Power Machines India Ltd. vs. State of Madhya Pradesh: Supreme Court Upholds Recovery of Dues as Land Revenue (17 April 2017)

Can a state government provide a separate mechanism for recovering dues under the Micro, Small and Medium Enterprises Development Act, 2006, that differs from the standard procedure under the Arbitration and Conciliation Act, 1996? The Supreme Court of India addressed this question in a case concerning the validity of a rule allowing recovery of dues as arrears of land revenue. This judgment clarifies the scope of state rule-making powers and the permissibility of having multiple remedies for the same issue. The bench comprised Justices Arun Mishra and S. Abdul Nazeer, with Justice Arun Mishra authoring the opinion.

Case Background

Power Machines India Ltd. (the appellant) was directed to pay ₹1,15,77,630, plus ₹1,04,96,746 in interest, to Lakshmi Engineering Industries (Bhopal) Pvt. Ltd. (respondent No. 3) by the Madhya Pradesh Facilitation Council on 15 January 2014. This order came under the Micro, Small and Medium Enterprises Development Act, 2006. The interest was to be paid at three times the bank rate notified by the Reserve Bank of India, within 30 days of the award.

The Collector, Noida, initiated recovery of the amount based on a letter dated 2 April 2016, from the Madhya Pradesh Micro and Small Enterprises Facilitation Council. The recovery was to be done under the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006. A recovery citation was served to the appellant on 20 April 2016, under the Uttar Pradesh Zamindari Abolition and Land Reforms Act, 1950. Another citation was received on 16 May 2016, which was issued on 20 April 2016.

Subsequently, the Tehsildar of Dadri, Gautam Buddha Nagar, withdrew ₹1,18,78,588.14 from the appellant’s bank account on 23 May 2016, and a further ₹2,12,33,618.57 was recovered on 24 May 2016. The appellant then filed a writ petition in the High Court of Madhya Pradesh, challenging Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006, as ultra vires.

The High Court of Madhya Pradesh dismissed the writ petition challenging Rule 5 but allowed another writ petition, permitting respondent No. 3 to initiate recovery proceedings de novo. The Allahabad High Court dismissed a related petition, noting that the Madhya Pradesh High Court had already addressed the issue.

Fresh recovery proceedings were initiated by the Tehsildar, Dadri, on 19 September 2016, for ₹5,29,58,937, as per the award dated 15 January 2014. The High Court of Madhya Pradesh upheld Rule 5, stating it was in conformity with the Act of 2006. This led to the appeal before the Supreme Court.

Timeline

Course of Proceedings

The appellant initially filed a writ petition before the Allahabad High Court to quash the recovery proceedings. However, this petition was dismissed because the High Court of Madhya Pradesh had already addressed the matter. The appellant then filed two writ petitions in the High Court of Madhya Pradesh. The first challenged the validity of Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006. The second sought to quash the recovery proceedings, arguing they did not comply with Rule 5.

The High Court of Madhya Pradesh dismissed the first writ petition, upholding the validity of Rule 5. However, it allowed the second writ petition, directing respondent No. 3 to initiate fresh recovery proceedings in accordance with the law. This judgment led to the current appeal before the Supreme Court, challenging the High Court’s decision on Rule 5.

Legal Framework

The case primarily revolves around the interpretation of the Micro, Small and Medium Enterprises Development Act, 2006 (the Act of 2006), and the Arbitration and Conciliation Act, 1996 (the Act of 1996). Specifically, the court examined the validity of Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006 (the Rules).

Section 30 of the Act of 2006 empowers the State Government to make rules to carry out the provisions of the Act. This includes any matter prescribed under the Act. Section 18 of the Act of 2006 allows parties to refer disputes regarding amounts due under Section 17 to the Micro and Small Enterprises Facilitation Council. The Council can conduct conciliation or refer the matter to an institution for alternate dispute resolution. If conciliation fails, the Council can arbitrate or refer the matter for arbitration.

Section 36(1) of the Act of 1996 states that an arbitral award, once the time for setting it aside has expired, is enforced as if it were a decree of the court under the Code of Civil Procedure (CPC). Rule 5 of the Rules allows the Collector to recover the awarded amount as arrears of land revenue if no appeal is filed under Section 19 of the Act of 2006, or if such an appeal is dismissed.

Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006 states:

“5. Recovery of amount due as arrears of land revenue: If a buyer does not file any appeal under section 19 of the Act for setting aside any decree, award or other order made either by the Council itself or by any institution or centre or if such appeal is dismissed, in that situation such decree, award or order shall be executed by the Collector of the District concerned and the amount due shall be recovered as arrears of land revenue.”

Arguments

The appellant, Power Machines India Ltd., argued that Rule 5 of the Rules is ultra vires, arbitrary, and violates Article 14 of the Constitution of India. They contended that it is repugnant to Section 36 of the Act of 1996 and Section 18 of the Act of 2006. The appellant argued that the rule-making power under Sections 21 and 30 of the Act of 2006 does not extend to creating a recovery mechanism that bypasses the safeguards provided by the CPC.

The appellant further submitted that the CPC provides safeguards, such as the requirement to explain delays in execution, the power to stay execution, and the right to object to attachment of property. These safeguards are absent in the recovery procedure under Rule 5, which allows for outright recovery as arrears of land revenue. The appellant also argued that only four states use the CPC for recovery under Section 36 of the Act of 1996, leading to discrimination.

The respondents argued that Rule 5 was framed under Section 30 of the Act of 2006, to provide a speedy recovery mechanism. They contended that there is no repugnancy between Rule 5 and the provisions of the Act of 2006 or the Act of 1996. They also argued that it is permissible to have multiple remedies, and it is up to the award-holder to choose one.

The respondents also submitted that the rule is in furtherance of the objective of the Act of 2006, which is to provide speedy recovery for micro, small, and medium enterprises. They stated that there is no conflict of provisions, and it is open to elect one of the available remedies.

Submissions Table

Issues Framed by the Supreme Court

The Supreme Court framed the following issue:

1. Whether the State Government was permitted to enact Rule 5 of the Rules for recovery of the amount as arrears of land revenue and whether speedy remedy could have been provided under the Rules framed under the Act of 2006, notwithstanding the remedy as provided in section 36 of the Act of 1996 for executing the arbitral award as a decree in accordance with the provisions of the CPC, while providing remedy the State has exceeded its ken of powers.

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Cases Relied Upon

• Bihar State Co-operative Marketing Union Ltd. v. Uma Shankar Sharan & Anr. (1992) 4 SCC 196: This case established that multiple remedies can exist under a statute, even if inconsistent. The person can choose which remedy to pursue. The Court held that the application of one provision does not exclude the operation of another, and both can be valid until one is elected.
• Mardia Chemicals Ltd. & Ors. v. Union of India (2004) 4 SCC 311: This case upheld the validity of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act), which allows secured interest to be enforced without court intervention. The Court emphasized the need for faster recovery mechanisms and gave primacy to public interest over private interest.
• Agricultural Market Committee v. Shalimar Chemical Works Ltd. (1997) 5 SCC 516: This case discussed the limits of delegated legislation, stating that the legislature cannot delegate essential legislative functions. The delegate must work within the scope of its authority and cannot widen or constrict the scope of the Act.
• Dr. Mahachandra Prasad Singh v. Chairman, Bihar Legislative Council & Ors. (2004) 8 SCC 747: This case held that delegated legislation should not travel wider than the object of the legislature. The delegate’s function is to serve and promote the object of the enabling Act.
• B.K. Srinivasan & Ors. v. State of Karnataka & Ors. (1987) 1 SCC 618: This case discussed the need for publication and promulgation of subordinate legislation for it to take effect.
• Academy of Nutrition Improvement & Ors. v. Union of India etc. (2011) 8 SCC 274: This case clarified that while general rule-making power exists, it cannot be used to extend the scope of the Act.
• General Officer Commanding-in-Chief & Anr. v. Dr. Subhash Chandra Yadav & Anr. (1988) 2 SCC 351: This case held that a rule enabling the transfer of a Cantonment Board employee was ultra vires.
• International Airports Authority of India v. K.D. Bali & Anr. (1988) 2 SCC 360: This case stated that subordinate legislation must give way to the parent act if in conflict.
• Avinder Singh & Ors. v. State of Punjab & Ors. (1979) 1 SCC 137: This case held that a delegate is not free to switch policy laid down by the Legislature.
• Suraj Mall Mohta & Co. v. A.V. Visvanatha Sastri & Anr. (1955) 1 SCR 448: This case discussed the issue of discriminatory procedures under tax law.
• Shree Meenakshi Mills Ltd., Madurai etc. v. Sri A.V. Visvanatha Sastri & Anr. AIR 1955 SC 13: This case discussed discriminatory procedures under the Taxation on Income (Investigation Commission) Act, 1947.
• Maganlal Chhaganlal (P) Ltd. v. Municipal Corporation of Greater Bombay & Ors. (1974) 2 SCC 402: This case considered alternative procedures for eviction of unauthorized occupants on Government premises.

