Supreme Court settles the overriding effect of the MSMED Act, 2006 on the Arbitration Act, 1996 in disputes: Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Pvt. Ltd. (31 October 2022)

Date of the Judgment: 31 October 2022

Citation: (2022) INSC 915

Judges: Uday Umesh Lalit, CJI and Bela M. Trivedi, J.

Can a Micro and Small Enterprise (MSE) bypass an existing arbitration agreement and directly approach the Micro and Small Enterprises Facilitation Council for dispute resolution? The Supreme Court of India recently addressed this crucial question, clarifying the interplay between the MSMED Act, 2006 and the Arbitration and Conciliation Act, 1996. This judgment settles the legal position on whether the MSMED Act has an overriding effect on the Arbitration Act, especially when it comes to disputes involving delayed payments to MSEs. The bench was composed of Chief Justice Uday Umesh Lalit and Justice Bela M. Trivedi, with the majority opinion authored by Justice Bela M. Trivedi.

Case Background

This batch of appeals involved several cases with similar legal questions, primarily concerning the jurisdiction of the Micro and Small Enterprises Facilitation Council under the MSMED Act, 2006, in the presence of existing arbitration agreements. The disputes generally arose from delayed payments to suppliers who were registered as micro or small enterprises. The core issue was whether these suppliers could invoke the MSMED Act’s dispute resolution mechanism, bypassing prior arbitration agreements.

Timeline:

Course of Proceedings

The cases involved various High Courts taking different stances on the issue. Some High Courts held that the MSMED Act would not override arbitration agreements, while others ruled in favor of the Facilitation Council’s jurisdiction despite such agreements. These conflicting decisions led to the matter being brought before the Supreme Court to establish a definitive legal position.

Legal Framework

The judgment primarily revolves around the interpretation of the following key legal provisions:

• Section 2(n) of the MSMED Act, 2006: Defines “supplier” as a micro or small enterprise that has filed a memorandum with the authority under Section 8.
• Section 8(1) of the MSMED Act, 2006: Specifies the filing of memorandum by micro, small and medium enterprises.

  “(1) Any person who intends to establish, – (a) a micro or small enterprise, may, at his discretion; or (b) a medium enterprise engaged in providing or rendering of services may, at his discretion; or (c) a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951), shall file the memorandum of micro, small or, as the case may be, of medium enterprise with such authority as may be specified by the State Government under sub-section (4) or the Central Government under sub-section (3):”

• Section 15 of the MSMED Act, 2006: Mandates that buyers must make payments to suppliers on or before the agreed date, or within 45 days if no agreement exists.

  “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: Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

• Section 16 of the MSMED Act, 2006: Specifies that if a buyer fails to make payment, they are liable to pay compound interest at three times the bank rate.

  “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: 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: Provides for reference to the Micro and Small Enterprises Facilitation Council for dispute resolution.

  “(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. (2) On receipt of a reference under sub-section (1), 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. (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. (4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India. (5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.”

• Section 24 of the MSMED Act, 2006: Gives overriding effect to Sections 15 to 23 of the Act.

  “The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”

• Section 7 of the Arbitration and Conciliation Act, 1996: Defines an arbitration agreement.

  “In this Part, “arbitration agreement” means an agreement by the parties to submit to arbitration all or certain disputes which have arisen or which may arise between them in respect of a defined legal relationship, whether contractual or not.”

• Section 80 of the Arbitration and Conciliation Act, 1996: States that a conciliator cannot act as an arbitrator in the same dispute.

  “Unless otherwise agreed by the parties, the conciliator shall not act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings.”

• Section 16 of the Arbitration and Conciliation Act, 1996: Deals with the competence of the arbitral tribunal to rule on its own jurisdiction.

  “(1) The arbitral tribunal may rule on its own jurisdiction, including ruling on any objections with respect to the existence or validity of the arbitration agreement, and for that purpose, — (a) an arbitration clause which forms part of a contract shall be treated as an agreement independent of the other terms of the contract; and (b) a decision by the arbitral tribunal that the contract is null and void shall not entail ipso jure the invalidity of the arbitration clause.”

