Statutory Limitation on Claims under the Micro, Small and Medium Enterprises Development Act – Part II

Should the Limitation Act be applicable?

The MSMED Act is aimed at the expeditious resolution of purely commercial disputes where the terms of engagement are decided by private parties and government intervention is intended to secure an efficacious remedy for timely payment. Consequently, the MSMED Act should not be interpreted in a manner that provides remedies that have specifically been excluded (for instance the recourse to courts), or grants fresh rights that evergreens claims.

Statutory arbitrations ‘under an arbitration agreement’

An argument could be made for an examination of the nature of arbitrations under the MSMED Act, to lie outside the purview of statutory arbitrations to which the Limitation Act does not apply. The MSMED Act contains a special provision where it deems the arbitration to be conducted under the Arbitration Act “as if the arbitration was in pursuance of an arbitration agreement” (deeming provision) in section 18(3). The deeming provision is peculiar to the MSMED Act and is not found in other statutes providing for arbitration.

Section 2(4) of the Arbitration Act provides that section 43 of the Arbitration Act (which makes the Limitation Act applicable to arbitrations) does not apply to an arbitration under a statue, if the arbitration is being conducted pursuant to an arbitration agreement and the very statute under which such arbitration was being conducted were the arbitration agreement. Section 18(3) states that arbitration must be carried out between parties as if the arbitration was in pursuance of an arbitration agreement referred to in section 7(1) of the Arbitration Act, i.e., under an agreement between parties to arbitrate. In an arbitration conducted under section 7(1) of the Arbitration Act, all provisions of the Arbitration Act (i.e., entire Part I for arbitrations seated in India), including section 43 on limitation, apply. No provision of the MSMED Act provides for it (i.e., the MSMED Act) to be treated as the arbitration agreement between parties.

The language of the deeming provision in the MSMED Act may be reflective of an understanding that MSME disputes, which relate to private commercial agreements with rights and obligations determined solely by parties, should be resolved as commercial disputes through a private arbitrations under an agreement, and not as arbitrations conducted under a statute, where the statute itself becomes the arbitration agreement. However, it must be added that the above distinction is being drawn on first principles and no existing discussions in case law or in the history of the MSME Bill support this understanding.

Special versus general legislation

Notwithstanding the argument of the deeming provision to differentiate arbitrations under MSMED Act from other statutory arbitrations, we may also look to the provisions of the MSMED Act for guidance. The provisions of the MSMED Act would prevail over other enactments in matters which have been expressly dealt by it (i.e. the MSMED Act). Section 24 of the MSMED Act provides that 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.

Specifically, Section 18(3) of the MSMED Act reads as follows: “…the provisions of the Arbitration and Conciliation Act, 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”. The implication of reading this provision is that those provisions of the Arbitration Act should apply to disputes which are being arbitrated pursuant to the MSMED Act, as if such disputes were being arbitrated pursuant to an arbitration agreement referred to in Section 7(1). On the other hand, section 2(4) of the Arbitration Act makes the entire Part I of the Arbitration Act (other than sections 40(1), 41 and 43) to all arbitrations under a statute.

Thus, section 18(3) of the MSMED Act and section 2(4) Arbitration Act provide a different and inconsistent set of provisions which must apply to arbitrations under the MSMED Act. In order to resolve this inconsistency, we must bear in mind that the MSMED Act is a special legislation. Further, it includes section 24, which incorporates a non-obstante clause and provides that in case of an inconsistency between sections 15 to 23 of the MSMED Act and any other legislation, then the terms of the MSMED Act shall prevail. Consequently, section 18(3) of the MSMED Act must prevail over section 2(4) of the Arbitration Act.

For the above reasons, we argue that:

  • the arbitration of disputes under the MSMED Act is essentially an arbitration pursuant to an arbitration agreement; and

  • therefore, the Limitation Act should be considered applicable to all claims being arbitrated before MSME-FCs, as it is to arbitrations under an arbitration agreement.
Disclosure of debts owed to MSMEs

Another significant change brought by the MSMED Act was mandatory disclosures by buyers of amounts due to suppliers in their audited financial statements. Additionally, in January 2019 the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019 (MSME Order) was notified under the Companies Act, 2013 (Companies Act).

Section 22 of the MSMED Act and Rule 3 of the MSME Order provide for disclosures on unpaid amounts to suppliers in the financial statements of the buyer:

“22. Where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely: –

(i) the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year; …

3. Every specified company shall file a return as per MSME Form I annexed to this Order, by 31st October for the period from April to September and by 30th April for the period from October to March.”

The MSME Order ensured that any incorrectness or incompletion in the disclosures made by a company would attract fines under the Companies Act for officers of up to 3 lakh rupees and imprisonment. See section 405 of the Companies Act and the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019, which requires bi-annual disclosures of outstanding dues in Form MSME-1, and has been issued under section 405.

Disclosure in the financial statements of an amount due to a creditor was recently reaffirmed to be an ‘acknowledgment of debt’, by the Mumbai bench of the National Company Law Tribunal (NCLT) in TJSB Sahakari Bank Ltd. v. Unimetal Castings Ltd. The disclosure of that debt in the financial statements of the buyer estopped the buyer from arguing that the debt had become barred by limitation since continued acknowledgement lead to each such act giving rise to as a fresh cause of action. This leads to a situation where a buyer would be evergreening these claims each year by disclosing these amounts in its financial statements. The requirement of disclosures of these amounts leads to the result of evergreening these claims which may otherwise have been time barred.

This result gives rise to significant commercial difficulties. Amounts which are not disclosed by the buyer (because they are not known to exist, as set out in our initial example where interest payments were not accounted for) would result in the buyer incurring penalties including possible imprisonment. Moreover, there are often situations where supplier agreements are no longer existing, and suppliers cannot be traced or are deliberately holding-out to earn higher interest amounts. In those cases, the buyer has no choice but to continue to accrue escalating interest on its books of accounts each year to ensure compliance under the MSMED Act and Companies Act. The amount continuing to accrue greater interest on the balance sheet would erode the distributable profits of a corporate buyer. Even willing buyers do not have any recourse to mounting claims under the MSMED Act.

A regulatory framework of this nature, besides having led to the inefficient use of judicial time to adjudicate the applicability of limitation, results in substantial distress for corporate bodies in an environment where the urgency for measures to improve ease of doing business and attract investment is already widely felt.

Conclusion

In order to lay the matter to rest, it is suggested that the Central Government should exercise its rule-making powers under section 29 of the MSMED Act. It must clarify that claims under the MSMED Act are mere commercial claims which like all other commercial claims must be barred by limitation in the ordinary course. This would balance the interest of corporate buyers, the MSME sector and ensure that judicial time is spent focusing on matters which can be resolved only by judicial intervention and not issues that can be clarified by executive action.

Shinoj Koshy and Purvi Khanna

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