Books Relied Upon

• “Principles of Statutory Interpretation ” by Justice G.P. Singh, 14th Edn.: This book discusses the principles of statutory interpretation, including the need to avoid inconsistency and repugnancy, and the concept of harmonious construction.

Legal Provisions Relied Upon

• Section 30 of the Micro, Small and Medium Enterprises Development Act, 2006: This section empowers the State Government to make rules to carry out the provisions of the Act.
• Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006: This section allows parties to refer disputes to the Micro and Small Enterprises Facilitation Council.
• Section 36(1) of the Arbitration and Conciliation Act, 1996: This section states that an arbitral award is enforced as a decree of the court under the CPC.
• Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006: This rule allows the Collector to recover dues as arrears of land revenue.
• Article 14 of the Constitution of India: Guarantees equality before the law and equal protection of the laws.
• Order 21 of the Code of Civil Procedure: Deals with the execution of decrees.

Authorities Table

Judgment

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

How each authority was viewed by the Court?

The Supreme Court relied on Bihar State Co-operative Marketing Union Ltd. v. Uma Shankar Sharan & Anr. (1992) 4 SCC 196* to support the idea that multiple remedies can coexist. The Court also relied on Mardia Chemicals Ltd. & Ors. v. Union of India (2004) 4 SCC 311* to emphasize the need for faster recovery mechanisms.

The other cases cited by the appellant were distinguished by the Court, stating that they were either factually different or did not apply to the present situation. For instance, the Court distinguished Agricultural Market Committee v. Shalimar Chemical Works Ltd. (1997) 5 SCC 516*, stating that the rule-making power was not exceeded in this case. Similarly, Dr. Mahachandra Prasad Singh v. Chairman, Bihar Legislative Council & Ors. (2004) 8 SCC 747* was distinguished by stating that Rule 5 is ancillary and remedial.

The Court also distinguished Academy of Nutrition Improvement & Ors. v. Union of India etc. (2011) 8 SCC 274* by stating that in the present case the rule is within the scope of the Act. The Court stated that the other cases such as General Officer Commanding-in-Chief & Anr. v. Dr. Subhash Chandra Yadav & Anr. (1988) 2 SCC 351*, International Airports Authority of India v. K.D. Bali & Anr. (1988) 2 SCC 360*, Avinder Singh & Ors. v. State of Punjab & Ors. (1979) 1 SCC 137*, Suraj Mall Mohta & Co. v. A.V. Visvanatha Sastri & Anr. (1955) 1 SCR 448*, Shree Meenakshi Mills Ltd., Madurai etc. v. Sri A.V. Visvanatha Sastri & Anr. AIR 1955 SC 13*, and Maganlal Chhaganlal (P) Ltd. v. Municipal Corporation of Greater Bombay & Ors. (1974) 2 SCC 402* were not applicable to the present case.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily influenced by the need to provide a speedy and effective mechanism for the recovery of dues for micro, small, and medium enterprises. The Court emphasized that the objective of the Micro, Small and Medium Enterprises Development Act, 2006, is to protect and facilitate the development of these enterprises. The Court reasoned that allowing recovery of dues as arrears of land revenue is a reasonable measure to achieve this objective.