Arguments

The arguments presented by the counsels for the Buyers and the Suppliers are summarized below:

Arguments by the Buyers:

• The non-obstante clause in Section 18 of the MSMED Act, 2006 does not explicitly include “agreement,” unlike Section 16, and therefore, Section 18 cannot override an existing arbitration agreement.
• The use of “may” in Section 18, as opposed to “shall” in Section 16, indicates that the legislature did not intend to supersede contracts between parties.
• Only Sections 18(1) and 18(4) have a non-obstante clause, implying that Section 18(1) only provides an option, not a compulsion, to approach the Facilitation Council.
• Courts cannot supply omissions in a statute, and Section 18 is merely a procedure, not a substantive right.
• Section 18 is procedural, providing an option to approach the Facilitation Council for recovery of dues only when there is no arbitration agreement.
• Commercial contracts must be construed carefully, respecting party autonomy in deciding procedural and substantive law.
• Courts must read agreements as they are and cannot rewrite them.
• The doctrine of election prevents parties from taking advantage of one part of an agreement while rejecting the rest.
• Both the MSMED Act and the Arbitration Act are special laws, but the MSMED Act should only apply when the contract is silent about dispute resolution.
• The Facilitation Council cannot act as both conciliator and arbitrator due to the bar in Section 80 of the Arbitration Act, 1996.
• The MSMED Act does not override contracts with arbitration clauses, and reliance on Silpi Industries vs. Kerala State Road Transport Corporation is misplaced.

Arguments by the Suppliers:

• Section 18 aims to create a cost-effective and expeditious dispute resolution mechanism, overriding any contrary agreement.
• Section 18 is consistent with Section 2(4) of the Arbitration Act, 1996, and once invoked, it overrides any arbitration agreement.
• Section 24 of the MSMED Act, 2006, gives overriding effect to Sections 15 to 23.
• Section 18 provides a statutory right to approach the Council, which cannot be negated by an arbitration agreement.
• Section 18(3) creates a deeming fiction, making the arbitration under the MSMED Act equivalent to an agreement under Section 7 of the Arbitration Act, 1996.
• The MSMED Act is a special statute that prevails over the general Arbitration Act, 1996.

Arguments by the MSE Facilitation Council:

• Sections 15 to 19 of the MSMED Act are interlinked and override any independent arbitration agreement.
• Section 18 is substantive, providing a right and remedy for MSEs.
• Beneficial statutes should be interpreted liberally, favoring the object of the Act and the benefit of the persons for whom the Act is made.

Submissions Table

Issues Framed by the Supreme Court:

The Supreme Court framed the following key issues:

1. Whether the provisions of Chapter -V of the MSMED Act, 2006 would have an effect overriding the provisions of the Arbitration Act, 1996?
2. Whether any party to a dispute with regard to any amount due under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council under sub-section (1) of Section 18 of the said Act, if an independent arbitration agreement existed between the parties as contemplated in Section 7 of the Arbitration Act, 1996?
3. Whether the Micro and Small Enterprises Facilitation Council, itself could take up the dispute for arbitration and act as an arbitrator, when the council itself had conducted the conciliation proceedings under sub-section (2) of the Section 18 of the MSMED Act, 2006 in view of the bar contained in Section 80 of the Arbitration Act,1996?

Treatment of the Issue by the Court:

The following table demonstrates as to how the Court decided the issues

Authorities

The Supreme Court considered various authorities while arriving at its decision. These are categorized by the legal point they address:

On Statutory Interpretation and Overriding Effect:

• Commissioner of Income Tax, Patiala vs. Shahzada Nand & Sons, AIR 1966 SC 1342, Supreme Court of India: The meaning and intention of a statute must be collected from its plain and unambiguous expression.
• Kaushalya Rani vs. Gopal Singh, AIR 1964 SC 260, Supreme Court of India: Defined a “Special Law” as one enacted for special cases, in special circumstances.
• Solidaire India Ltd. Vs. Fairgrowth Financial Services Ltd. & Ors, (2001) 3 SCC 71, Supreme Court of India: A special statute enacted subsequently in time prevails in case of any conflict.
• Maruti Udyog Ltd. Vs. Ram Lal & Ors, (2005) 2 SCC 638, Supreme Court of India: A special statute enacted subsequently in time prevails in case of any conflict.
• K. Prabhakaran v. P. Jayarajan, (2005) 1 SCC 754, Supreme Court of India: A legal fiction presupposes the existence of a state of facts which may not exist and then works out the consequences which flow from that state of facts.
• Union of India Vs. Prabhakaran Vijaya Kumar and Ors, (2008) 9 SCC 517, Supreme Court of India: Beneficial or welfare statutes should be given a liberal interpretation.
• Regional Provident Fund Commr. Vs. Hoogly Mills Co. Ltd., (2012) 2 SCC 489, Supreme Court of India: Beneficial or welfare statutes should be given a liberal interpretation.

