Supreme Court clarifies jurisdiction in MSMED Act and DRT cases: Bank of India wins against Yadav Consultancy (05 December 2017)

This judgment addresses a dispute over payment of security service charges. The core legal issue is whether the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 can be invoked when proceedings are ongoing before the Debt Recovery Tribunal (DRT). The Supreme Court of India settled this dispute, clarifying the jurisdiction of both bodies. This case involves Bank of India and Yadav Consultancy Services. The judgment was delivered by a two-judge bench of Justice Kurian Joseph and Justice R. Banumathi, with Justice R. Banumathi authoring the opinion.

Case Background

The Bank of India (appellant) initially filed a suit in 1998 against M/s Sona Aluminium Finishers (P) Ltd. for recovery of ₹9.55 lakhs. The suit was decreed on 30 January 1999. Due to the amount exceeding ₹10 lakhs, the recovery proceedings were transferred to the Debt Recovery Tribunal (DRT), Pune in 2002. After the property was attached, it was auctioned on 8 March 2006. The DRT issued a sale certificate to the auction purchasers (respondents 3 to 5) on 14 July 2006.

On 26 July 2006, the DRT appointed Yadav Consultancy Services (respondent 1) as “Court Commissioner” to take possession of the property. The Bank was directed to pay the service charges. Yadav Consultancy took possession on 9 November 2006. The auction purchasers then applied to the DRT on 13 November 2006, and the DRT directed Yadav Consultancy to hand over possession to them on the same day.

A dispute arose between the Bank and M/s Sona Aluminium. Though the matter was compromised, the compromise failed. The Bank informed Yadav Consultancy on 4 May 2007 that their services were no longer required after 8 May 2007. However, the Recovery Officer directed the Bank to continue payments on 12 June 2007. The Bank challenged this order before the DRT. The DRT set aside the Recovery Officer’s order on 24 July 2008, directing Yadav Consultancy to recover its charges from the auction purchasers from 8 May 2007.

Timeline

Course of Proceedings

Yadav Consultancy did not challenge the DRT order of 24 July 2008. Instead, they applied to the DRT on 7 November 2008, seeking payment of their charges by the auction purchasers. The auction purchasers challenged the DRT order before the Debt Recovery Appellate Tribunal (DRAT), Mumbai. While this appeal was pending, Yadav Consultancy filed a writ petition in the High Court to expedite the DRAT appeal. The DRAT appeal was eventually dismissed for default on 30 May 2012.

Instead of challenging the DRAT order, Yadav Consultancy sought arbitration before the Micro, Small and Medium Enterprises Development Facilitation (MSMEDF) Council, Pune. The MSMEDF Council issued an ex parte award on 12 September 2012, directing the Bank to pay ₹1,62,82,079 with 24% interest. The High Court stayed the District Judge’s order on 19 March 2013, subject to the Bank depositing the entire amount. The Bank’s appeal under Section 34 of the Arbitration and Conciliation Act, 1996, was dismissed by the District Judge on 16 June 2014. The High Court dismissed the Bank’s further appeal on 19 November 2015.

Legal Framework

The case primarily involves the interpretation of the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) and the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The RDDBFI Act establishes Debt Recovery Tribunals (DRTs) and Debt Recovery Appellate Tribunals (DRATs) to handle recovery of debts owed to banks and financial institutions. Section 31-A of the RDDBFI Act deals with the transfer of recovery proceedings to the Recovery Officer of the DRT when the decreed amount exceeds ₹10 lakhs.

The MSMED Act, 2006, aims to facilitate the development of micro, small, and medium enterprises and provides for mechanisms to resolve disputes related to delayed payments to service providers. The MSMED Act establishes the Micro, Small and Medium Enterprises Development Facilitation Council (MSMEDF Council) to handle such disputes.

The Supreme Court considered the jurisdictional overlap between the DRT and the MSMEDF Council. The court examined whether the MSMEDF Council could entertain a dispute when proceedings were already underway before the DRT.

Arguments

The appellant Bank argued that its obligation to pay charges to Yadav Consultancy expired on 13 November 2006, when possession was handed over to the auction purchasers. The Bank contended that the DRT order of 24 July 2008, which directed Yadav Consultancy to recover its charges from the auction purchasers, had attained finality. The Bank also argued that the MSMEDF Council lacked jurisdiction since the matter was already being pursued before the DRT, DRAT, and the High Court.

