Micro, Small, and Medium Enterprises (MSMEs) play a crucial role in India’s business landscape. They are governed by the Micro, Small, and Medium Enterprises Development Act, 2006. This act provides a dispute resolution mechanism specifically for disputes related to payment defaults by buyers. This process is outlined in Chapter 5, Section 15-23 of the MSMED Act, 2006.
Section 15 of the Act sets a maximum payment timeline of 45 days for buyers. Additionally, the Act empowers sellers to receive the amount with compound interest, which is three times the bank rate notified by the Reserve Bank of India, from the agreed payment date. Furthermore, the Act establishes an Alternative Dispute Resolution Body called the Micro and Small Enterprises Facilitation Council to resolve disputes efficiently and promptly. The establishment process of this body is detailed in Section 18 of the Act.
The procedure for dispute resolution is as follows:
- Section 18(2):On receipt of complaint, The Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
- Section 18(3): Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section(1) of section 7 of that Act.
The Micro and Small Enterprises Facilitation Council’s jurisdiction, as per Section 18(4), is determined by the location of the Supplier or Seller, irrespective of the Buyer’s location. The MSMED Act mandates that the Council consist of a maximum of 5 members, but a minimum of 3 members, for adjudicating disputes. Additionally, appeals can only be filed before the courts by depositing 75 percent of the award or decree as stipulated by the Council.
The purpose of establishing a separate Alternative Dispute Resolution Body under the MSMED Act, 2006, was to provide an exclusive mechanism for resolving grievances for MSME’s, thereby minimizing any disruption to their routine business activities.
However, at several instances, it has come into conflict with the standard ADR process. Section 18 of the Act grants the Micro and Small Enterprises Facilitation Council overriding authority. It states that “the provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law in force at the time.” This interpretation suggests that the Council holds supreme authority as the sole method of dispute resolution for MSME’s.
In the case of Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd.[1], the Hon’ble Supreme Court emphasized the supremacy of the Micro and Small Enterprises Facilitation Council in case of disputes involving MSME’s and held the validity of jurisdiction of this council as per Section 18 of the Act, despite the existence of an Arbitration Agreement between the parties. This acts as the foundational precedent empowering the authority of this council.
Several High Courts have also interpreted this Section. In the case of BSNL v. Maharashtra Micro and Small Enterprises Facilitation Council[2], it was said that “There is no question of an independent arbitration agreement ceasing to have any effect because the overriding clause only overrides things inconsistent therewith and there is no inconsistency between an arbitration conducted by the Council under Section 18 and arbitration conducted under an individual clause since both are governed by the provision of the Arbitration Act, 1996.” It essentially clarified the conflict between the two provisions. In another case of
M/s. Bharat Heavy Electricals Limited v. State of U.P. & Ors[3], the Division Bench of the Allahabad High Court observed that though there may be an arbitration agreement between the parties, the provisions of Section 18 (4) specifically contain an overriding clause empowering the Facilitation Council to act as an Arbitrator, which means that it cannot be excluded from the Arbitration Process.
In conclusion, the primary objective of establishing the Micro and Small Enterprises Facilitation Council under the MSMED Act, 2006, is to expedite and streamline the administration of justice and the resolution of cases. The overarching goal of the Alternative Dispute Resolution System is to alleviate the burden on the regular courts, making this Council specifically targeted towards Micro, Small, and Medium Enterprises. While there may be instances where it conflicts with the Arbitration and Conciliation Act, 1996, in practical terms, it serves as a replication of the system outlined in the Act for the MSME sector. Although the courts have repeatedly emphasized the supremacy of this council, they have also acknowledged the importance of individual parties’ choices regarding Arbitration Agreements. Nevertheless, this mechanism continues to be a popular choice for Enterprises within the MSME sector.
| Article By: | Editorial desk of KNK LEGAL |
| Research support: | By Mr. Kuber Kumar, currently pursuing BBA-LLB (H) from USLLS |
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[1] Gujarat State Civil Supplies Corp. Ltd. v. Mahakali Foods Pvt. Ltd., (2022) 2 S.C.C. 534 (India).
[2] Bharat Sanchar Nigam Ltd. v. Maharashtra Micro & Small Enterprises Facilitation Council, (2018) 13 S.C.C. 1 (India).
[3] M/s. Bharat Heavy Electricals Ltd. v. State of U.P. & Ors., (2003) 6 S.C.C. 528 (India).
