MSMED Act 2006 Overrides Arbitration And Conciliation Act 1996 And Any Agreement Entered Into Between Parties: Allahabad HC

The Allahabad High Court on Tuesday held that the provision of Micro, Small and Medium Enterprises Development Act, 2006 have an overriding effect on the Arbitration and Conciliation Act 1996 and any agreement entered into between parties.

Relying on the decision of the Supreme Court in M/s Silpi Industries vs. Kerala State Road Transport Corporation, the bench comprising of Justice Mahesh Chandra Tripathi and Justice Prashant Kumar held that MSMED Act being a special and beneficial legislation will override the 1996 Act.

The Court further held that

“The parties to an arbitration have an autonomy to decide not only on the procedural law to be followed but also on the substantive law. The private agreement between the parties cannot obliterate the statutory provisions. Once the statutory mechanism under Section 18(1) of the MSMED Act, 2006 is triggered by any party it would override any agreement entered into between the parties.”

Factual Background

Appellant registered as “small scale industry” in 1971 under the Industrial Development and Regulation Act, 1951. Appellant claimed to be working as small scale industry since then.

In 1993, 'Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993' was promulgated, which was later on repealed. In 2006, 'Small Scale Industries Act, 2006' was promulgated. After the promulgation of the 2006 Act, appellant applied for certificate, which was issued to the appellant on 29.10.2007 under the Micro, Small and Medium Enterprises Development Act, 2006.

Later, rules for small scale industries were modified and all small scale industries registered under the 2006 Act were supposed to get a Udyog Adhaar Number. Appellant was issued Udyog Adhaar Number on 10.5.2016 wherein it was mentioned that the registration of the appellant was in continuation of the original certificate of Small Scale Industry issued in 1971.

Appellant and M.P. State Electricity Board entered into a contract. Thereafter, various work orders were issued to the appellant for supply of transformers till 1998. Appellant supplied the goods, however no payment was made by the respondent within stipulated time. After various representations, payment was made by respondent, however the interest on delayed payment was not paid. On demand of interest, Appellant was blacklisted by the respondent. Petitioner against the blacklisting order is pending before the Jabalpur High Court.

In 2001, appellant filed a claim petition for delayed payment and for payment of interest before U.P. Industry Facilitation Council, Kanpur. During the pendency of the claim petition, respondents offered settlement with the condition that the claim petition be withdrawn. During the pendency of the withdrawal application, Micro, Small and Medium Enterprises Development Act, 2006 was enacted.

Since no action was taken by the respondent on the settlement offer, appellant made an application before the Facilitation Council to restart the proceedings of aforesaid claim petition. The Facilitation Council, established under the MSMED Act, 2006, rejected the claim petition filed before the erstwhile Council under the 1993 Act, giving liberty to the appellant to file fresh claim before the newly established Facilitation Council under the MSMED Act, 2006.

Accordingly, appellant preferred a fresh claim application on 31.7.2007 before the Facilitation Council requesting to restart the proceedings of the said claim. Respondent opposed the petition on grounds that once the order was passed to file a fresh petition, the Council cannot reopen and restart the proceedings. However, the objection was rejected by the Council and award was passed on merits.

Respondent, MP State Electricity Board being aggrieved by the award challenged the same under Section 34 of the Arbitration and Conciliation Act, before the District Judge, Kanpur Nagar. The Commercial Court held that as per contract/agreement, the parties had agreed that all disputes would be subject to the jurisdiction of Jabalpur Court, hence the Commercial Court in Kanpur would have no jurisdiction to entertain such a case. It was observed that the Council had returned no finding on the issue of jurisdiction despite the same being raised before it. Since the Council did not have jurisdiction over the dispute, the award was liable to be rejected.

In appeal under Section 37 of the 1996 Act, counsel for appellant, Marsons Electrical Industries, argued that the contract cannot override the MSMED Act. It was argued that once no objection has been raised regarding registration of the appellant under the MSMED Act before the Facilitation Council and in appeal under Section 34 of 1996 Act, the same cannot be taken before the High Court.

Referring to Section 18(4) of the MSMED Act, it was argued that since the supplier is situated within the jurisdiction of Council at Kanpur, the award was within jurisdiction. Further, it was submitted that Section 24 of the MSMED Act provides that Section 15 to 23 of the MSMED Act shall have overriding effect on any other law for the time being enforced. Hence, MSMED Act being a special Act will have overriding effect on any other Act even over the provisions of Arbitration and Conciliation Act, 1996.

