This article is written by Avik Sarkar, an enrolled student at LawSikho.
Earlier the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 was introduced in order to ensure timely payments of the services rendered by micro small and medium industries and thereby increasing the working capital of the industries as well. Later on, the Act was repealed by the Micro Small and Medium Industries Act, 2006 which was introduced in order to make the industry more competitive. However, it is pertinent to note that with changing times the industries also have to change strategies in order to cope up with the trends. And due to changing trends the law involved with the industries also undergoes a shift. Courts from time to time have stepped up and demystified every issue that has come their way. In the matter of Silpi Industries v Kerala State Road Transport Corporation, the court had delved into the matter relating to registration of industries and the applicability of the Limitation Act, 1963 under the MSME Act. This particular piece discusses the nook and corner of the judgement and critically analyses the same
Micro small and medium enterprise
The micro small and medium enterprise (hereinafter referred to as MSME) sector has always been a significant contributor to the country’s GDP growth. Earlier the performance of the MSMEs used to be harrowingly low. The prime contributor for such crippling performance was speculated to be inadequate working capital, delayed payments by buyers. In order to deal with this conundrum, the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (hereinafter referred to as IDPASC Act) was formulated. Later on, the same was repealed by the MSME Act, 2006 and all the provisions of the earlier act were enshrined in Section 32 of the MSME Act, 2006.
The MSME Act, 2006 was mainly formulated to bring in competitiveness amongst the micro, small and medium enterprises. Though it’s been quite a considerable amount of time since the MSME Act, 2006 has been formulated yet a plethora of conundrums are to be demystified. Similar conundrums were dealt with in the matter of Silpi Industries v. Kerala State Road Transport Corporation, where the court had crystallized the applicability of the Limitation Act,1963 to arbitrations proceedings initiated under the MSME Act, 2006 and also delved into the conundrum with regards to registration of industries under the same Act. This piece peruses the nuances of the judgement and critically analyses the same.
In the present case, the Kerala State Road Transport Corporation (hereinafter referred to as KSRTC) had invited tenders for supply for thread rubber for tyre re-building. Following this, Silpi industries had submitted its tender and were awarded the same. Both the parties had agreed that 90 percent of the total price was payable on the supply of material. And the remainder 10 percent shall be paid subject to the final performance report. Later on, KSRTC defaulted in making payments of the remaining 10 percent. Therefore, to realize the remaining amount, Silpi industries moved the Industrial Facilitation Council under MSME Act. Further, if the Council failed in the conciliation procedure, then the dispute shall be referred for arbitration under the Arbitration and Conciliation, 1996 Act (hereinafter referred to as Arbitration Act).
In the arbitration proceeding, the award was passed in favour of Silpi industries. The KSRTC challenged the same at the High Court of Kerala under Section 37 of the Arbitration Act. The high court, while setting aside the arbitral award passed, upheld the applicability of the Limitation Act, 1963 and also held that the counterclaim is maintainable in the current proceeding. Aggrieved by the decision of the high court Silpi industries have further appealed to the apex court of the country.
Limitation Act conundrum demystified
The apex court referred to Section 43 of the Arbitration Act where direct reference has been made with regards to the applicability of the Limitation Act, 1963 in arbitration proceedings. To substantiate further the court referred to the case of Andhra Pradesh Power Coordination Committee & Ors. v. Lanco Kondapalli Power Ltd. & Ors, where the applicability of the Limitation Act, 1963 in an arbitration proceeding has been upheld. Therefore, when conciliation procedure fails as contemplated under Section 18(2) of the MSME Act then the facilitation council has the leeway under Section 18(3) of the MSME Act, to itself take up the dispute for arbitration or refer the same to an institution or a centre for providing alternative dispute resolution.
The court iterated that once the conciliation process fails and the dispute goes for arbitration under Section 18(3) of the MSME Act, it is contemplated that the parties had an arbitration agreement as per Section 7 of the Arbitration Act. Further, the court referred to Section 23(2A) of the Arbitration Act which gives the buyers the right to counterclaim, plead for set-off within the scope of the arbitration agreement. The court also noted that non-allowance to file a counterclaim would lead to a parallel proceeding before various fora.
