Without Registration For 'Financial Activity', Loan Advanced By Cold Storage Facility Cannot Be Recovered Under MSMED Act: Allahabad High Court

The Allahabad High Court has held that without registration for financial services under Section 22 of the U.P. Regulation of Cold Storage Act, 1976 along with Micro, Small and Medium Enterprises Development Act, 2006, the alleged loan advanced by the petitioner was a private contract not amenable to recovery under the aforesaid laws.

The bench comprising Justice Mahesh Chandra Tripathi and Justice Prashant Kumar held,

“For the purposes of MSMED Act and to provide financial services under Section 22 of the Act, 1976 the petitioner ought to have the registration under the MSMED Act, 2006 for 'financial activity', which admittedly could not be explained by the petitioner. The petitioner having not been registered under the MSMED Act for financial activity and there being a private agreement between the petitioner and the contesting respondents, the petitioner could not have sought a recovery for an alleged loan purportedly granted under Section 22 of the Act, 1976 by taking aid of the provisions contained under MSMED Act.”

Factual Background

Petitioner runs a cold storage at Shivrajpur where the farmers of the region store their potatoes for a charge/rent. Petitioner also provides financial assistance to farmers, who store their crops in its storage facility, for fresh sowing.

Respondent-farmers stored their corps at the storage facility and took a loan of Rs.4,09,022/- from the petitioner. Since the respondent-farmers failed to pay their loans, petitioner filed a claim petition before the U.P. Micro, Small and Medium Enterprises Facilitation Council, Kanpur Nagar under the MSMED Act, 2006 for recovery of the loan amount along with the interest.

Respondent-farmers did not appear in the conciliation proceedings, and the reference could not be decided. The matter was referred to arbitration. Respondent-farmers were given 15 days to file reply. While deciding the claim of the petitioner, two issues were framed by the Council for adjudication. The first issue was whether the petitioner was entitled to the principal amount, and the second was regarding the entitlement to the interest.

The Council held that according to its Udyog Aadhar Registration Certificate, claimant-petitioner was only runny warehousing and storage facilities. There was no document to prove the loan provided by the petitioner to the respondent-farmers. It was further held that under the MSMED Act, the Council does not have any power to deal with recovery of loan/financial services. Accordingly, the Council directed the petitioner to avail alternate remedy.

Consequently, the issue of interest was also decided against the petitioner as no principal amount was shown to be due.

Counsel for petitioner argued that Section 22 of the U.P. Regulation of Cold Storage Act, 1976 gives the petitioner-company right to offer service of finance to individuals, who are doing business/ work (agricultural produce). It was argued that the cold storage of the petitioner comes under the MSMED Act and the recovery of petitioner's services of finance is permissible in view of Section 24 (overriding effect) of the MSMED Act.

It was argued that the bank as well as the Act, 1976 both permit the petitioner to provide short terms finance to farmers to meet expenses and there is amicable agreement between the petitioner and the farmers. Further, it was argued that since the petitioner was registered under the MSMED Act, Council had the jurisdiction to deal with the case.

It was argued that the order could not be challenged under Section 34 of the Arbitration and Conciliation Act, 1996. It was stated that 84 different cases of the petitioner of similar nature were pending before the Council and the company is on the verge of closure due to non-repayment of the loan amount.

Per contra, council for respondent contended that under Udyog Aadhar Registration Certificate, the petitioner is only registered for warehousing and storage services and not for any providing any financial services. Accordingly, the Council had no power to adjudicate on such matter under the MSMED Act.

High Court Verdict

The Court framed three issues for its consideration: first, whether the loan and financial services were covered under 'Cold Storage'; second, whether the petitioner was registered for financial services under the MSMED Act; lastly, whether the writ petition was maintainable.

With regards to the maintainability of the writ petition, the Court held that a writ petition is maintainable as the Facilitation Council had refused to entertain the matter and there was no award passed in terms of the MSMED Act.

Section 22 of the U.P. Regulation of Cold Storage Act, 1976 reads as

“If any money is lent by the licensee to a hirer against the goods stored by some hirer in the cold storage, the rate of interest, in no case, shall be higher than one-half of one percent annum simple interest over the current rate of interest charged by the State Bank of India, at the time of the loan, for like purposes in respect of advances made by it against goods pledged in its favour.”

The Court observed that the loan was advanced at a rate of 18% per annum which is much higher than the rate of interest charged by State Bank of India. The Court held that since the loan was advanced on the condition that in case of non-payment, the farmer will deposit his goods in the next season as well. Such terms did not attract Section 22 of the Act of 1976.

The Court held that for advancing loan, the petitioner ought to have registered under the MSMED Act for providing financial activity. Since the petitioner had not obtained any such registration, the Court held that the petitioner could not seek recovery of the alleged laon extended to the respondent-farmers.

The Court held that U.P. Regulation of Cold Storage (Licensing) Rules, 1976 framed under the Act of 1976 provide the terms and conditions of the license and specification of a cold storage which does not include providing credit facilities.

“Grant of loan is not incidental to a cold storage services, which is explicit from bare perusal of the definition clauses, the licence, terms and conditions and specification of cold storage. Therefore, cold storage service and credit facilities by pledging the produce stored in the cold storage are two different services, which are not directly linked with each other. Therefore, the grant of loan will not be covered under cold storage services.”

Accordingly, it was held that no loan was due to the petitioner. The Court dismissed the writ petition holding that the Facilitation Council had no jurisdiction over unregistered services allegedly advanced by the petitioner.

Case Title: M/S Neeraj Potato Presarvation And Food Products Pvt.Ltd. v. U.P. Micro Small And Medium Enterprises Faciliation Council And 2 Others 2024 LiveLaw (AB) 120 [WRIT - C No. - 35190 of 2023]

Case citation: 2024 LiveLaw (AB) 120

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