Registration under MSMED Act and the SC Ruling in Silpi Industries

[Akansha Uboveja is a 5^th year B.A.LLB (Hons.) student at Hidayatullah National Law University in Raipur, Chhattisgarh]

The Supreme Court in its judgment dated 29 June 2021 in Silpi Industries v Kerala State Road Transport Corporationsettled the position of law regarding applicability of the Limitation Act, 1963 to arbitration proceedings initiated under section 18(3) of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). However, this judgment also becomes pertinent to note because the Court indirectly diluted the statutory protection available to Micro, Small, and Medium Enterprises (MSMEs) insofar it holds the requirement of registration mandatory to claim benefit under the MSMED Act. This post seeks to discuss the ratio of this judgment along with critically analyzing the same.    

Factual Background 

The Kerala State Road Transport Corporation (KSRTC) invited tenders for the supply of thread rubber for tyre rebuilding. Silpi Industries were given the purchase order under which the 90% of the total purchase price was payable to them on supply of material. The remaining 10% was to be paid if the condition that the thread rubber supplied by Shilpi industries runs certain kilometers is fulfilled. When such a balance amount of 10% was not paid, Shilpi Industries approached the Industrial Facilitation Council under MSMED Act. However, the conciliation proceedings failed, and the matter was referred to arbitration under the Arbitration and Conciliation, 1996 Act (The 1996 Act).   

The award was passed in the favor of the Shilpi Industries, against which KSRTC appealed to the Kerala High Court under section 37 of the 1996 Act. The High Court, while setting aside the arbitral award, ruled that the Limitation Act is applicable to the proceedings under the 1996 Act arising out of the MSMED Act and also that the counter-claim is maintainable in such proceedings. It also noted that as there is already an arbitration agreement between the parties, and hence the application filed by the KSRTC under section 11(6) of the 1996 Act was allowed. Aggrieved by the decision of the High Court, Shilpi Industries filed the present appeal before the Supreme Court. 

Judgment

The Supreme Court, while dismissing the present appeal, observed the following:

The Limitation Act is applicable to the arbitration proceedings under MSMED Act

To arrive at this conclusion, the Court referred to section 43 of the 1996 Act which provides that the Limitation Act shall apply to arbitration proceedings. Thus, where the settlement has not been arrived under section 18 of the MSMED Act, the Facilitation Council can take the dispute for arbitration under section 18(3) of the MSMED Act or may refer to an arbitral institution or centre. In such proceedings, the provisions of the 1996 Act are made applicable as if there exists an agreement between the parties under section 7(1) of the 1996 Act. Therefore, given the presence of an express provision, the Court upheld the findings of the High Court and also referred to the judgment in Andhra Pradesh Power Coordination Committee v. Lanco Kondapalli Power Ltd.    

Counter claims are maintainable even in arbitration proceedings initiated under section 18(3) of the MSMED Act

The Court concluded that as the provisions of the 1996 Act are applicable to arbitration proceedings under section 18(3) of the MSMED Act, section 23(2A) of the 1996 Act clears the position in this regard. It gives a right to the other party as well to submit a counter-claim or plead set-off with regard to a claim within the scope of the arbitration. Thus, by adopting the approach of harmonious interpretation with regard to section 18(3) of the MSMED Act, section 7(1) and 23(2A) of the 1996 Act, the Court concluded that the counter-claim is maintainable before the statutory authorities under the MSMED Act. Moreover, allowing such counter-claims becomes essential to avoid multiple proceedings, which can be instituted if the other party attempts to present their claim in another forum.    

Requirement of registration by the seller on the date of supply of goods and services

Silpi Industries was denied any relief for the reason that it was not registered by submitting the memorandum under section 8 of the MSMED Act on the date of supply of goods and services. Silpi Industries approached the District Industrial Centre for grant of entrepreneur memorandum on 25 March 2015, whereas the supplies were made in between 2011 and 2014. The Court made a reference to Shanti Conductors Pvt. Ltd. v. Assam State Electricity Board. In this case, for the applicability of the MSMED Act, the date of supply of the goods and services was held to be relevant. Thus, it was concluded that due to lack of registration on the relevant period, Silpi Industries is not entitled to invoke the provisions of the MSMED Act itself.      

Critical Analysis of the Decision 

MSMED Act vis-à-vis the 1996 Act

The judgment settled the issue concerning the applicability of the Limitation Act and maintainability of the counter-claim in the arbitration proceedings arising out of the MSMED Act. However, the above-discussed reasoning of the Court raises a further question whether the 1996 Act will be applicable in its entirety if the conciliation proceedings failed under section 18 of the MSMED Act or limitation provisions which are not in contravention with MSMED Act. For instance, section 18(5) of the MSMED Act provides a time period of 90 days to decide any reference, whereas the 1996 Act prescribes that any arbitral award has to be passed within a time period of 12 months. Nevertheless, such contradictions can be avoided as the MSMED Act is special beneficial legislation whereas the 1996 Act is a general one. Having said that, the Supreme Court in Edukanti Kistamma (Dead) through LRs. v. S. Venkatareddy (Dead) through LRs. held that a special statute would be preferred over a general one where it is a beneficial legislation.   

Supply of goods subsequent to registration

Insofar as the Court opined that any registration obtained under the MSMED Act is prospective in nature and applies to the supply of goods and services rendered subsequent to such registration, the author respectfully submits that the same is not in line with the object of the MSMED Act. This legislation was enacted to ensure speedy disposal of the cases which involve MSMEs. However, going by the above ruling, now the unregistered MSMEs would have to go through regular court proceedings to settle their claims. Further, section 8 of the MSMED Act uses the word ‘may, at his discretion,’ whereby the enterprises hold a discretion of whether to get registered or not. 

There are several judgments from various High Courts where it was explained as to why a compulsory registration regime can run contrary to the scheme of this beneficial legislation. For instance, the Delhi High Court in Ramky Infrastructure Private Limited V. Micro And Small Enterprises Facilitation Council explained that according to section 2(n) of the MSMED Act, ‘suppliers’ can be categorized under two limbs where the Small Industries Development Corporation of a State or a Union territory, the National Small Industries Corporation, and a company, co-operative society, trust or a body engaged in selling goods produced by MSMEs are not required to obtain registration.

Moreover, the Government of India through notification No. 2 (3) 1/2007- MSME Pol (Pt.) dated August 1, 2007clarified that the filing of the memorandum is voluntary for the enterprises and there is no time limit for the same. If the legislature would have intended that benefit under the MSMED Act can be claimed only after the enterprise is registered as a supplier, there would not be any notification making such registration discretionary in nature. Thus, mere non-compliance of a discretionary provision depriving the party of a substantive right conferred by this welfare legislation can overall have a far-reaching consequence.           

Concluding Remarks

India has more than 75 million MSMEs, out of which merely less than 10% of them fall within the registered category. The above ruling can negatively impact more than 90% of the MSMEs which are not registered. Thus, there is an urgent need to revise this decision or the legislature must bring an amendment to the MSMED Act to bring in more clarity. However, with regard to the issue of applicability of the Limitation Act and filing of counter-claims in arbitration proceedings initiated under the MSMED Act, this ruling has settled the law.     

– Akansha Uboveja