-sections (1) and (4) of Section 18. The provisions of Sections 15 to 23 have also overridden effect as contemplated in Section 24 of the Act when anything inconsistent is contained in any other law for the time being in force.