It was observed by the courts that Silpi industries had not submitted a memorandum under Section 8 of the MSME Act during the time when it had made supplies to KSRTC thereby making it an unregistered entity. And due to the same Silpi industries was denied any sort of relief under the act. It’s an incontrovertible fact that Silpi Industries had approached the District Industrial Centre for grant of entrepreneur memorandum in 2015. However, it is pertinent to note that Silpi industries had supplied goods to KSRTC back in between 2011 and 2014 while it was unregistered. A similar stance was taken in the matter of Shanti Conductors Pvt. Ltd. v. Assam State Electricity Board. Here it was held that for a business to avail benefits under the MSME Act, the entity needs to be registered on the date the goods were supplied.
Is registration actually mandatory?
Though the court held that registration of an entity is mandatory under the MSME Act but in the present case, the author would humbly like to posit a different point of view of the same.
- Firstly, it is pertinent to note that Section 7 and Section 8 of the MSME Act doesn’t specify any particular way of filing a memorandum.
- Secondly, Section 8(1) of the MSME Act makes the filing of a memorandum absolutely discretionary. A similar stance was taken in the matter of Hameed Leather Finishers v. Associated Chemical Industries Pvt. Ltd. Here it was succinctly stated by the Allahabad High Court that an entity in order to avail benefits under Chapter V of the MSME Act doesn’t necessarily need to file a memorandum.
- Further, the court had held that the definition of “supplier” under Section 2(n) also includes entities that have not filed a memorandum. On another occasion in Indur District Cooperative Marketing Society Ltd. v. Microplex (India), Hyderabad and Ors it was held by the Andhra Pradesh High Court that making filing of memorandum mandatory to be a ‘supplier’ under the definition of the act would be abnormal.
- Further, the government of India through its notification had crystallised that filing of the memorandum is voluntary and shall not be bound by any time limit.
- It must be noted that encumbering entities with the mandatory filing of the memorandum will lead to deprivation of relief granted under the MSME Act and also considering that the majority number industries have yet not registered under the same Act.
The interplay between MSME Act and Arbitration Act
The interplay between these two acts has always been a contentious one. However, it is pertinent to note that the position of the buyer under Section 18(2) of the MSME Act is subverted compared to its position under the Arbitration Act. On the contrary, Section 18(2) of the MSME Act tends to ameliorate the position of the supplier by granting them special benefits. Therefore, whenever there is a dispute between an MSME and a non-MSME, the tussle lies in the fact of whether to arbitrate the matter under the MSME Act or the Arbitration Act.
In the matter of Principal Chief Engineer v. Manibhai And Bros (Sleeper), the apex court of the country had held that provisions of the MSME Act prevail over the Arbitration Act. Further, it held that MSME Act being a special provision shall prevail over the arbitration clause and parties are bound to abide by the rules enshrined under Section 18 of the MSME Act.
A similar stance was taken by the Supreme Court in the present matter (Silpi Industries matter). In the above case, the apex court had wonderfully maintained an equipoise between the needs of the supplier, the buyer and at the same time maintaining the special stature of the MSME Act. Firstly, the supreme court prevented the buyer from inducing a parallel proceeding and to prevent the same upheld the right of the counterclaim. Secondly, it also upheld the special benefits that are granted under the MSME Act.
As has been discussed above, the dictum of the apex court has catered to the needs of both the buyers and the supplier. But it’s high time that the courts crystallise its standpoint with regards to registration and till then the micro, small and medium industries are advised to go for filing of memorandum in order to get registered under the act and keep themselves away from the future scuffle.
This particular judgement does pave way for future legislation. The aim should be to provide relief to the majority of industries under the MSME Act as they play a very pivotal role in boosting the economy and thereby helping in carving the future of the nation.
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