This article is written by Krishna Joshi, pursuing a Certificate Course in Arbitration: Strategy, Procedure and Drafting from LawSikho.
What is MSME
The MSME are micro, small and medium enterprises primarily dealing with manufacturing, production, and preservation of goods and commodities.
These are bifurcated on the basis of their annual turnover. Where the annual turnover of the enterprises are upto Rs 5 crore, then it is known as Micro enterprises. But where the annual turnover of the enterprises are between Rs 5 crore to 75 crore, then they are classified into the group of Small Enterprises. And lastly, where the annual turnover is above Rs.75 crore and less than Rs. 250 crore, then they are classified into the group of Medium Enterprises.
MSME manufactures wide varieties of products which are sold in domestic as well as international markets. By this way the MSMEs help in the promotion of growth and development of Khadi, Village and Coir Industries.
If we talk in terms of employment, the MSMEs have employed more than 11 crore people in India and the aim of MSMEs is to grow this number to 15 crore in the upcoming years.
MSMEs also play an important role in the GDP. Presently, there is an increase of 29% in the GDP of India because of the MSME sector. Not only this, MSMEs products are also responsible for exports. More than 50 percent of exports include MSMEs products.
Therefore, by witnessing such a huge growth of MSMEs, the Government of India provides funds to MSME from time to time. Recently, in August 2020, the Finance minister of India Mrs. Nirmala Sitharaman had announced the fund of Rs 50000 crore for MSME.
Why does the need arise for MSME Act
Delay in payments is one of the main reasons for this Act. There is a provision in the MSME Act that mandatorily requires a buyer of goods to make payments within forty-five days. Due to delay in payment many of the MSME are turning into Non-Performing Assets (“NPA”), thus affecting their sustainability.
The Government of India identified this problem and introduced the MSME Act in 2006 for advancement and development of MSMEs and to boost competitiveness of MSMEs. The prime objective of the Act is to protect the MSMEs from defaulting buyers, who clog up payments of these enterprises.
How are disputes resolved under MSME
Any dispute regarding delay in payment is presented before the Facilitation Council constituted by the respective State Government. The Facilitation Council either decides the dispute by itself or it refers to the dispute for conducting Conciliation under the aegis of the Arbitration & Conciliation Act, 1996.
If the dispute is not settled through Conciliation, then the Facilitation Council has the power to settle the dispute through referring the dispute for Arbitration.
If the dispute is sent for Arbitration, then according to section 18 of the MSME Act 2006. the Arbitrator has to solve the dispute and complete the proceedings within the statutory period of ninety days from making such reference.
Whether arbitration agreements prevail over MSME Act
General Rule is that the Special Law will always prevail over General Law. However, the conflict which arises here is that, both MSME Act 2006 and Arbitration & Conciliation Act, 1996 are Special Laws. So which Act will override the other?
Various High Court has given different views regarding the same controversy. Some High Court through their judgments held that the provisions of MSME Act will prevail over Arbitration Act and the other High Court held that the provisions of Arbitration Act all prevail over MSME Act.
Judicial trend in India
Let us see the various important Judgements passed by the various High Courts before reaching the conclusion.
In Saryu Plastics Pvt. Ltd. v. Gujarat Water, the division bench of Gujarat High Court held that:
- There is no provision under the MSME Act 2006 which negates the Arbitration Agreement or renders the Arbitration Agreement between the parties as ineffective.
- As it was also clarified that Section 15 to 23 of the MSME Act will prevail over any other law only when there is anything inconsistent with the provisions of the MSME Act.
- Whereas Section 18 of the MSME Act provides for the forum of resolution of disputes, which in no way negates the Arbitration Agreement.
- Hence there is no question of whether the Arbitration Agreement ceases to have effect because the overriding clause will only override the things which are inconsistent with the MSME Act.
- Since, there is no inconsistency regarding the provisions of Jurisdiction. As, the provisions of Arbitration & Conciliation Act, 1996 will apply whether the dispute is solved by either Facilitator Council or it is settled by the way of Arbitration Agreement.
However, In Hindustan Wires Limited v R Suresh (2013 SCC OnLine Bom 547), the Bombay High Court held a different view from the Gujarat High Court. In this case Bombay High Court held that where there is an already existing clause entered between the parties for Arbitration, then the provisions of MSME Act will not apply. The parties will be governed by the provision of the Arbitration & Conciliation Act, 1996.
However, in Bharat Heavy Electricals Limited v State of UP (2014 (4) ALJ 52), the Allahabad High Court held a different view from the Bombay High Court. The Allahabad High Court held that:
“Though there may be an existing Arbitration Clause entered between the parties in the contract, still Section 18(4) of the MSME Act will apply. Because Section 18 of the MSME Act has a non-obstante clause, which empowers the Facilitator Council to act as an Arbitrator. Section 15 to 23 of the MSME Act further clarifies that it shall have the effect, notwithstanding anything contained in any other law for the time being in force. The provisions of the MSME Act will apply.”
However, Punjab and Haryana High Court in the Chief Administrator Officer, COFMOW v MSEFC of Haryana (CWP 277/2015), came at a different conclusion and it held that:
Even If there is an Arbitration Clause already existing between the parties in a contract which provides for the appointment of the Arbitrator. Then it must only be seen as a contract recognised by law because Section 18 provides for the non-obstante clause that will eclipse the provision of any other law for the time being in force.
The Delhi High Court in Ge T&D India Limited v Reliable Engineering Projects (OMP (Comm) 76/2016), held that as the MSME Act provides for special forum for adjudication of the disputes, the provisions of MSME Act should avail over the Arbitration & Conciliation Act, 1996.
But the matter once again came before the Delhi High Court in the recent case of Mangalore Refinery & Petrochemicals Ltd v Micro and Small Enterprises Facilitation Council (2019 SCC Online DEL 6860), the Delhi High Court once again took a firm stand on its earlier decision and held that the reference under Section 18 of the MSME Act is a statutory reference and any arbitration agreement between the parties will have no effect over the statutory provisions.
However, it is interesting to note that under section 18 of the MSME Act, it is mandatory to complete the Arbitral Proceeding by the Facilitator Council within the period of 90 days. Also, there is no provision of extension of time.
Whereas, on the other hand, Arbitration & Conciliation Act, 1996 provides for the larger period of time for the completion of Arbitration proceedings. In addition to that, the Arbitration & Conciliation Act, 1996 even provides for the extension of timelines, if required.
Though it is to be kept in mind that the parties can choose only one option, whether it wants to be governed by the provisions of the MSME Act or by the Arbitration & Conciliation Act, 1996. Since both the Acts have different timelines for the completion of the proceedings. If the party chooses to be governed by the provisions of the MSME Act, then the Law of Estoppel will apply against the party and it has to complete the proceedings within the period of 90 days. The parties can not take the aid of Arbitration & Conciliation Act, 1996 for the extension of time.
After going through the various Judgments passed by the different High Court, I came to the conclusion that the MSME Act 2006, being a special Act will override the Arbitration Act in case of inconsistency. The Legislature will not make different Laws for the same subject matter.
When we harmoniously construe the provisions of the MSME Act with the provisions of the Arbitration & Conciliation Act, 1996, I believe that the rights granted under the MSME Act will supersede the arbitration clause contained in the agreement between the parties.
However, it has to be kept in mind that the arbitration clause, in such situations, has not been categorically declared to be redundant. The Law on the issues surrounding the overlapping of the two Acts is still evolving and the Supreme Court is yet to clarify the legal position on many related aspects. So before coming to any concrete conclusion, we must wait for the decision of the Hon’ble Supreme Court.
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