To Register Or Not To Register? - MSMEs And Arbitration Act

Silpi and Mahakali - Gotta Register It!

In Silpi Industries, the central issues before the Supreme Court were, the applicability of the Limitation Act, 1963 to arbitration proceedings initiated under the MSMED Act, 2006 and maintainability of counterclaims. However, venturing beyond the core issues before it, the Supreme Court in Silpi Industries held that an MSME must be registered at the time of contract formation to avail itself of the benefits under the MSMED Act, 2006. This effectively left unregistered enterprises without the MSMED Act's protections. Any registration done afterwards, even if undertaken before raising claims, cannot confer benefits. This interpretation, effectively introduced a hard procedural barrier for micro and small enterprises (hereinafter referred to as “MSE”)^[4]. Coming to Mahakali Foods. The Supreme Court, applying the well established principles of statutory interpretation, especially, “later laws override earlier contrary ones” and “special laws override general laws” held that the provisions of the MSMED Act, 2006 prevail over the Arbitration Act, given that while Arbitration Act is the general law governing arbitration, the MSMED Act, 2006 is specifically tailored for MSMEs. And even if the Arbitration Act is treated as a special law, MSMED Act, 2006 being a subsequent enactment, it would have an overriding effect, especially in view of Section 24 of the MSMED Act, 2006. The Supreme Court further ruled that Section 18(1) of the MSMED Act, 2006 provides suppliers a right to approach the Facilitation Council, notwithstanding any arbitration clause. Additionally, it affirmed that the Facilitation Council could act both as conciliator and arbitrator despite the explicit bar continued under Section 80 of the Arbitration Act. Interestingly, as if out of habit, while the core dispute revolved around arbitration versus statutory remedies, the Supreme Court took a moment - almost as an insightful aside - to clarify something that wasn't even centre stage - the timing of registration as MSE. Reinforcing its earlier stance in Silpi Industries, the Supreme Court reiterated that getting your MSE status after you've already signed the contract won't entitle you to seek any benefit as the supplier under the MSMED Act, 2006.

What emerges from Sipli Industries and Mahakali Foods, is that obtaining MSE registration after entering into a contract is akin to arriving late at a buffet only to find all the food already finished - you might have made the journey, but there's simply nothing left for you. The collective consequence of these judgments signifies an inflexible procedural landscape for MSEs. The Supreme Court's rationale in these judgments has introduced substantial implications. The Supreme Court's insistence on mandatory registration underscores an inflexible, though arguably necessary, stance to prevent potential misuses or opportunistic invocation of protections under the MSMED Act, 2006 after disputes arise. However, as recently emphasised in NBCC (India), the requirement of mandatory registration creates challenges, particularly for smaller enterprises which often operate informally or semi-formally.

NBCC (India) - Settling the Unsettled

In NBCC India, the Supreme Court pointed out that neither Silpi Industries or Mahakali Foods had addressed the core issue of whether prior registration was essential for invoking Section 18 of the MSMED Act, 2006. The Supreme Court further stated that the MSMED Act, 2006 never intended to leave unregistered MSEs out in the cold. It held that any party to a dispute, and not just a registered supplier could seek reference under Section 18 of the said Act. The language of the MSMED Act, 2006 is clear, unambiguous and not in favor of bureaucratic red tape. The Supreme Court emphasised that registration is discretionary, not mandatory, especially for micro and small enterprises. By demanding registration as a precondition, previous interpretations had put the cart before the horse, entirely missing the MSMED Act, 2006's remedial intent. The Supreme Court pointed out that the reason behind MSMED Act, 2006 was to support MSEs, and not to make them jump through hoops to claim their dues. Section 18 of the said Act is meant to be an open door, not a guarded fortress. The phrase “any party to a dispute” means just that - any party. If the intention had been to restrict dispute resolution only to registered suppliers, the legislature could have easily used the term “supplier” instead of “any party”. Striking hard at Silpi Industries and Mahakali Foods, the Supreme Court that neither judgment actually framed the issue of mandatory registration. The confusion arose from stay observations made in those cases, which were not supported by a comprehensive analysis of the statute. Therefore, these judgments did not lay down binding precedents on the issue at hand. However, for the sake of better clarity and an authoritative pronouncement on this issue, the Supreme Court in NBCC (India) referred the matter to a three judges Bench. This is due to the fact that the judgments in Silpi Industries, Mahakali Foods, and also NBCC (India) were all delivered by two judge Benches.

In essence, the Court turned the previous logic on its head. Instead of treating registration as a barrier to justice, it saw it for what it really is: a voluntary administrative act, not a prerequisite for invoking statutory remedies. The goal is to make justice accessible and efficient, not to hang it tantalizingly out of reach.

The problem with Silpi Industries and Mahakali Foods was that they managed to drop a legal bombshell on MSEs without actually dealing with the issue head-on. Neither case originally set out to decide whether pre-contract registration was mandatory for invoking dispute resolution under Section 18 of the MSMED Act, 2006. Instead, they were primarily occupied with limitation periods and conflicts between the Arbitration Act and the MSMED Act. Yet, they somehow still managed to leave behind a trail of confusion about registration. It's like they accidentally set fire to the rulebook while trying to fix a broken page.

NBCC (India) marks a significant turning point in the evolving jurisprudence surrounding the MSMED Act, 2006. It rightfully addresses the confusion created by earlier decisions in Silpi Industries and Mahakali Foods by examining the core legislative intent of the MSMED Act, 2006. As rightfully pointed out in NBCC (India), the observations made in those cases on the necessity of registration were incidental and not grounded in thorough statutory analysis. This decision serves as a powerful reminder that beneficial legislation must not be reduced to a procedural straitjacket. By recognizing that registration is merely an optional administrative step rather than an essential act for invoking benefits under the MSMED Act, 2006, the Supreme Court has reaffirmed the principle that justice should not be contingent on bureaucratic formalities. The ruling also acknowledges the reality that many MSMEs operate informally, and making registration a precondition would unfairly deny them the protection the said Act seeks to provide.

The three judge Bench will now have an opportunity to settle the matter once and for all and hopefully give the MSMED Act, 2006 the interpretation it deserves. The smart money says they'll stick with the NBCC (India) view, which aligns with the Act's purpose and plain language. In the end, this referral is a much-needed reality check—a reminder that justice isn't just about rigid formalism but about making sure small businesses aren't left stranded because of a technicality. It's time to put the “protection” back into the MSMED Act, 2006 and this three judge Bench has the chance to do just that.

Anirudh Goyal is a practicing advocate at the Calcutta High Court and Jaspreet Singh is a final year student at NUJS Kolkata'.Views are personal.