MSME Act Jurisdiction Clarified: Supreme Court Rules on Foreign Buyers in Vaishno Enterprises vs. Hamilton Medical AG (24 March 2022)

Introduction

Date of the Judgment: 24 March 2022
Citation: [Not Available in the source]
Judges: M. R. Shah, J., B. V. Nagarathna, J.
Can a Micro, Small, and Medium Enterprises (MSME) Facilitation Council in India resolve a dispute with a buyer located outside India? The Supreme Court of India recently addressed this question in a case involving a consultancy firm and a Swiss medical equipment company. The core issue was whether the MSME Act applies to a foreign buyer when the contract was executed in India and services were provided in India, but the buyer is located outside India. The Supreme Court, in this case, ultimately sided with the High Court’s decision, stating that the Council had no jurisdiction in this particular matter, while keeping open the larger question for consideration in an appropriate case. The judgment was delivered by a two-judge bench comprising Justice M.R. Shah and Justice B.V. Nagarathna.

Case Background

M/s. Vaishno Enterprises, the appellant, is an Indian consultancy firm providing services to foreign medical equipment companies. Hamilton Medical AG, the first respondent, is a Swiss company that manufactures and supplies medical ventilators. The appellant approached the respondent to collaborate on projects in India. On 20 August 2018, a tender was floated by HLL Infra-Tech Services Limited for the purchase of high-end ventilators. The respondent participated in the tender through its authorized local agent, M/s Medelec Health Care Solutions, and was awarded the tender. A Consulting Agreement was entered into between the appellant and the respondent on 10 February 2020 for six months, where the appellant was to act as a consultant for the respondent. After the expiry of the said agreement on 10 August 2020, a fresh Consulting Agreement was entered into on 24 August 2020, also for six months. The appellant got registered under the MSME Act on 28 August 2020. A dispute arose between the parties, and the appellant sent a legal notice on 9 September 2020 to the respondent, claiming payment for invoices and damages. The respondent terminated the Consulting Agreement on 22 October 2020. The appellant approached the Micro and Small Enterprises Facilitation Council (the Council) on 22 October 2020, seeking payment of dues, damages, and a declaration that the termination was illegal.

Timeline

Course of Proceedings

The appellant approached the Council on 22 October 2020, seeking various reliefs, including payment of dues, damages, and a declaration that the termination of the Consulting Agreement was illegal. The Council issued an intimation to the respondent on the same day. The respondent, in turn, informed the Council that it was a company based in Switzerland and that the MSME Act would not apply to it. The Council then issued notices to the respondent, calling for a statement of defense and for a conciliation meeting. The respondent filed a writ petition before the High Court challenging the notices issued by the Council. The learned Single Judge of the High Court allowed the writ petition, setting aside the notices, stating that the Council had no jurisdiction to resolve the dispute. The appellant challenged this decision before the Division Bench of the High Court, which dismissed the appeal and confirmed the order passed by the Single Judge. The present appeal before the Supreme Court is against the judgment of the Division Bench of the High Court.

Legal Framework

The core legal framework for this case is the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act). Specifically, the following provisions are relevant:

• Section 2(n) of the MSME Act defines “supplier” as a micro or small enterprise that has filed a memorandum with the authority referred to in sub-section (1) of Section 8.
• Section 8 of the MSME Act deals with the filing of the memorandum with the specified authority for registration as an MSME.
• Section 18 of the MSME Act provides for the mechanism for dispute resolution between the supplier and the buyer through the Micro and Small Enterprises Facilitation Council.

The Supreme Court considered these provisions to determine whether the MSME Act would apply to the dispute between the appellant and the respondent, given that the respondent is a foreign entity.

Arguments

Appellant’s Arguments:

• The appellant argued that the Council had jurisdiction because the initial agreement was executed in Delhi, the second agreement was also executed in New Delhi, and the services were rendered in India.
• The respondent was conducting business in India through its registered service centers and had a power of attorney holder in Delhi. Therefore, the cause of action arose in India.
• The MSME Act is a beneficial legislation aimed at promoting and developing micro, small, and medium enterprises. The High Court should not have entertained the writ petition against the Council’s notice.
• The respondent should have been directed to appear before the Council for conciliation and arbitration, and the issue of jurisdiction should have been left to the arbitrator.
• Since the dispute arose after the appellant’s registration as an MSME on 28 August 2020, the Council has jurisdiction.

