Dilution of the statutory protection available to MSMEs: A critique of the Supreme Court’s judgment in Silpi Industries

The judgment of the Supreme Court would have the unintended consequence of exacerbating issues relating to non-payment of dues to MSMEs.
Dilution of the statutory protection available to MSMEs: A critique of the Supreme Court’s judgment in Silpi Industries
Supreme Court

In this article, the author respectfully disagrees with the reasoning in M/S Silpi Industries v. Kerala State Road Transport Corporation (judgment dated June 29, 2021) insofar as it holds that to claim the benefit of provisions under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), the seller should have registered under the provisions of the Act, as on the date of entering into the contract and supply of material shall be subsequent to the registration.

In this case, the appellant was aggrieved by the order passed by the High Court wherein an award passed by the arbitrator was set aside and the High Court remanded the matters to the arbitrator for disposal de novo.

Issues before the Supreme Court

The Court in paragraph 13 of the judgment noted the following two issues which required consideration:

(i) Whether the provisions of Indian Limitation Act, 1963 is applicable to arbitration proceedings initiated under Section 18(3) of Micro, Small and Medium Enterprises Development Act, 2006? And

(ii) Whether, counter claim is maintainable in such arbitration proceedings?

Issue of limitation

The Supreme Court decided the issue relating to applicability of the Limitation Act, 1963 to the arbitration proceedings initiated under Section 18 of the MSMED Act, 2006 as follows:

“A reading of Section 43 itself makes it clear that the Limitation Act, 1963 shall apply to the arbitrations, as it applies to proceedings in court. When the settlement with regard to a dispute between the parties is not arrived as under Section 18 of the 2006 Act, necessarily, the Micro and Small Enterprises Facilitation Council shall take up the dispute for arbitration under Section 18(3) of the 2006 Act or it may refer to institution or centre to provide alternate dispute resolution services and provisions of Arbitration and Conciliation Act 1996 are made applicable as if there was an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act.

In view of the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation Act, 1996.”

If this interpretation is accepted, then another question arises whether the Arbitration Act, 1996 will be applicable in its entirety after the failure of conciliation proceedings or only limited provisions shall be applicable which are not in contravention with the MSMED Act, 2006. For example, Section 18(5) of the MSMED Act, 2006 states that every reference under Section 18 shall be decided within a period of 90 days, as opposed to the Arbitration Act, wherein the time period for passing an award is within twelve months from the date of completion of pleadings under sub-section (4) of Section 23.

Nevertheless, the author is in respectful agreement with the findings of the Court that the provisions of the Limitation Act shall be applicable to arbitration referred under Section 18 of the MSMED Act.

Maintainability of counter-claims in proceedings under Section 18

The Supreme Court took note of the beneficial provisions contained in the special enactment and held that such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council and held as under:

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.

Supply of goods shall be subsequent to registration

The Court finally held,

In our view, 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. In any event, for the supplies pursuant to the contract made before the registration of the unit under provisions of the MSMED Act, no benefit can be sought by such entity, as contemplated under MSMED Act…. If any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.”

With these observations, the Court held that appellant cannot seek reference to arbitration under the MSMED Act, 2006.

Critique of the decision

The author with utmost respect states that the reasoning given by the Court is not in line with the object of the Act of 2006.

1. Firstly, the Court while dealing with the issue as to whether the counter-claims were within limitation, made it clear that since the judgment of the High Court was an order of remand, it will not get into that controversy. It thus kept it open for the primary authority to go into these issues and record its own findings on merits. However, on the other hand, the Court delved into the merits of the case and held,

There is no acceptable material to show that, supply of goods has taken place or any services were rendered, subsequent to registration of appellant as the unit under MSMED Act, 2006.

However, it is required to be noted that the appellant claimed to have raised the last invoice after having approached the District Industrial Centre for grant of an entrepreneur memorandum. Additionally, the issue of registration was not directly before the Court as noticed in paragraph 13, and thus, it cannot be considered as a ratio decidendi and is mere obiter.

2. The Court ought to have considered that the purpose of the MSMED Act, 2006 is to ensure speedy disposal of cases involving MSMEs. This is clear from the language of Section 18(5) which states that every reference under this section shall be decided within a period of 90 days. In other words, the unregistered MSMEs will now have to go through the regular procedure for pursuing their claims and will not be able to resolve their disputes expeditiously. Especially after emphasising on the fact that the MSMED Act is a welfare legislation, the Court ought to have extended the benefits even to unregistered MSMEs.