Further, it was argued that Section 16 of the MSMED Act provides that in case of delay of payment, the buyer is liable to pay “bank interest with monthly rates from appointed day, which would be three times the bank rate of interest as notified by the Reserve Bank of India.” It was submitted that the case of the appellant was covered by the decision of the Supreme Court in M/s Silpi Industries vs. Kerala State Road Transport Corporation.

Counsel for respondent argued that the appellant was not a supplier under Section 2(n) of the MSMED Act. It was argued that the appellant was not registered under the MSMED Act on date of filing of the claim petition before the Facilitation Council. The obtained registration in 2016, after the award was passed, signed and published. Since, he was not registered on the date, benefits of small scale industry cannot be given under the MSMED Act, 2006, retrospectively.

It was argued that the claim was raised after three years of ending of work period. Relying on M/s Silpi Industries vs. Kerala State Road Transport Corporation, counsel argued that benefit cannot be given retrospectively under the MSMED Act. Accordingly, it was urged that the Facilitation Council had no jurisdiction to entertain the claim petition and pass the award.

High Court Verdict

The Court observed that during the pendency of the appeal under Section 34 of the 1996 Act, the appellant got Udyog Aadhar Registration under the MSMED Act. The appellant's Company was re-registered as a Small Scale Industry with the date of commencement of the certificate as 12.9.1971.

Accordingly, the Court held that there was no break in continuity of registration of the appellant. It held that since the appellant was registered as a Small Scale Industry, it will be treated as 'supplier' under the MSMED Act.

Relying on Section 32 of the MSMED Act, the Court held that all proceedings under the Act of 1993 shall deemed to have been initiated under the MSMED Act 2006.

“As per Section 32 of MSMED Act, 2006 while repealing the 1993 Act it was made clear that anything done or any action taken under the 1993 Act shall be deemed to have taken under the MSMED Act, 2006. Hence, the application filed by the appellant before the Facilitation Council is deemed to have been filed under the provisions of MSMED Act, 2006.”

The Court observed that in M/s Silpi Industries vs. Kerala State Road Transport Corporation, the Supreme Court had held that MSMED Act, 2006 being a special Act will have overriding effect on the Arbitration and Conciliation Act, 1996. It was held that a seller under MSEMD Act can approach competent authority under the Act and any agreement to the contrary must be ignored. The Supreme Court had further held that if any registration obtained will be prospective and applies for supply of goods and service subsequent to its registration and cannot operate retrospectively.

The bench headed by Justice Tripathi held that appellant's registration was continuing since 1971, hence, there was no question of prospective application.

Reliance was placed by counsel for respondent on Vaishno Enterprises vs. Hamilton Medical AG and another, wherein the Supreme Court had held that if the supplier registers under Section 8(1) of the MSMED Act, 2006 after the contract has been executed, the provisions of MSMED Act will not apply. The same was distinguished by the High Court on the premise that the registration of the appellant as a “small scale industry” dates back to 1971.

“Further, in case of MSMED Act, 2006 the agreement between the parties cannot have supremacy over the statutory provisions. The purpose of MSMED Act, 2006 was to ensure timely and smooth payment to the supplier registered as micro, small and medium enterprises.”

In conclusion, the Court held the MSMED Act being a special act will override the Arbitration and Conciliation Act, 1996 as well as the agreement between the parties. The Court held that since the proceedings under MSMED Act were initiated before the Facilitation Council at Kanpur, therefore, Commercial Court at Kanpur has the jurisdiction to entertain appeal under Section 34 of the 1996 Act.

Accordingly, the appeal under Section 37 of the Arbitration and Conciliation Act, 1996 was allowed, i.e., the order of the Commercial Court, Kanpur was set aside and the award passed by the facilitation Council, Kanpur was restored.

Case Title: Marsons Electrical Industries v. Chairman, Madhya Pradesh Electricity Board (Madhya Pradesh State Electricity Board) And Another [Appeal Under Section 37 Of Arbitration And Conciliation Act 1996 No. - 701 of 2023]

Citation: 2023 LiveLaw (AB) 488

Counsel for Petitioner: Alok Kumar Yadav, Shantanu Srivastava

Counsel for Respondent: Varun Srivastava, Aditya Khandekar

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