Respondent’s Arguments:

• The respondent argued that it is a company based in Switzerland, and the MSME Act does not apply to companies located outside India.
• The definition of “buyer” and “supplier” under Section 2 of the MSME Act indicates that the Act applies to entities within India.
• The respondent’s registered office and the address mentioned in the agreements were in Switzerland.
• The contract was executed on 24 August 2020, and the appellant was registered as an MSME on 28 August 2020. According to the arbitration agreement, the law applicable at the time of the contract’s execution governs the parties, and therefore, the MSME Act would not apply.

Issues Framed by the Supreme Court

The Supreme Court framed the following issue for consideration:

1. Whether the Council has jurisdiction under the MSME Act with respect to the dispute between the appellant and the respondent.

Treatment of the Issue by the Court

Authorities

The Court considered the following authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• The Court considered the case of M/s Shilpi Industries vs. Kerala State Road Transport Corporation [2021 SCC Online SC 439] and Shanti Conductors Pvt. Ltd. Vs. Assam State Electricity Board [(2019) 19 SCC 529] while keeping the larger question open for consideration in an appropriate case.
• The Court used Section 2(n) of the MSME Act to define “supplier” and determine if the appellant qualified as such at the time of the contract.
• The Court referred to Section 8 of the MSME Act to determine the requirements for registration as an MSME.
• The Court referred to Section 18 of the MSME Act to determine the jurisdiction of the Council.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the specific terms of the agreement between the parties and the timing of the appellant’s registration as an MSME. The Court emphasized that the contract, executed on 24 August 2020, explicitly stated that the laws of India applicable at the time of the contract would govern the parties. Since the appellant was not registered as an MSME until 28 August 2020, the Court concluded that the MSME Act did not apply to this particular dispute. The Court also noted that the respondent was a company based in Switzerland, which further supported the conclusion that the MSME Act would not apply in this case. The Court, however, kept open the larger question of whether the MSME Act would apply in cases where the buyer is located outside India but has availed services or done business in India, and also the question of whether subsequent registration as an MSME would confer jurisdiction on the Council.

Fact:Law Ratio

Logical Reasoning:

The Court considered the argument that the MSME Act is a beneficial legislation but emphasized that the specific terms of the agreement and the timing of registration were crucial in this case. The Court also considered the argument that the dispute arose after the appellant’s registration as an MSME but rejected it, stating that the governing law is that which was applicable at the time of the contract. The Court did not find any alternative interpretations that would have led to a different conclusion in this case, given the specific facts and the terms of the agreement.

The decision was reached by a two-judge bench comprising Justice M.R. Shah and Justice B.V. Nagarathna, and there were no dissenting opinions.

The Court quoted the following from the agreement: “This Agreement and the rights of the parties hereunder shall be governed by and construed in accordance with the laws of India.” The Court also observed: “It is admitted position that the date on which a contract/agreement was executed i.e. on 24.08.2020 the appellant was not registered MSME.” The Court further stated: “Therefore, when the contract was entered into the appellant was not MSME and therefore the parties would not be governed by the MSME Act and the parties shall be governed by the laws of India applicable and/or prevailing at the time of execution of the contract.”

Key Takeaways

• The MSME Act may not apply to disputes where the contract was executed before the supplier’s registration as an MSME.
• The governing law for a contract is determined by the laws applicable at the time of its execution, as stipulated by the contract itself.
• The location of the buyer (whether within or outside India) can be a significant factor in determining the applicability of the MSME Act.
• The Supreme Court has kept open the larger question of whether the MSME Act would apply in cases where the buyer is located outside India but has availed services or done business in India.

Directions

No specific directions were given by the Supreme Court in this judgment.

Specific Amendments Analysis

There is no specific amendment discussed in the judgment.

Development of Law

The ratio decidendi of this case is that the MSME Act does not apply to disputes where the contract was executed before the supplier’s registration as an MSME, and the contract specifies that the laws of India applicable at the time of the contract would govern the parties. This judgment clarifies that the timing of MSME registration and the specific terms of the contract are crucial in determining the applicability of the MSME Act. However, the larger issue of whether the MSME Act applies to foreign buyers who avail services in India has been left open for consideration in an appropriate case.

Conclusion

In conclusion, the Supreme Court dismissed the appeal, upholding the High Court’s decision that the Micro and Small Enterprises Facilitation Council had no jurisdiction to entertain the dispute between the appellant and the respondent. The Court emphasized that the MSME Act did not apply in this case because the contract was executed before the appellant’s registration as an MSME, and the contract stipulated that the laws of India applicable at the time of the contract would govern the parties. The Court, however, kept open the larger question of the applicability of the MSME Act to foreign buyers who avail services in India for future consideration.