Yadav Consultancy argued that the DRT had no jurisdiction to entertain the appeal against the Recovery Officer’s order. They contended that the MSMED Act, 2006, was specifically enacted to deal with disputes over delayed payments to service providers, and therefore, the MSMEDF Council had the jurisdiction to adjudicate the dispute. They also argued that the Bank had not taken steps to take possession from the Court Commissioner after paying the charges.

The Bank’s submission was that the order of the DRT dated 24.07.2008 had attained finality and the order of the Recovery Officer dated 25.03.2009 makes it clear that the continuation of the services of the first respondent was only on behalf of auction purchasers and that only the auction purchasers were bound to pay the charges for security services to the first respondent.

Yadav Consultancy submitted that the DRT had no jurisdiction to entertain the appeal against the order of the Recovery Officer dated 12.06.2007 and that the order of the DRT dated 24.07.2008 was non est.

The innovativeness of the argument by the Bank was that the MSMEDF Council lacked jurisdiction since the matter was already being pursued before the DRT, DRAT, and the High Court.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. When the obligation of the appellant Bank to pay the charges expired on 13 November 2006, when the physical possession of the subject property was handed over to the auction purchasers and when the order dated 24 July 2008 of Debt Recovery Appellate Tribunal, Pune has attained finality, can the first respondent claim charges for security services from the appellant Bank?
2. Whether the High Court was right in saying that DRT had no jurisdiction to entertain the appeal and that the order dated 24 July 2008 would be non est?
3. When the first respondent was appointed as Court Commissioner through the order of the Recovery Officer in the proceedings before DRT in R.P. No. 06/2002 and when the parties were vigorously pursuing the matter before DRT, DRAT and also before the High Court, whether the first respondent was right in approaching the Micro, Small and Medium Enterprises Development Facilitation (MSMEDF) Council, Pune?
4. Whether the award passed by the Micro, Small and Medium Enterprises Development Facilitation (MSMEDF) Council, Pune affirmed by the District Court and also by the High Court is sustainable?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

• Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act)
  • Section 31-A: Transfer of recovery proceedings to the Recovery Officer of the DRT when the decreed amount exceeds ₹10 lakhs.
  • Section 5: The Debt Recovery Tribunal is headed by the Presiding Officer who is or has been or is qualified to be a District Judge.
  • Section 10: The Appellate Tribunal is headed by the Chairperson who is or has been or is qualified to be a judge of a High Court.
• Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act)
• Order of DRT dated 24 July 2008: Set aside the order of the Recovery Officer and directed the Recovery Officer to recover Court Commissioner charges from 08.05.2007 from the auction purchasers.
• Order of Recovery Officer dated 25 March 2009: Held that the continuation of respondent No. 1 for safeguarding the auctioned property was solely on behalf of auction purchasers.

Judgment

The Supreme Court allowed the appeal of the Bank of India and set aside the judgment of the High Court. The court held that the Bank’s obligation to pay charges to Yadav Consultancy expired on 13 November 2006. The court also held that the DRT order of 24 July 2008 was valid and binding and that the MSMEDF Council lacked jurisdiction in this case.

The Court’s view of the authorities is as follows:

• The Recovery of Debts Due to Banks and Financial Institutions Act, 1993 (RDDBFI Act) was viewed as providing for the establishment of DRTs and DRATs as quasi-judicial bodies with powers similar to civil courts.
• The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) was viewed as not applicable in this case, as the matter was already before the DRT.
• The Order of DRT dated 24 July 2008 was viewed as valid and binding.
• The Order of Recovery Officer dated 25 March 2009 was viewed as clarifying that the services of Yadav Consultancy after 13 November 2006 were for the benefit of auction purchasers.

What weighed in the mind of the Court?

The Supreme Court’s decision was significantly influenced by the sequence of events and the legal framework. The court emphasized the finality of the DRT order dated 24 July 2008 and the fact that Yadav Consultancy had initially accepted and acted upon this order. The court also noted that the Recovery Officer’s order dated 25 March 2009, clarified that Yadav Consultancy’s services after 13 November 2006, were for the benefit of the auction purchasers.

The court also considered the jurisdictional aspects, holding that the MSMEDF Council could not interfere with matters already under the purview of the DRT. The court noted that the DRT and DRAT are quasi-judicial bodies with powers similar to civil courts. The court observed that the High Court had not kept in view the order of DRT dated 24.07.2008 and the order of the Recovery Officer dated 25.03.2009.

