Order Under Section 16 Of A&C Act Which Results In Conclusion Of Arbitral Proceedings- Can Be Challenged Under Section 34: Madras High Court

The Single Bench of Justice M. Sundar held that since registration under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) is not compulsory, the order passed by the Arbitral Tribunal accepting the plea of lack of jurisdiction due to the non-registration of the claimant under the MSMED Act, is patently illegal and in conflict with the public policy of India.

The petitioner – M/s. Sunwin Papers, is registered with the Ministry of Micro, Small and Medium Enterprises. The petitioner made certain supplies to the respondent Sivadarshini Papers Pvt. Ltd..

After the respondent allegedly failed to make payments, the petitioner invoked the provisions of the MSMED Act. Subsequently, the Facilitation Council under the MSMED Act referred the dispute to arbitration under Section 18 of the MSMED Act.

Before the Arbitral Tribunal, the respondent raised a preliminary issue under Section 16 of the A&C Act, contesting the jurisdiction of the Arbitral Tribunal. The respondent averred that the sub-classification under which the petitioner had obtained registration under the MSMED Act had been excluded vide the Gazette Notification of S.O. 85(E), dated 10.01.2017, and therefore, the petitioner had ceased to be a MSME. Accepting the plea made by the respondent under Section 16, the Arbitral Tribunal ruled that it did not have the jurisdiction. Against this, the petitioner filed an application under Section 34 of the A&C Act before the Madras High Court.

The respondent M/s. Sivadarshini Papers submitted before the High Court that since the petitioner ceased to be a MSME, therefore, the reference to arbitration made by the Facilitation Council under Section 18 of the MSMED Act was bad in law.

The respondent, disputing the maintainability of the application under Section 34 of the A&C Act, averred that an application under Section 34 was not maintainable against a proceeding under Section 16 of the A&C Act.

To this, the petitioner Sunwin Papers contended that the order passed by the Arbitral Tribunal, accepting the plea made under Section 16 of the A&C Act, brought the proceedings before the Tribunal to a closure; hence, an application under Section 34 of the A&C Act was maintainable.

The petitioner submitted that after it had obtained registration under the MSMED Act, the Ministry of Micro, Small and Medium Enterprises had issued the Notification dated 10.01.2017. The petitioner averred that the said Notification is prospective in nature and therefore, it did not affect the existing registrants and that it only applied to the fresh applicants.

Referring to the decision of the Supreme Court in Indian Farmers Fertilizer Co-Operative Limited versus Bhadra Products (2018), the High Court held that if an order under Section 16 of the A&C Act has the effect of concluding the arbitral proceedings, the same would be subject to an appeal under Section 37 of the A&C Act.

Holding that sauce to Goose is sauce for the Gander too, the Court held that an application under Section 34 of the A&C Act would also be maintainable against an order under Section 16 which results in closure of the arbitral proceedings.

"Though Bhadra Products penned by Hon'ble Mr. Justice Rohinton Fali Nariman turns on a case where limitation was decided by AT, the principle is, if an order under Section 16 has the effect of concluding the arbitral proceedings, the same would be subject to an appeal under Section 37. Sauce to Goose is sauce for the Gander too. Therefore, I am inclined to entertain captioned Arb OP essentially because what is now being referred to as impugned award i.e., proceedings dated 01.10.2020 gives a closure to the arbitral proceedings".

The Court observed that on the basis of the Notification dated 10.01.2017, an Office Memorandum dated 27.06.2017 was issued, which had specified certain activities which would not be included in the manufacture and production of goods or provision of services under Section 7 of the MSMED Act.

Noting that the said Notification and Office Memorandum were issued after the petitioner had obtained registration under the MSMED Act, the Court ruled that a subordinate legislation is, as a thumb rule, prospective in nature.

While ruling that the said Notification issued under the MSMED Act was not even a subordinate legislation and that it was only a notification made under a Statute, the Court noted that Section 7 of the MSMED Act only deals with the classification of Enterprises and that Section 8 of the MSMED Act provides for the registration.

"To be noted, Section 7 of MSMED Act deals with classification of Enterprises and Section 8 would provide for the registration. There is nothing to demonstrate that notification for the Office Memorandum is retrospective and all registrants would stand effaced qua MSMED Act. This by itself drops the curtains on the matter.", the Court said.

Further, the Court held that registration under MSMED Act is not compulsory, which was also noted by the Tribunal in its order and hence, the plea of lack of jurisdiction raised by the respondent ought to have been rejected by the Tribunal.

"This therefore is a clear case of patent illegality within the meaning of Section 34(2A) and it would also be in conflict with public policy of India owing to being in conflict with fundamental policy of Indian Law which in legal parlance will be Clause (ii) of Explanation 1 under Section 34(2)(b)(ii) of A and C Act.", the Court said.

Ruling that the dispute between the parties has to be adjudicated by arbitration, the Court set aside the order passed by the Arbitral Tribunal under Section 16 of the A&C Act.

Case Title: M/s. Sunwin Papers versus M/s. Sivadarshini Papers Pvt. Ltd.

Dated: 11.08.2022 (Madras High Court)

Citation: 2022 LiveLaw (Mad) 383

Counsel for the Respondent: Mr. Adarsh Subramanian

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