Supreme Court's decision on Applicability of Limitation Act to Arbitration initiated under provisions of MSMED Act, 2006

M/s. Silpi Industries etc. v. Kerala State Road Transport Corporation & Anr. etc.
[CIVIL APPEAL NOS.1570-1578 OF 2021]
M/s. Khyaati Engineering v. Prodigy Hydro Power Pvt. Ltd.
[CIVIL APPEAL NOS.1620-1622 OF 2021]
Date of Judgement: June 29, 2021
Authority: Supreme Court

  • In this case two preliminary issues were identified by the Hon’ble Supreme Court:
  1. Whether the provisions of Indian Limitation Act, 1963 is applicable to arbitration proceedings initiated under Section 18(3) of Micro, Small and Medium Enterprises Development Act, 2006? and
  2. Whether counter claim is maintainable in such arbitration proceedings?
  • In response, reference was first drawn to the legislative intent behind the enactment of Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) and the erstwhile Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.
  • The legislature’s prime intent was to resolve the issue of inadequate working capital in small scale undertakings, by statutorily ensuring prompt payments of money by buyers and mandatory provisions for payment of interest on outstanding money, in case of default to the benefit of the sellers.
  • It was also noted that MSMED Act was enacted to provide, for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and connected matters.
  • If any party has a dispute with regard to amount due under Section 17, a reference is required to be made to the Micro and Small Enterprises Facilitation Council (“MSEFC”). On such reference, the Council is empowered to conduct or make reference for conducting conciliation under Section 18(2).
  • The Court opined that from a reading of Section 18(3) of the MSMED Act, it was observed that when the conciliation is not successful under Section 18(2), the MSEFC shall either itself take up the dispute for arbitration or refer it to any institution for arbitration and the provisions of Arbitration and Conciliation Act 1996 (“A&C Act”) shall be made applicable.
  • Reference was then drawn to Section 43 of the A&C Act which itself makes it clear that the Limitation Act, 1963 shall apply to the arbitrations, as it applies to proceedings in court.
  • Referring to the judgement in the case of Andhra Pradesh Power Coordination Committee v. Lanco Kondapalli Power Ltd. & Ors. which discussed that since Section 43 of the A&C Act clarified that Limitation Act, 1963 is applicable to the arbitration proceedings, and Section 18 (3) of the MSMED Act clarifying that the A&C Act shall be applicable. On a conjoint reading of the said provisions the Supreme Court held that Limitation Act, 1963 is applicable to the arbitration proceedings pursuant to Section 18(3) of the MSMED Act.
  • Regarding the second issue with respect to maintainability of a counter claim in arbitration proceedings, it was observed that if arbitration proceedings are initiated under Section 18(3) of the 1996 Act, the provisions of A&C Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in Section 7(1) of the A&C Act which defines an arbitration agreement as an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.
  • Additional reference was drawn to Section 23(2A) of the A&C Act, which gives a right to a respondent to submit a counter claim or plead set-off regarding claims within the scope of the arbitration agreement. It was held that when there is an express provision for filing counter-claim and set-off , there is no reason for curtailing that right of the respondent in proceedings before the MSEFC.
  • The Court also observed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at three times of the bank rate and the 75% pre-deposit which is contemplated under Sections 16 and 19 of the MSMED Act, to the detriment of the seller.
  • The Court placing reliance on Edukanti Kistamma (Dead) through LRs. v. S. Venkatareddy (Dead) through LRs. & Ors, held that MSMED Act, being a special beneficial Statute, will have an overriding effect (as contemplated under section 24 of the MSMED Act)vis-à-vis A&C Act, which is a general Act. Owing to the beneficial provisions in the special enactment i.e., MSMED Act, available benefits cannot be denied on the ground that counter-claim by buyer is not maintainable before the MSEFC which will in effect lead to buyers wishing to avoid the jurisdiction of the MSEFC by conveniently pleading the spacious plea of counter-claim, without responding to the claims of the seller which will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises. Therefore, it was held that if buyer has any claim, it can very well be subject to the jurisdiction before the MSEFC and make its claim / counter claim.
  • Even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by MSMED Act, the seller can certainly approach the competent authority to make its claim. However, if there is any contrary agreement between the parties, same is to be ignored in view of the statutory obligations and mechanism provided under the MSMED Act.
  • Further justifying the maintainability, the Court observed that if it does not allow the counter-claim made by the buyer in the proceedings arising out of claims made by the seller, this may lead to parallel proceedings before various fora and could effectively lead to multiple conflicting findings on the same issue.
  • Therefore, on a harmonious construction of Section 18(3) of the MSMED Act and Section 7(1) and Section 23(2A) of the A&C Act, the Court held that counter-claim and set-off is maintainable before the statutory authorities under MSMED Act.
  • Despite the above rations, appellant (M/s. Khyaati Engineering) was held to not be entitled for the relief of counter-claim / set-off as pursuant to the facts of the case pertaining to C.A.Nos.1620-1622 of 2021, the appellant did not have the registration as per Section 8(1) of the MSMED Act on the date of supply of goods and services.
  • The Court held that to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the MSMED Act, as on the date of entering the contract. This assertion is also an indicative clarification to the registration conundrum prevalent due to conflicting legal positions and aims to uphold that registration by an MSMED is indeed mandatory to reap benefits under the MSMED Act. In any event, the Court held that for the supplies pursuant to the contract made, before the registration of the business unit under provisions of the MSMED Act, no benefit can be sought by such entity under MSMED Act.
  • By taking recourse to filing memorandum under Section 8(1) of the MSMED Act, subsequent to entering into contract and supply of goods and services, one cannot assume the legal status of being classified under MSMED Act, and if subsequently any registration is obtained, same will be prospective and would be applied for supply of goods and services subsequent to registration but shall not be considered to operate retrospectively. The Court held that any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party which is not intended by legislation.
  • In conclusion, we can say that this seminal judgement has the effect of settling long drawn controversies with respect to the applicability of the limitation law, maintainability of counter-claims and set-offs during arbitrations and the registration mandate as envisaged under the MSMED Act. The clarifications regarding the interplay of all the three legislations namely Limitation Act, 1963, MSMED Act and A&C Act while attributing primacy of the MSMED Act over A&C Act shall have lasting positive ramifications for involved stakeholders and beneficially steer the MSMED centric arbitral jurisprudence in India.
Dated: July 8, 2021

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