Facilitation Council Has Exclusive Jurisdiction To Arbitrate Claims After The Supplier’s Registration Under The MSMED Act: Calcutta High Court

The bench of Justice Moushumi Bhattacharya was dealing with a petition filed under Section 34 of the Arbitration and Conciliation Act, 1996 (A&C Act), where it observed that the award holder had invoked the arbitration clause contained in the Contract and had proceeded with the arbitration despite being fully aware that the reference before the Facilitation Council under the MSMED Act was pending. The Court concluded that the same was patently contrary to the provisions of the MSMED Act.

While reiterating that MSMED Act would prevail over the A&C Act since the former is a special statute, the Court set aside the award for being in contravention with the fundamental policy of Indian law and for being vitiated by patent illegality.

Certain disputes arose between the petitioner, Marine Craft Engineers Pvt Ltd, and the respondent, Garden Reach Shipbuilders and Engineers Ltd, out of the purchase order issued by the latter. Consequently, the petitioner/ supplier made a reference before the West Bengal State Micro Small Enterprises Facilitation Council under the MSMED Act. In the meanwhile, the respondent invoked the arbitration clause contained in the purchase order and appointed an Arbitrator, who passed an award in its favour.

The petitioner, Marine Craft, challenged the arbitral award passed by the Arbitrator by filing a petition under Section 34 of the A&C Act before the Calcutta High Court.

Challenging the Arbitrator’s jurisdiction to pass the award, Marine Craft argued that in view of the reference pending before the Facilitation Council and the non-obstante clause contained in Section 18 of the MSMED Act, the Facilitation Council had exclusive jurisdiction to decide the dispute.

Marine Craft claimed that it was a “supplier”, as defined in Section 2(n) of the MSMED Act, and thus it could make a reference to the Facilitation Council under Section 18 of the Act for recovery of the amount due to it under Section 17.

To this, the respondent, Garden Reach, submitted that the petitioner was registered as an MSME under the MSMED Act only after the contract was executed between the parties. Thus, the dispute referred to arbitration could not have been adjudicated by the Facilitation Council since it was not a dispute contemplated under Sections 17 or 18 of the MSMED Act, it averred.

Referring to the facts of the case, the Court observed that the Letter of Intent (LOI) or the purchase order was issued prior to the date the petitioner, Marine Craft, was registered as an MSME under the MSMED Act.

However, Marine Craft’s demand for payment was made with reference to the work done / services rendered by it after its registration under the MSMED Act, the Court took note.

The bench reckoned that the petitioner, Marine Craft, was registered under the MSMED Act on 19.4.2013, and after it completed rendering the services in July, 2013, it started raising the bills.

The Court referred to the decision of the Apex Court in Shanti Conductors Pvt Ltd vs. Assam State Electricity Board (2019), where the Court was dealing with ‘The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993’, which was the predecessor of the MSMED Act. The Supreme Court in the said case had interpreted Sections 3 and 4 of the 1993 Act, which were pari materia to Sections 15 and 16 of the MSMED Act. It had concluded that the buyer shall be liable to make payment of interest if the supplies are made subsequent to the enforcement of the 1993 Act, even if the agreement is executed prior to the enforcement of the said Act.

The bench further observed that the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Pvt Ltd (2022) had reiterated the ratio of Shanti Conductors (2019) and had held that, if a party obtains registration subsequent to the execution of a contract, the provisions of the MSMED Act would apply to the supply of goods and services made subsequent to the registration.

The High Court thus concluded that the date of execution of a contract between a buyer and a supplier under the MSMED Act is irrelevant for the application of the provisions of the MSMED Act, provided the supplier claims recovery of the amount due under Section 17 for the goods supplied or services rendered after the date of its registration under the MSMED Act.

“In other words, whether the supplier was registered as an MSME on the date of the contract would not disqualify the supplier from making reference to the Micro and Small Enterprises Facilitation Council under section 18 for recovery of outstanding amounts as long as the amounts claimed are relatable to goods supplied or services rendered after the date of registration of the supplier as a micro, small or medium enterprise under section 8(1) of the Act,” said the Court.

The Court thus ruled that in view of the non obstante clause contained in Section 18(1) of the MSMED Act, the Facilitation Council has exclusive jurisdiction to decide the reference made under the said Act.

The bench added, “..the unilateral act of the respondent in invoking the contractual arbitration clause and appointing the learned Sole Arbitrator on 23.9.2016 after the petitioner made a reference to the Facilitation Council is thus patently contrary to the provisions of the MSMED Act.”

“The impugned Award dated 23.9.2018 by which the claim of the respondent (which was the claimant in the arbitration proceedings) of Rs. 30,24,849/- was allowed in full is hence in the form of a face-off with the provisions of the MSMED Act so to speak,” the bench held.

While reiterating that the MSMED Act would prevail over the A&C Act since the former is a special statute, the Court allowed the petition and set aside the award for being in contravention with the fundamental policy of Indian law and for being vitiated by patent illegality appearing on the face of it.

Case Title: Marine Craft Engineers Pvt Ltd vs. Garden Reach Shipbuilders and Engineers Ltd

Citation: 2023 LiveLaw (Cal) 96

Dated: 05.04.2023

Counsel for the Petitioner: Mr. Sabyasachi Chowdhury, Adv. Mr. S.E. Huda, Adv. Mr. Arjun Mookherjee, Adv. Mr. Shreyaan Bhattacharyya, Adv. Mr. Avijit Guha Roy, Adv.

Counsel for the Respondent: Mr. Siddhartha Banerjee, Adv. Mr. B.K. Sen, Adv. Mr. Sudipta Nayan Ghosh, Adv. Mr. Soumajit Majumder, Adv. Ms. Jyoti Rauth, Adv.

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