On Arbitration and Contractual Autonomy:

• Bharat Aluminum Company Vs. Kaiser Aluminum Technical Services, (2012) 9 SCC 648, Supreme Court of India: Parties to an arbitration agreement have autonomy to decide on procedural and substantive law.
• Antrix Corporation Limited Vs. Devas Multimedia Private Limited, (2014) 11 SCC 560, Supreme Court of India: Parties to an arbitration agreement have autonomy to decide on procedural and substantive law.
• Amazon.com NV Investment Holdings LLC. Vs. Future Retail Limited and others, (2022) 1 SCC 209, Supreme Court of India: Parties to an arbitration agreement have autonomy to decide on procedural and substantive law.
• Orissa State Financial Corporation vs. Narsingh ch. Nayak and Others, (2003) 10 SCC 261, Supreme Court of India: Courts must read the agreement as it is and cannot rewrite it.
• Shin Satellite Public Co. Ltd. Vs. Jain Studios Ltd., (2006) 2 SCC 628, Supreme Court of India: Courts must read the agreement as it is and cannot rewrite it.

On MSMED Act and its Applicability:

• Silpi Industries etc. vs. Kerala State Road Transport Corporation and Anr., 2021 SCC Online SC 439, Supreme Court of India: The MSMED Act is a special legislation that overrides the Arbitration Act. Also, to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the Act, as on the date of entering into the contract.
• Secur Industries Ltd. Vs. Godrej & Boyce Mfg. Co. Ltd. And Anr, (2004) 3 SCC 447, Supreme Court of India: Explained the deeming fiction created in Section 18(3) of the MSMED Act.
• Shanti Conductors Pvt. Ltd. vs. Assam State Electricity Board, (2019) 19 SCC 529, Supreme Court of India: Date of supply of goods/services can be taken as the relevant date for applicability of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.

On Casus Omissus:

• Shiv Shakti Cooperative Housing Society, Nagpur vs. Swaraaj Developers and Others, (2003) 6 SCC 659, Supreme Court of India: Courts cannot supply casus omissus i.e., omission in a statute cannot be supplied by construction.

On Applicability of Arbitration Act:

• Bharat Sewa Sansthan Vs. U.P. Electronics Corporation, AIR 2007 SC 2961, Supreme Court of India: Explained the objectives of the Arbitration Act, 1996.

On Gujarat High Court Decisions:

• Principal Chief Engineer Vs. M/s. Manibhai & Brothers (Sleeper) & Anr, AIR 2016 Guj 151, High Court of Gujarat: Held that Section 18 of the MSMED Act, 2006, would have an overriding effect over any other law for the time being in force including the Arbitration Act, 1996.

On Bombay High Court Decisions:

• Steel Authority vs. MSE Facilitation Council, AIR 2012 Bom. 178, High Court of Judicature at Bombay: Held that the Facilitation Council would not be entitled to proceed under the provisions of Section 18(3) of MSMED Act, 2006 when there is an independent arbitration agreement between the parties.

Judgment

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

How each authority was viewed by the Court?