The court’s reasoning is explained below:

The court rejected the argument that the DRT had no jurisdiction to entertain the appeal against the Recovery Officer’s order. The court stated that the DRT and DRAT are quasi-judicial bodies with powers similar to civil courts. The court also rejected the argument that the MSMED Act was specifically enacted for delayed payment disputes, holding that the MSMED Act could not be invoked when the matter was already before the DRT.

The court quoted the order of the DRT dated 24.07.2008, which reads as under:

“…….The Court Commissioner was appointed at the instance of the Recovery Officer and the Recovery Officer has wrongly saddled the appellant to pay the charges. The Court Commissioner should not suffer in the present proceeding and, therefore, Recovery Officer is directed to recover Court Commissioner charges from 08.05.2007 till his discharge from the auction purchasers……..”

The court also quoted the order of the Recovery Officer dated 25.03.2009, which reads as under:

“8……The Auction Purchasers have not filed any application to discharge the said Agency, therefore, they have opted to continue the services, of the said Agency, in exercise of their discretion and in furtherance of their Exh 225. This Tribunal would therefore not be inclined to accept the prayer of CH to discharge the said Agency, as doing so is likely to prejudice the Auction Purchaser’s rights, in the matter of preservation and protection of the auctioned property, and violation of their rights, and discretion, as the CH has no concern in the preservation or protection of the auctioned property from 13.11.2006 i.e., since the Auction Purchasers having filed Undertaking at Exh 225.
9……….The status of the said Agency as “Court Commissioner” appears to be lost from 13.11.2006, as thereafter the “Court Commissioner” appears to have continued to safeguard the auctioned property for and on behalf of the Auction Purchasers, in furtherance of their private arrangement, particularly in light of Exh 225 of the Auction Purchaser. The term “Court Commissioner” as used by CH in its application Exh 308 therefore is a misnomer. The said Agency from 13.11.2006 does not appear to have rendered services to the Auction Purchasers as “Court Commissioner” but as a private agency………… The order of the Hon’ble PO dated 24.07.2008, passed in Misc. Civil Appeal 25/2007 whereby, it appears, relief is granted to the Auction Purchasers, who have been directed to pay the Court Commissioner charges w.e.f. 08.05.2007. Therefore, I am not required to go into the said aspects again, as the same having reached finality, as from the available record and papers, no appeal appears to be filed against the said order dated 24.07.2008….”

The court also stated, “The High Court did not consider various orders passed by DRT and DRAT and the conduct of the parties who have been vigorously pursuing the matter before DRT, Recovery Officer and DRAT. The High Court also did not keep in view that the parties were bound by the earlier orders passed by DRT and Recovery Officer which clearly held that charges towards security services are payable only by the auction purchasers.”

Key Takeaways

• The MSMED Act cannot be invoked when proceedings are already underway before the DRT.
• Orders passed by the DRT are binding and must be respected.
• Parties cannot circumvent the jurisdiction of the DRT by approaching the MSMEDF Council.
• Auction purchasers are liable for security charges after taking possession of the property.

Directions

The Supreme Court directed the following:

• The judgment of the High Court and the award passed by the MSMEDF Council were set aside.
• The Bank is free to recover ₹1,22,00,000 withdrawn by Yadav Consultancy after adjusting payments due up to 24 July 2008.
• The Bank is permitted to withdraw the amount of ₹93,22,590 along with accrued interest.
• Yadav Consultancy is granted liberty to proceed against the auction purchasers for security service charges payable after 24 July 2008.

Development of Law

The ratio decidendi of this case is that when proceedings are already underway before the Debt Recovery Tribunal (DRT), the Micro, Small and Medium Enterprises Development Facilitation Council (MSMEDF Council) does not have jurisdiction to entertain the same dispute. This clarifies the jurisdictional overlap between the RDDBFI Act and the MSMED Act, ensuring that parties cannot bypass the DRT by initiating proceedings under the MSMED Act.

Conclusion

In conclusion, the Supreme Court’s judgment in Bank of India vs. Yadav Consultancy Services (P) Ltd. clarifies the jurisdictional boundaries between the DRT and the MSMEDF Council. The court held that once proceedings are initiated before the DRT, the MSMEDF Council cannot entertain the same dispute. The court also upheld the validity of the DRT order dated 24 July 2008, and ruled that the Bank’s obligation to pay charges to Yadav Consultancy expired on 13 November 2006. This judgment provides clarity on the applicability of the MSMED Act in cases where proceedings are already ongoing before the DRT.