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An Interplay Between MSME-D Act And Arbitration Act – Arbitration & Dispute Resolution

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Arbitration is undoubtedly the most popular mode of dispute
resolution in the 21st century. With increasing
cross-border transactions, numerous parties are opting to
adjudicate their disputes through an arbitral tribunal instead of
the time-consuming traditional route of approaching courts. Party
autonomy is the ethos of arbitration, which makes it the most
attractive alternate dispute resolution mechanism.

In India conciliation and arbitration is governed by the
Arbitration and Conciliation Act, 1996 (Arbitration
Act
). Since its enactment in 1996, the Arbitration
Act has undergone several amendments, with the end goal of making
India a global hub of arbitration. Despite such amendments, there
exists one tenet of arbitration which remains unchanged under the
Arbitration Act – the existence of an arbitration agreement between
the parties to submit their disputes to arbitration.

In a country like India with a burgeoning population, the micro,
small and medium enterprises (MSME)
sector contribute significantly to its economic evolution. Ten
years after the enactment of the Arbitration Act, with the aim of
facilitating the promotion, development and enhancement of
competitiveness inter se between micro, small and medium
enterprises, the Parliament of India enacted the Micro, Small and
Medium Enterprises Development Act, 2006 (MSMED
Act
). The MSMED Act classifies enterprises as micro,
small or medium based on their investment in plant and machinery or
equipment.

Intriguingly, while the MSMED Act is promulgated for the
development and promotion of micro, small and medium enterprises,
it restricts the mechanism for recovery of “delayed
payments”1 solely to those supplier entities
who fall within the category of “micro” and
“small” enterprises. The MSMED Act also specifically
imposes a liability on the buyer to pay for the goods supplied or
services rendered by a micro and small enterprise. In the event of
any delay or failure to make such payment, the MSMED Act permits
the micro and small enterprise to refer ‘disputes’
pertaining to the “amount due”2 to the adjudicating
authority contemplated constituted under the Act – The Micro
and Small Enterprises Facilitation Council
(MSEFC).3

Upon reference of a dispute by a supplier pertaining to any
“amount due” to the MSEFC, Section 18 of the MSMED Act
inter alia mandates that – (i) the MSEFC shall
either itself conduct conciliation or seek assistance of any
institution or centre providing alternate dispute resolution
services as if the conciliation was initiated under Part III of the
Arbitration Act4; and (ii) where the conciliation
has been unsuccessful, the MSEFC shall either itself take up the
dispute for arbitration or refer it to any institution or centre
providing alternate dispute resolution services as if the
arbitration was in pursuance of an arbitration agreement referred
to in Section 7(1) of the Arbitration Act.5

Effectively, the MSMED Act has put the MSEFC at par with an
arbitral tribunal and has made the entire Arbitration Act
applicable to any disputes which arise on account of outstanding
dues to be recovered by a micro and small enterprise. A twofold
question thus arises – (i) does the MSMED Act override the
provisions of an arbitration agreement already executed between the
parties? and (ii) in the absence of an arbitration agreement
between the parties, can a statutory provision under Section 18 of
the MSME-D Act compel a party to resolve the disputes through the
Arbitration Act?

Additionally, there are fundamental differences under the
Arbitration Act and the MSME-D Act.6 First, the MSEFC
constituted under the MSME-D Act is mandatorily required to attempt
to conciliate the disputes between the parties prior to initiation
of arbitration proceedings. This is not the requirement under the
Arbitration Act. Second, in the event of the failure or
termination of the conciliation proceedings under the MSME-D Act,
the MSEFC or any institution or centre so identified by it must
proceed with arbitration contemplated under Section 18(3) of the
MSME-D Act. Contrary to this, the Arbitration Act allows
adjudication of disputes by an arbitral tribunal agreed between by
the parties. Third, in order to challenge the award passed
in favour of the supplier under the MSME-D Act, it is mandatory for
the buyer to pre-deposit 75% of the amount so awarded. There is no
such analogous provision under the Arbitration Act.

Acknowledging the possibility of such potential conflicts or
discrepancies between the provisions of the Arbitration Act and the
MSMED Act, the MSMED Act itself stipulates that the
provisions of sections 15 to 23 shall have effect
notwithstanding anything inconsistent therewith contained in any
other law for the time being in force
.”7 In
other words, in the event, Section 18 of the MSME-D Act contains a
particular procedure for an arbitration, the said provisions
override and take precedence over those stipulated under the
Arbitration Act.