The Court also noted that the recovery procedure under Rule 5 is initiated only after the adjudication process is complete, and the arbitral award has been passed. The Court further reasoned that the procedure cannot be said to be illegal, arbitrary, or violative of Article 14 of the Constitution. The Court also observed that the Code of Civil Procedure cannot be the only remedy and that it is open to legislate recovery mechanisms without interference of the Civil Court.

The Court also considered the fact that the detailed procedure under the CPC is often misused by unscrupulous judgment debtors, leading to delays in execution. Therefore, providing a speedy recovery mechanism through arrears of land revenue was seen as a necessary and reasonable step.

The Court also considered the principle that multiple remedies can coexist, and it is up to the person to elect one of them. The Court further held that the State Government has the power to make rules to carry out the provisions of the Act, and Rule 5 is within the scope of that power.

Sentiment Analysis Table

Fact:Law Ratio Table

Conclusion

The Supreme Court dismissed the appeal, upholding the validity of Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006. The Court held that the State Government has the power to provide a speedy recovery mechanism for dues owed to micro, small, and medium enterprises. The Court also clarified that the existence of an alternative remedy under the Code of Civil Procedure does not invalidate the recovery mechanism provided by Rule 5.

This judgment has significant implications for the recovery of dues under the Micro, Small and Medium Enterprises Development Act, 2006. It affirms that State Governments can provide alternative recovery mechanisms that are faster and more effective than the traditional methods under the Code of Civil Procedure. This decision also allows award-holders to choose from available remedies.

Flowchart of the Decision-Making Process

Implications

The Supreme Court’s judgment in Power Machines India Ltd. vs. State of Madhya Pradesh has several significant implications:

• Speedy Recovery for MSMEs: The judgment reinforces the importance of providing a speedy and effective mechanism for the recovery of dues owed to micro, small, and medium enterprises. This is crucial for the financial health and sustainability of these businesses.
• State Rule-Making Power: The ruling clarifies the scope of state rule-making powers under the Micro, Small and Medium Enterprises Development Act, 2006. It affirms that states can create alternative recovery mechanisms that are faster and more efficient.
• Multiple Remedies: The judgment establishes that multiple remedies can coexist, and it is up to the award-holder to choose which remedy to pursue. This provides flexibility and options for creditors.
• Validity of Recovery as Land Revenue: The Supreme Court has upheld the validity of recovering dues as arrears of land revenue, which is a more straightforward and efficient process than traditional methods under the Code of Civil Procedure.
• Discourages Delay Tactics: The ruling discourages the use of delay tactics by judgment debtors, as the recovery process under Rule 5 is more direct and less susceptible to procedural delays.
• Precedence for Other States: This judgment sets a precedent for other states to adopt similar rules and regulations for the recovery of dues for MSMEs.

Final Analysis

The Supreme Court’s decision in Power Machines India Ltd. vs. State of Madhya Pradesh is a significant step towards ensuring the financial stability of micro, small, and medium enterprises in India. The Court’s emphasis on the need for a speedy and effective recovery mechanism aligns with the objectives of the Micro, Small and Medium Enterprises Development Act, 2006.

By upholding the validity of Rule 5 of the Madhya Pradesh Micro and Small Enterprises Facilitation Council Rules, 2006, the Court has provided a clear legal framework for states to create alternative recovery mechanisms. This approach recognizes that the traditional procedures under the Code of Civil Procedure can be time-consuming and ineffective, particularly for MSMEs that often lack the resources to pursue lengthy legal battles.

The Court’s reliance on the principle that multiple remedies can coexist is also crucial. This allows award-holders to choose the most appropriate and efficient method for recovering their dues. The judgment also sends a strong message that state governments can take proactive steps to protect the interests of MSMEs and ensure that they receive the payments they are entitled to.

The decision also underscores the importance of delegated legislation. The Court held that the rule-making power of the State Government was not exceeded and that Rule 5 was within the scope of Section 30 of the Act.

In conclusion, this judgment is a landmark ruling that provides a clear direction for the recovery of dues for MSMEs. It highlights the need for a pragmatic approach to legal remedies and the importance of balancing the interests of all stakeholders.