Supreme Court settles applicability of Limitation Act and maintainability of counterclaims under MSMED Act: Silpi Industries vs. Kerala State Road Transport Corporation (29 June 2021)

Introduction

Date of the Judgment: 29 June 2021
Judges: Ashok Bhushan J. and R. Subhash Reddy J.
Can a buyer raise a counterclaim in arbitration proceedings initiated by a supplier under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act)? The Supreme Court of India addressed this question, along with the applicability of the Limitation Act, 1963, to such arbitrations. This judgment clarifies the legal framework governing disputes involving micro, small, and medium enterprises.

The Supreme Court bench, comprising Justices Ashok Bhushan and R. Subhash Reddy, delivered the judgment. The court addressed the applicability of the Limitation Act, 1963, to arbitration proceedings initiated under Section 18(3) of the MSMED Act, 2006, and whether counterclaims are maintainable in such proceedings.

Case Background

The appeals before the Supreme Court arose from two sets of cases. The first set involved disputes between suppliers of thread rubber for tyre rebuilding and the Kerala State Road Transport Corporation (KSRTC). The suppliers claimed non-payment of the balance 10% of the purchase price, which was contingent on a final performance report. These claims were initially taken to the Industrial Facilitation Council, then to arbitration, and subsequently appealed to the High Court.

The second set of appeals involved a dispute between a supplier of hydro-mechanical equipment and Prodigy Hydro Power Pvt. Ltd. The supplier claimed non-payment despite fulfilling contractual obligations. The supplier approached the Micro and Small Enterprises Facilitation Council, while the buyer filed an application under Section 11(6) of the Arbitration and Conciliation Act, 1996, for the appointment of an arbitrator.

Timeline

Course of Proceedings

In the first set of cases, the High Court of Kerala allowed the appeals by KSRTC, setting aside the arbitrator’s awards and remanding the matters for fresh consideration. The High Court held that the Limitation Act, 1963, applies to arbitration proceedings under the MSMED Act and that counterclaims are maintainable.

In the second set of cases, the High Court of Madras allowed the application filed by Prodigy Hydro Power Pvt. Ltd. under Section 11(6) of the Arbitration and Conciliation Act, 1996, appointing a second arbitrator. The High Court reasoned that the Facilitation Council primarily deals with claims by the supplier and does not allow counterclaims by the buyer.

Legal Framework

The judgment primarily revolves around the interpretation of the MSMED Act, 2006, and the Arbitration and Conciliation Act, 1996. Key provisions include:

• Section 15 of the MSMED Act, 2006: This section mandates that a buyer must make payment to the supplier on or before the agreed date or, if no agreement exists, before the “appointed day.”
  “Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day”
• Section 16 of the MSMED Act, 2006: This section specifies the date from which and the rate at which interest is payable in case of delayed payment. It mandates compound interest with monthly rests at three times the bank rate notified by the Reserve Bank.
  “Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.”
• Section 17 of the MSMED Act, 2006: This section states that the buyer is liable to pay the amount due with interest.
  “For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.”
• Section 18 of the MSMED Act, 2006: This section provides for reference to the Micro and Small Enterprises Facilitation Council for dispute resolution. It allows the Council to conduct conciliation or refer the matter to arbitration.
  “(1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.”
  “(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.”
• Section 19 of the MSMED Act, 2006: This section mandates a pre-deposit of 75% of the awarded amount for any application to set aside a decree, award, or order, unless the appellant is a supplier.
  “No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent. of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court”
• Section 43 of the Arbitration and Conciliation Act, 1996: This section makes the Limitation Act, 1963, applicable to arbitrations.
• Section 23(2A) of the Arbitration and Conciliation Act, 1996: This section allows a respondent to submit a counterclaim or plead a set-off within the scope of the arbitration agreement.

Arguments

The appellants (suppliers) argued that the MSMED Act, 2006, is a beneficial legislation intended to protect micro and small enterprises. They contended that the scope of the Act should not be expanded to include counterclaims by buyers, as this would undermine the Act’s objectives. They argued that the conciliation and arbitration processes under the Act are solely for the claims of the supplier.

The respondents (buyers) argued that the MSMED Act is intended to protect unpaid sellers. They contended that denying the jurisdiction of the Facilitation Council on the basis of counterclaims would defeat the purpose of the Act. They also argued that since Section 18(3) of the MSMED Act makes the provisions of the Arbitration and Conciliation Act, 1996, applicable, counterclaims should be allowed under Section 23(2A) of the 1996 Act.

