Arbitration Under MSMED Act For Supplies Made Prior To Registration, Void-ab-initio: Gujarat High Court

The bench of Dr. Justice A. P. Thaker held that for initiation of proceedings like conciliation and arbitration under the MSMED Act, it is necessary that such firm/supplier is registered under the MSMED Act during the relevant time. It added that since the lack of jurisdiction of the Arbitral Tribunal went to the root of the entire proceeding, even if the opposite party had knowledge regarding the arbitral proceedings conducted under the MSMED Act and it did not participate in the proceedings, that would not give the Tribunal any jurisdiction under the MSMED Act.

Respondent no. 3- M/s Vishal Carrier, provided certain services to the petitioner- Anupam Industries. Alleging that the petitioner failed to clear its dues for the services provided, the respondent approached the Micro, Small and Medium Enterprises Facilitation Council under the MSMED Act. Since the conciliation proceedings before the Facilitation Council failed, the matter was referred to arbitration under Section 18(3) of the MSMED Act and an arbitral award was passed in favour of the respondent. The petitioner filed a petition under Article 227 of the Constitution of India before the Gujarat High Court to set aside the arbitral award.

The petitioner Anupam Industries submitted before the High Court that in order to claim any relief under the MSMED Act, a party must be registered under the said Act. It argued that the claim filed by the respondent was not maintainable as it was not registered under the MSMED Act at the time the relevant transaction was executed between the parties. It was only after the transaction was executed between them, that the respondent came to be registered under the MSMED Act, the petitioner averred.

Since the MSMED Act itself was not applicable to the transaction, the petitioner argued that the arbitral proceedings under the MSMED Act were non est. Thus, it contended that there was no need of filing any appeal under Section 34 of the A&C Act, as initiation of arbitral proceedings under the MSMED Act was not valid.

The respondent, Vishal Carrier, submitted that after the petitioner failed to appear for the arbitral proceedings despite repeated notices, the Arbitrator passed an award allowing the claim of the respondent. Further, a copy of the award was also sent to the petitioner. It added that despite having knowledge about the arbitral award, the petitioner did not challenge the award by filing a statutory appeal under Section 34 of the A&C Act within the stipulated time. Thus, the arbitral award had attained finality, the respondent averred.

It added that the petitioner, by not participating in arbitral proceedings, had waived its right to raise objections regarding the jurisdiction of the Arbitral Tribunal.

The Court noted that against the arbitral award, no proceedings under the A&C Act or under Section 19 of the MSMED Act to set aside the award, had been initiated by the petitioner.

Referring to the definition of “supplier” under Section 2(n) of the MSMED Act, the Court reckoned that unless and until the supplier/firm is treated as a Micro, Small or Medium Enterprise and is registered under Section 8 of the MSMED Act, the provisions of the MSMED Act would not be applicable.

“Therefore, if any enterprise is not registered as a "small" or "medium" or "micro" enterprise at the time of transaction then for the said transaction, such establishment has no right to take shelter under the various provisions of the MSMED Act, 2006”, the Court said.

The Court added that for initiation of proceedings like conciliation and arbitration under the MSMED Act, it is necessary that such establishment/supplier is registered under the MSMED Act. Referring to the facts of the case, the Court noted that during the relevant period, the respondent was not registered under the MSMED Act.

The bench further observed that the Apex Court in Silpi Industries versus Kerala State Road Transport Corporation (2021) had ruled that to seek benefit under the provisions of the MSMED Act, the seller should be registered under the Act on the date of entering into the contract. Further, if any registration under the MSMED Act is subsequently obtained, the same would not operate retrospectively, and it will apply only to supplies made subsequent to the registration. Therefore, no benefit under the MSMED Act can be sought with respect to supplies made before registration, the Supreme Court had held.

Since the respondent had initiated proceedings under the MSMED Act for the services provided before its registration, the entire proceedings undertaken by the Facilitation Council under the MSMED Act, including the arbitral reference, were without jurisdiction, the High Court ruled.

The bench added that if the Tribunal or the Court has no inherent jurisdiction to entertain and decide the dispute between the parties, the order or award passed by it will be null and void-ab-initio. Since the award is null and void from the very beginning, the issue of nullity can be raised at any stage of the proceedings, including at the stage of execution of the decree, the bench said. Further, the Court ruled that participation in proceedings before a forum which has no jurisdiction, does not give jurisdiction to such a forum, since the lack of jurisdiction goes to the root of the entire proceedings.

Therefore, the Court held that even if the petitioner had knowledge regarding the arbitral proceedings conducted under the MSMED Act and it purposefully did not participate in the proceedings before the Arbitral Tribunal, that would not give the Tribunal any jurisdiction under the MSMED Act.

The bench concluded that since the provisions of the MSMED Act were itself not applicable to the transaction, there would be no question of applicability of the provisions of the A&C Act. It added that the petitioner’s petition under Article 227, challenging the Arbitral Tribunal’s jurisdiction under the MSMED Act, was maintainable.

Holding that the proceedings before the Arbitrator under the MSMED Act were without jurisdiction, the Court ruled that the arbitral award was not sustainable in the eyes of law. The Court thus allowed the petition and set aside the award.

Case Title: Anupam Industries Ltd. versus State Level Industry Facilitation Council

Case Citation: 2023 Livelaw (Guj) 7

Counsel for the Petitioner: Mr. Naveen Pahwa, Sr. Advocate with Mr Kamlesh P Vaidankar, Nilu K Vaidankar;

Counsel for the Respondents: Mr. Dhaval Dave, Sr. Advocate with Rohan A Shah, Rushabh H Shah

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