Until recently, divergent views had been adopted by the Indian
High Courts which further led to the contested issue of
maintainability of an arbitration clause as against the MSME-D
Act.8
While some High Courts in India held that the provisions of the
MSME-D Act would prevail over the arbitration clause, others
differed by restraining the MSEFC from proceeding with arbitration
under the MSEFC Act giving priority to the pre-existing arbitration
agreement between the parties.

Till date, the Supreme Court of India has had only two occasions
to deal with what appears to be a burning question of law. In the
case of Principal Chief Engineer v. Manibhai & Bros
(Sleeper)
,9 the Supreme Court of India held
that despite the existence of an arbitration clause, an entity
protected under the MSME-D Act can nevertheless invoke provisions
of the MSME-D Act. More recently, in M/s. Silpi Industries,
etc. v. Kerala State Road Transport Corporation & Anr.
etc
.,10 the Supreme Court of India was
presented with yet another opportunity to address this conundrum,
albeit in the context of ascertaining whether a buyer
could be permitted to file its counterclaims in the absence of any
such provision under the MSME-D Act. In this case, the Supreme
Court of India held that even in cases where there is no
arbitration agreement between the parties, if a supplier who is
covered under the MSME-D Act approaches the MSEFC for resolution of
dispute, the parties would be bound by the provisions under the
MSME-D Act. The Supreme Court noted that even in instances where a
specific arbitration agreement exists the same ought not to be
considered, thereby paving way for the precedence of the MSME-D
Act.

It appears that the underlying premise for such reasoning
primarily lies in the statutory provision contained under Section
24 of the MSME-D Act which gives an overriding effect over any
other inconsistent or conflicting legal provision. In addition to
this, the Supreme Court of India has also regarded the MSME-D Act
as a special statute intended to benefit the micro, small and
medium enterprises covered under the MSME-D Act. In keeping with
the Supreme Court of India’s decision,11 a special statute
(which is also a beneficial one) must be preferred over a general
one.

Statutes are enacted for specific purposes. Each statute then
has its own objects and reasons. Taking measures to constructively
work towards the same is crucial. Inconsistency or any conflicts
between statutes may defeat the very reasons for their enactment.
As can be seen from the above, and specifically in light of the
Supreme Court of India’s decisions, the effective realisation
of the MSME-D Act and the inconsistencies between the MSME-D Act
and Arbitration Act can be resolved by giving precedence to a
special statute over a general one. This will facilitate the
elimination of any probable conflict(s) arising between the two
statutes. Since the MSME-D Act is a special beneficial statute, as
opposed to the Arbitration Act, which is generic in nature, any
inconsistency between the two should be resolved harmoniously by
usually by applying the principles of purposive construction and
allowing the provisions of the special law to prevail. This will
reduce ambiguities, unnecessary conflicts, and delays in justice
delivery mechanism specifically for micro and small
enterprises.

Footnotes

1.
Chapter V, MSMED Act.

2.
Section 18(1) of the MSEMD Act.

3.
Section 18 of the MSMED Act.

4.
Section 18(2) of the MSMED Act.

5.
Section 18(3) of the MSMED Act.

6.
M/s. Silpi Industries, etc. v. Kerala State Road Transport
Corporation & Anr. etc
., (2021) SCC OnLine SC 439, ¶
23.

7.
Section 24, MSMED Act.

8.
Steel Authority of India and Anr v. MSEFC, (2010 SCC
Online Bom 2208); Bharat Heavy Electricals Limited v State of
U.P.
(2014 SCC Online All 2895); The Chief Administrator
Officer, COFMOW v MSEFC of Haryana
(CWP 277/2015 High Court of
Punjab & Haryana); Principal Chief Engineer v. M/s Manibhai
and Brothers (Sleepers)
, (2016 SCC Online Guj 10012), Ge
T&D India Limited v Reliable Engineering Projects
(Delhi
High Court, (OMP (Comm) 76/2016); Bharat Heavy Electricals
Limited v The Micro and Small Enterprises Facilitation Centre

(2017 SCC Online Del 10604);

9. Order
dated July 5, 2017 in Diary No(s).16845/2017, Supreme Court of
India.

10.
Supra note 6.

11.
Edukanti Kistamma (Dead) through LRs v. S. Venkatareddy (Dead)
through LRs and Ors,
(2010) 1 SCC 756.

The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.

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