In Civil Appeal Nos.1620-1622 of 2021, the respondent argued that the expression ‘any party’ in Section 18 of the MSMED Act refers only to the supplier and not the buyer, therefore, no counterclaim can be entertained.

Issues Framed by the Supreme Court

The Supreme Court framed the following issues for consideration:

1. Whether the provisions of the Indian Limitation Act, 1963, are applicable to arbitration proceedings initiated under Section 18(3) of the Micro, Small, and Medium Enterprises Development Act, 2006?
2. Whether a counterclaim is maintainable in such arbitration proceedings?

Treatment of the Issue by the Court

Authorities

The Supreme Court considered the following authorities:

Judgment

The Court relied on Andhra Pradesh Power Coordination Committee & Ors. v. Lanco Kondapalli Power Ltd. & Ors. [(2016) 3 SCC 468]* to support the applicability of the Limitation Act, 1963. It also agreed with the views of the Allahabad High Court in M/s. B.H.P. Engineers Pvt. Ltd. v. Director, Industries, U.P. (Facilitation Centre), Kanpur & Ors. [2009 SCC OnLine All 565]* and the Bombay High Court in M/s. Steel Authority of India Ltd. & Anr. v. Micro, Small Enterprise Facilitation Council [2010 SCC OnLine Bom 2208]* on the maintainability of counterclaims.

What weighed in the mind of the Court?

The Supreme Court’s reasoning was primarily influenced by the need to provide a comprehensive and effective dispute resolution mechanism under the MSMED Act, 2006, while also ensuring that the provisions of the Arbitration and Conciliation Act, 1996 are not undermined. The court emphasized that the MSMED Act is a beneficial legislation intended to protect micro, small, and medium enterprises. However, it also recognized the need for a balanced approach that allows both suppliers and buyers to present their claims and counterclaims within the same proceedings.

The court’s decision was driven by both factual and legal considerations.

The court considered alternative interpretations but rejected them. For instance, the argument that the MSMED Act only allows claims by the supplier was rejected on the grounds that Section 18(3) of the Act makes the Arbitration and Conciliation Act, 1996, applicable, which includes provisions for counterclaims. The court also reasoned that not allowing counterclaims would lead to parallel proceedings and undermine the intent of the MSMED Act.

The Supreme Court held that the Limitation Act, 1963, applies to arbitration proceedings under the MSMED Act. The court also held that counterclaims are maintainable in such proceedings. The court emphasized the need to avoid parallel proceedings and ensure a comprehensive dispute resolution mechanism.

“When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

“The Arbitration and Conciliation Act, 1996 is a general law whereas the Micro, Small and Medium Enterprises Development Act, 2006 is a special beneficial legislation which is intended to benefit micro, small and medium enterprises covered by the said Act.”

“Thus, we hold that MSMED Act, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act.”

Key Takeaways

• The Limitation Act, 1963, applies to arbitration proceedings initiated under Section 18(3) of the MSMED Act, 2006.
• Counterclaims are maintainable in arbitration proceedings initiated under the MSMED Act, 2006.
• The MSMED Act, 2006, being a special statute, has an overriding effect over the Arbitration and Conciliation Act, 1996, which is a general act.
• Buyers can raise counterclaims in arbitration proceedings initiated by suppliers under the MSMED Act, 2006.
• This judgment clarifies the legal framework for dispute resolution under the MSMED Act, 2006, and promotes a comprehensive approach to resolving disputes between suppliers and buyers.
• The ruling prevents parallel proceedings in different forums, ensuring efficiency and consistency in dispute resolution.

Directions

The Supreme Court dismissed the civil appeals. The court clarified that the issue of whether the claims/counterclaims are within time is left open to the primary authority to decide on merits.

Development of Law

The ratio decidendi of this case is that the Limitation Act, 1963, applies to arbitration proceedings under the MSMED Act, 2006, and counterclaims are maintainable in such proceedings. This clarifies the legal position and ensures a comprehensive approach to dispute resolution under the MSMED Act, 2006. The court also established that the MSMED Act, 2006, being a special statute, has an overriding effect over the Arbitration and Conciliation Act, 1996, which is a general act.

Conclusion

The Supreme Court’s judgment in Silpi Industries vs. Kerala State Road Transport Corporation clarifies the applicability of the Limitation Act, 1963, and the maintainability of counterclaims in arbitration proceedings under the MSMED Act, 2006. The court’s decision ensures a balanced and comprehensive approach to dispute resolution, protecting the interests of both suppliers and buyers while promoting the objectives of the MSMED Act, 2006.