Disputes Prior To Registration Under MSME Act Can't Be Referred To MSME Arbitration: Delhi High Court Reiterates

Brief Facts:

The Respondent No. 3 was awarded a Letter of Intent for Architectural Consultancy Service for the construction project by Mahanagar Telephone Nigam Ltd. (“Petitioner”), with the consultancy fee settled at 2.95% of the project's estimated cost. It submitted architectural drawings and raised bills for the work done, but the Petitioner did not make payments promptly. Feeling aggrieved by same, Respondent No. 3 approached the MSME Council for arbitration due to non-payment and claimed a total sum of Rs. 2,15,96,273.86. The dispute was referred to the Delhi International Arbitration Centre (“DIAC”) for adjudication. The Petitioner approached the Delhi High Court (“High Court”) and filed a writ petition challenging the decision of the MSME Council to refer the dispute to arbitration.

The Petitioner argued that at the time of entering into the contract, it wasn't registered as an MSME, therefore, the referral of the dispute to DIAC by MSME Council was invalid. The Petitioner contended that the benefits under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”) cannot be claimed if the entity is not registered as an MSME.

Observations by the High Court:

The High Court noted that Sections 17 and 18 of the MSME Act provides for a cost-effective dispute resolution mechanism for recovering unpaid dues of suppliers, particularly micro, small, and medium-level enterprises. The High Court observed that these sections give the right to such enterprises to have their disputes adjudicated by Facilitation Councils, irrespective of any other contractual provisions to the contrary.

Addressing the issue of whether an enterprise, though not registered at the time of entering into a contract but registered subsequently during the contract's term, is entitled to benefits under the MSME Act, the High Court referred to the Supreme Court judgments in Silpi Industries v. Kerala State Road Transport Corporation [2021 (18) SCC 790] and Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited [2023 (6) SCC 401]. The High Court noted that if registration is obtained subsequently, it would have a prospective effect, therefore, MSME Act would be applicable only to goods and services supplied after registration.

Therefore, it held that the benefits under the MSME Act do not apply retrospectively if registration is obtained after commencement of the contract.

The High Court noted that the contract was initiated in 2006 and Respondent No. 3 registered as a micro-enterprise in 2018, with one RA bill issued post-registration. However, the High Court held that the determination of services rendered post-registration and the nature of the contract were issues intertwined with questions of law and facts. The High Court held that these questions should be raised before the arbitrator by filing appropriate applications under the Arbitration & Conciliation Act, 1996. Therefore, the High Court dismissed the writ petition.

Case Title: Mahanagar Telephone Nigam Ltd. vs Delhi International Arbitration Centre, Through Its Co-Ordinator & Ors.

Citation: 2024 LiveLaw (Del) 160

Case Number: W.P.(C) 14515/2023 & CM APPL. 57558/2023

Advocate for the Petitioner: Mr. Chandan Kumar and Ms. Kirti Atri

Advocate for the Respondent: Mr. Avishkar Singhvi, Mr. Naved Ahmed, Mr. Vivek Kumar Singh and Mr. Deokinandan Sharma, Advocates for R-2. Dr. Anurag Kumar Agarwal, Advocate for R-3.

Click Here To Read/Download Order