MSEF Council Cannot Entertain Independent Claims At The Instance Of The Buyer Against The Supplier: Delhi High Court

The bench of Justice Prathiba M. Singh held that MSMED Act does not contemplate a scheme for the buyer approaching the facilitation council under Section 18 of the Act for recovering any monies from the seller. It is only the seller who can independently approach the facilitation council for adjudication upon its claims, but the buyer would have the right to make counter-claims, however, it cannot approach the facilitation council on its own.

Facts

The parties entered into an agreement dated 17.10.2019. Under the contract, the petitioner was to supply goods and services including labor, material tools etc., as also engineers and supervisors for monitoring services to the respondent.

A dispute arose between the parties regarding the payments under the agreements, accordingly, the respondent issued a legal notice to the petitioner. Thereafter, the respondent enchased the bank guarantee issued by the petitioner. The respondent also terminated the agreement citing non-performance by the petitioner.

Thereafter, the respondent preferred a claim before the MSFE Council under Section 18 of the MSMED Act, 2006. Consequently, the Council vide its order dated 14.09.2021 advised the petitioner to pay to the respondent a sum of Rs. 9,59,66,352/-. Aggrieved by the order of the tribunal, the petitioner approached the High Court in a writ petition challenging the order as well as the jurisdiction of the tribunal.

Contention of the Parties

The petitioner challenged the order of the Council on the following grounds:

• Petitioner has not received any legal notice dated 30.06.2021 from the respondnent and the same is incorrectly stated in the impugned order.
• The Council failed to appreciate that the respondent is a buyer under the MSMED Act and only the claims by the seller can be decided under Section 18 of the Act, therefore, the Council passed the matter without any jurisdiction.
• The respondent is a medium enterprise, ergo, it is not entitled to invoke the jurisdiction of the Council under Section 18 of the Act.
• The claims of the buyer cannot be independently decided by the Council and only the counter-claims that it files in response to the claims of the seller can be decide by the Council.
• The scheme of the MSMED Act, 2006 does not envisage a buyer approaching the MSEFC for recovering any monies from the sellers. The same is not contemplated under the MSMED Act, 2006.

The respondent countered the above submission on the following grounds:

• The Supreme Court in Silpi Industries has categorically held that both the claims and the counter-claims are maintainable before the MSEF Council.
• The MSME ecosystem provides quick adjudication and higher payment of interest and, therefore, the jurisdiction of the MSEFC cannot be held to be barred.
• That as per Section 2(9) of the MSMED Act, 2006 claims and counter claim are placed at the same pedestal and therefore, the distinction sought to be made by the Petitioner would not be tenable in law.
• The respondent was a small enterprise at the contemporaneous time period when the dispute had arisen and the claim was made.
• That as per notification dated 18th October, 2022 issued by the Ministry of Micro, Small and Medium Enterprise even a medium enterprise can continue invoking the jurisdiction of the MSEFC for a period of three years after its re-classification.

Analysis by the Court

The Court referred to the Statement of Object and Reasons (SOAR) of the MSMED Act, 2006 and observed that it brought into effect to support small-scale industries, engaged in the manufacturing and extending the said support in a comprehensive manner to the Services sector. It further observed that chapter V of Act is based on the provisions of the Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 which was meant to create a statutory liability upon the buyers to make payments to the supplier.

The Court held that the under Section 18 any party to a dispute can make a reference to the MSEFC in respect of any amount due under Section 17. Section 17 in turn refers to Section 16 and Section 16 in turn refers to Section 15. Thus, Sections 15 to 18 of the MSMED Act, 2006 are inter-linked with each other and are also linked to the title of the chapter i.e., Chapter V: Delayed Payments to Micro and Small Enterprises. Thus, the entire Chapter V applies only in respect of delayed payments to Micro and Small Enterprises. Chapter V excludes Medium Enterprises under Section 2(g) of the Act.

The Court held that Section 17 of the Act sufficiently addresses the situation and a plain reading of the statute would reveal that the Act does not deal with a situation where a Buyer raises claims against the Supplier and makes it categorically applicable only in respect of claims recoverable by Suppliers, who are registered under the Act as Micro or Small Enterprises, therefore, a buyer cannot maintain an independent claim against the supplier under the MSMED Act.

The Court held that the amount due under Section 17 can only be an amount liable to be paid by the Buyer to the Supplier and not the other way round. Thus, it is clarified that the language in Section 18 i.e., “any party to a dispute” cannot be extended to a claim by a Buyer against the supplier as the same is qualified as being only in respect of the amount due under Section 17.

Accordingly, the Court set aside the order of the tribunal.

Case Title: Uniseven Engineering and Infrastructure Pvt. Ltd v. MSEF Council District (South) and Anr. 

Citation: 2023 LiveLaw (Del) 569

Date: 05.07.2023

Counsel for the Petitioner: Mr. Anirudh Bakhru, Mr. Ayush Puri, Mr. Umang Tyagi, Mr. Kanav Madnani, Mr. Vijay Laxmi Rathi & Mr. Pragya Choudhary, Advocates.

Counsel for the Respondent: Ms. Arushi Gupta on behalf of Mr. Jawahar Raja, ASC, GNCTD for R-1.) Dr Amit George & Mr Sahil Garg, Advocate for R-2

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