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The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, has played a crucial role in protecting the interests of micro and small enterprises. Various judicial pronouncements have clarified its provisions and established precedents. Below are some significant case laws that have shaped the interpretation of the MSMED Act:

• The Indur District Co-operative Marketing Society Ltd. v. Microplex (India), Hyderabad (2016) (3) ALD 588

The Court held that the supplier need not be registered or have a registered office within the jurisdiction of the Facilitation Council; it is sufficient if the supplier is located within the Council’s jurisdiction.

• Silpi Industries v. Kerala State Road Transport Corporation and Anr. (2021) SCC OnLine SC 439

The Supreme Court ruled that registration under the MSMED Act at the time of contract performance is essential.

• Uttarakhand Power Corporation Ltd. v. Mahaveer Transmission Udyog Pvt. Ltd.

The Court, relying on Goodyear India Limited v. Norton Intech Rubbers Pvt. Ltd., held that deposits under Section 19 must be made in cash, and alternative modes such as bank guarantees are not permissible.

• Kotak Mahindra Bank Ltd. v. Girnar Corrugators Pvt. Ltd. (2023) LiveLaw (SC) 12

The Madhya Pradesh High Court ruled that the MSMED Act prevails over the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest (SARFAESI) Act, 2002, due to the overriding effect of Sections 15 to 23.

• Bajaj Electricals Ltd. v. Chanda S. Khetawat and Anr.

The Bombay High Court emphasized that the MSMED Act was enacted to ensure smooth and timely payments to micro and small enterprises and has overriding authority over conflicting laws.

• Magnus Opus IT Consulting Pvt. Ltd. v. Artcad Systems (2022) LiveLaw (Bom) 354

The Bombay High Court observed that if the MSME Facilitation Council fails to conclude arbitration within 90 days, as mandated by Section 18(5), the arbitration process becomes ineffective, and the aggrieved party must seek recourse under Section 29A of the Arbitration and Conciliation Act.

• NBCC (India) Ltd. v. State of West Bengal and Prs. (2022) LiveLaw (Cal) 214

The Calcutta High Court ruled that objections to the applicability of the MSMED Act to works contracts must be raised and resolved within arbitration proceedings before the MSME Council.

• Gujarat State Civil Supplies Corporation v. Mahakali Foods Pvt. Ltd. (2022) LiveLaw (SC) 893

The Supreme Court held that a reference to the MSME Facilitation Council is valid even when an independent arbitration agreement exists, allowing the Council to proceed under Section 18.

• Steel Authority of India & Anr. v. MSEFC AIR (2012) Bom 178

The Bombay High Court clarified that arbitration under Section 18 of the MSMED Act does not invalidate an independent arbitration agreement unless inconsistencies arise.

• Reliance Communications Ltd. v. State of Bihar, Patna HC WP 8077/2018

The Patna High Court ruled that Section 18(3) does not imply that a conciliator can act as an arbitrator unless agreed upon by the parties.

• Cummins Technologies India Pvt. Ltd. v. Micro and Small Enterprises Facilitation Council, WP 7785/2020 Allahabad HC

The Allahabad High Court held that Section 18(3) of the MSMED Act, which allows the MSEFC to arbitrate disputes, overrides Section 80 of the Arbitration Act.

• Ved Prakash v. P. Ponram, OSA No. 231/2019 Madras HC

The Madras High Court confirmed that, while the MSME Council may proceed with arbitration after conciliation, the same member cannot act as both conciliator and arbitrator without mutual consent.

• Indian Oil Corporation Ltd. v. FEPL Engineering (P) Ltd. C.M. No. 19356/2019 Del HC

The Delhi High Court clarified that the location of the supplier determines the arbitration venue, whereas the arbitration agreement dictates the arbitration seat.

• Fives Stien India Project Pvt. Ltd. v. State of Madhya Pradesh, MANU/MP/0565/2018

The Madhya Pradesh High Court ruled that the 90-day limit for MSME Council arbitration is directory, not mandatory.

• Goodyear India Ltd. v. Norton Intech Rubbers Pvt. Ltd. (2012) 6 SCC 345

The Supreme Court, relying on Snehadeep Structures Pvt. Ltd. v. Maharashtra Small-Industries Development Corpn. Ltd. (2010) 3 SCC 34, held that courts cannot waive or reduce the mandatory 75% pre-deposit requirement under Section 19, but they may allow instalment payments.

In an economy wherein, transactions between suppliers and buyers are several and numerous, an instance might occur wherein the buyer of the goods or services, does not pay the agreed upon consideration or value of the goods or services availed by him, to the supplier. To insulate such a supplier, and also reprimand the buyer defaulting with his payments, an authority, namely, the “Micro and Small Enterprises Facilitation Council” was brought in by the Micro, Small and Medium Enterprises Development Act, 2006.

According to Section 15 of this Act, when a supplier, who is registered as a micro or a small enterprise, supplies any goods or renders any services to a buyer, the buyer must make the payment for the said goods or services, as the case maybe, on or before the date which is agreed to in writing by the parties, or if there is no such agreement, then before the appointed day, which is within 15 days from the day of acceptance or the day of deemed acceptance of the goods or services, as the case may be. Such period agreed to by the parties in writing, must not exceed 45 days from the day of acceptance or the day of deemed acceptance.

Section 16 of the Act states that, if the buyer fails to make payment of the amount to the supplier, as mandated under Section 15 of the Act, the buyer shall, irrespective of what is contained in any agreement between the supplier and the buyer, or in any law, 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 to, at three times the bank rate notified by the Reserve Bank of India.

Section 18 of the Act states that, any party to a dispute can make a reference to the Micro and Small Enterprises Facilitation Council. The mode of settlement to be employed by the Facilitation Council shall be conciliation, an amicable method of Alternative Dispute Resolution. The Facilitation Council can either conclude the conciliation by itself or refer it to a suitable institution for the same. If the process of conciliation goes in vain, the Facilitation Council, shall then employ arbitration as the method of settlement of the dispute in hand. The arbitration proceedings can either be concluded by the Facilitation Council itself or referred to a suitable institution for the same. Such references of disputes by parties to the Facilitation Council, shall be adjudicated and decided within 90 days from the date of making such references.

Section 19 of the Act states that, if an order or decree, delivered in a dispute, by the Facilitation Council, either by way of conciliation or arbitration, is challenged by the aggrieved party (not being the supplier) by making an application to the Court, he must first deposit with it 75% of the amount decided by the Facilitation Council, in its order or decree. The Court shall order a percentage of such amount to be paid to the decree-holder, which shall depend on the facts and circumstances of the case.

Sub-rule (iv) of Rule 3 of the Karnataka State Micro and Small Enterprises Facilitation Council Rules, 2018, states that, the State Government may specify any fee and for processing charges paid while filing application.

Sub-rule (i) of Rule 7 of the Rules, provides that, an aggrieved Micro or Small Enterprise unit can move a reference to the Facilitation Council which has jurisdiction of the area, in the format provided as Schedule-1 of these Rules. The said reference must contain the Udyog Aadhar Memorandum (UAM) number, mobile number and e-mail address of the aggrieved Micro or Small Enterprise unit as provided in Schedule-1.

The Micro and Small Enterprises Facilitation Council is of much relief to the micro and small enterprises in our country, as it helps them to avoid the long delays and huge Court fees, in case they had to approach an ordinary Court of law, for the recovery of money.

Authored by:
Adv VISHNU P.V
Associate,
MENTO ASSOCIATES