• Commissioner of Income Tax, Patiala vs. Shahzada Nand & Sons [AIR 1966 SC 1342]:* Used to emphasize that the meaning of a statute must be derived from its plain and unambiguous language.
• Kaushalya Rani vs. Gopal Singh [AIR 1964 SC 260]:* Used to define what constitutes a “Special Law.”
• Solidaire India Ltd. Vs. Fairgrowth Financial Services Ltd. & Ors [(2001) 3 SCC 71]:* Cited to support the principle that a special statute enacted later in time prevails in case of conflict.
• Maruti Udyog Ltd. Vs. Ram Lal & Ors [(2005) 2 SCC 638]:* Cited to support the principle that a special statute enacted later in time prevails in case of conflict.
• K. Prabhakaran v. P. Jayarajan [(2005) 1 SCC 754]:* Used to explain the legal fiction created in Section 18(3) of the MSMED Act.
• Union of India Vs. Prabhakaran Vijaya Kumar and Ors [(2008) 9 SCC 517]:* Cited to support the principle that beneficial statutes should be interpreted liberally.
• Regional Provident Fund Commr. Vs. Hoogly Mills Co. Ltd. [(2012) 2 SCC 489]:* Cited to support the principle that beneficial statutes should be interpreted liberally.
• Bharat Aluminum Company Vs. Kaiser Aluminum Technical Services [(2012) 9 SCC 648]:* Acknowledged the principle of party autonomy in arbitration agreements, but stated that statutory provisions take precedence.
• Antrix Corporation Limited Vs. Devas Multimedia Private Limited [(2014) 11 SCC 560]:* Acknowledged the principle of party autonomy in arbitration agreements, but stated that statutory provisions take precedence.
• Amazon.com NV Investment Holdings LLC. Vs. Future Retail Limited and others [(2022) 1 SCC 209]:* Acknowledged the principle of party autonomy in arbitration agreements, but stated that statutory provisions take precedence.
• Orissa State Financial Corporation vs. Narsingh ch. Nayak and Others [(2003) 10 SCC 261]:* Acknowledged that courts cannot rewrite agreements, but stated that statutory provisions take precedence.
• Shin Satellite Public Co. Ltd. Vs. Jain Studios Ltd. [(2006) 2 SCC 628]:* Acknowledged that courts cannot rewrite agreements, but stated that statutory provisions take precedence.
• Silpi Industries etc. vs. Kerala State Road Transport Corporation and Anr. [2021 SCC Online SC 439]:* Followed to support the view that the MSMED Act is a special law that overrides the Arbitration Act. Also, it was used to emphasize that to seek the benefit of provisions under MSMED Act, the seller should have registered under the provisions of the Act, as on the date of enteringinto the contract.
• Secur Industries Ltd. Vs. Godrej & Boyce Mfg. Co. Ltd. And Anr [(2004) 3 SCC 447]:* Used to explain the deeming fiction created in Section 18(3) of the MSMED Act.
• Shanti Conductors Pvt. Ltd. vs. Assam State Electricity Board [(2019) 19 SCC 529]:* Used to emphasize that the date of supply of goods/services can be taken as the relevant date for applicability of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993.
• Shiv Shakti Cooperative Housing Society, Nagpur vs. Swaraaj Developers and Others [(2003) 6 SCC 659]:* Used to emphasize that courts cannot supply casus omissus in a statute.
• Bharat Sewa Sansthan Vs. U.P. Electronics Corporation [AIR 2007 SC 2961]:* Used to explain the objectives of the Arbitration Act, 1996.
• Principal Chief Engineer Vs. M/s. Manibhai & Brothers (Sleeper) & Anr [AIR 2016 Guj 151]:* Cited as an example of a High Court ruling that Section 18 of the MSMED Act has an overriding effect.
• Steel Authority vs. MSE Facilitation Council [AIR 2012 Bom. 178]:* Cited as an example of a High Court ruling that the Facilitation Council cannot proceed under Section 18(3) when an arbitration agreement exists.

Ratio Decidendi

The Supreme Court held that the MSMED Act, 2006, is a special law enacted to protect the interests of Micro, Small, and Medium Enterprises. The Court ruled that the provisions of the MSMED Act, particularly Sections 15 to 23, have an overriding effect on the provisions of the Arbitration Act, 1996, due to the non-obstante clause in Section 24 of the MSMED Act. The Court further held that a party to a dispute can make a reference to the Micro and Small Enterprises Facilitation Council under Section 18(1) of the MSMED Act, irrespective of any existing arbitration agreement. The Court also ruled that the Facilitation Council can act as both conciliator and arbitrator in the same dispute, as the MSMED Act overrides the bar in Section 80 of the Arbitration Act.

Flowchart of Dispute Resolution under MSMED Act

Key Takeaways

• Overriding Effect: The MSMED Act has an overriding effect on the Arbitration Act in disputes involving delayed payments to MSEs.
• Access to Facilitation Council: MSEs can approach the Facilitation Council for dispute resolution, regardless of any existing arbitration agreement.
• Dual Role of Council: The Facilitation Council can act as both conciliator and arbitrator, despite Section 80 of the Arbitration Act.
• Expedited Resolution: The MSMED Act provides a more expeditious and cost-effective dispute resolution mechanism for MSEs.
• Protection of MSEs: The judgment underscores the importance of protecting the interests of MSEs, which are vital to the economy.

Conclusion

The Supreme Court’s judgment in Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Pvt. Ltd. provides much-needed clarity on the interplay between the MSMED Act and the Arbitration Act. It reaffirms the legislative intent to protect MSEs by providing them with a swift and effective dispute resolution mechanism. This judgment is significant for both businesses and legal practitioners, as it settles the position that the MSMED Act will take precedence in disputes involving delayed payments to MSEs, even if there is a pre-existing arbitration agreement. The judgment emphasizes the importance of adhering to the timelines for payments to MSEs and provides a clear path for them to seek redressal in case of delays.