3. Various judgments passed by different High Courts have offered compelling reasons as to why a compulsory registration regime is not borne out from the scheme of the Act. However, the same do not appear to have been cited before the Supreme Court.

For instance, Indur District Cooperative Marketing Society Ltd v. Microplex (India), Hyderabad [judgment dated October 27, 2015], M/s Hameed Leather Finishers v. M/s Associated Chemical Industries Kanpur Pvt Ltd [Judgment dated October 11, 2013], Ramky Infrastructure Private Limited v. Micro and Small Enterprises Facilitation Council [Judgment dated July 4, 2018] were not cited.

The Delhi High Court in Ramky Infrastructure case held that the definition of Section 2(n) of the Act indicates that it is in two parts. The first limb defines a supplier to mean a micro or small enterprise which has filed a memorandum with the authority referred to in sub-section (1) of Section 8 of the Act and the second limb refers to (i) National Small Industries Corporation; (ii) the Small Industries Development Corporation of a State or a Union territory; and (iii) a company, co-operative society, trust or a body engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises. Neither the National Small Industries Corporation – which is a Government of India enterprise – nor the Small Industries Development Corporation of a State or a Union territory is required to file a memorandum as referred to under Section 8(1) of the Act.

4. This interpretation is also bolstered by the understanding of the executive. The Government of India vide its notification No. 2 (3) 1/2007- MSME Pol (Pt.) dated August 1, 2007, clarified that there is no limitation of 180 days for filing the memorandum with the MSEFC and that it is voluntary for the enterprise to file the memorandum as and when it decides to. The ‘contemporanea expositio’ principle, which is well established and applied in various cases, could have been applied in the case. This notification was also not cited before the Supreme Court.

5. The Court relied on Edukanti Kistamma (Dead) through LRs v. S Venkatareddy (Dead) through LRs & Ors wherein it was held that the purpose and object of the Act must be given its full effect by applying the principles of purposive construction. Also, it applied the doctrine of harmonious construction and observed that “On a harmonious construction of Section 18(3) of the 2006 Act and Section 7(1) and Section 23(2A) of the 1996 Act, we are of the view that counter-claim is maintainable before the statutory authorities under MSMED Act.”

The same doctrine of harmonious construction could have been applied to extend the benefit of the Act of 2006 to the unregistered MSMEs. The very purpose of the MSMED Act, 2006 is to secure the interest of MSMEs which is clear from the title of the statute as well as the objective of the Act. Further, the title of Chapter V is “Delayed payments to Micro and Small Enterprises”. If the intention of the legislature was to deprive the MSMEs of these benefits merely on the ground that they did not register themselves as suppliers, then there was no need to bring a notification which states that the condition to register is only discretionary.

6. Filing of the memorandum by a Micro or Small Enterprise under Section 8 of the Act is optional and not mandatory, which is clear from the use of the words “may, at his discretion” in Section 8 of the MSMED Act, 2006. Moreover, non-compliance with a directory provision cannot take away the substantive right of an entity which has otherwise been conferred by the MSMED Act, 2006.

7. Not giving benefits of a welfare legislation to unregistered MSMEs on the ground that they did not file a memorandum with the authority would be contrary to the objectives of the Act.

8. Section 18(1) enables “any party” to a dispute to make a reference. Therefore, it is not necessary that the said party has to be a “supplier” in terms of Section 2(n) of the Act. If the intention was to make it open only for a supplier or a registered MSME, then these terms would have been used. Further, the very definition of “supplier” in terms of Section 2(n) of the Act is qualified by the initial words of the Section “unless the context otherwise requires”. In the context of Section 18, the term “supplier” cannot be interpreted in such a technical and strait-jacketed manner.

9. In paragraph 26 of the judgment. the Court observed:

“The appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSMED Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services.”

10. Filing a memorandum merely makes the availing of the benefits easier and is not a prerequisite to get the benefits under the Act of 2006.

Conclusion

India has more than 75 million MSMEs, out of which only 7 million MSMEs are registered. In other words, less than ten percent of the MSMEs are in the registered category. Therefore, this judgment passed by the Supreme Court will have far reaching consequences as it will impact more than 90% of MSMEs that are not registered. These unregistered MSMEs will now be deprived of the benefits of the Act of 2006 as the buyer will use this judgment to wriggle out of proceedings initiated under the MSMED Act, 2006. Undoubtedly, the provisions of the MSMED Act, 2006 acted as a deterrent and helped MSMEs in recovery of their dues. The government needs to bring an amendment to the Act of 2006 so as to give more clarity to the law.

The author respectfully submits that the judgment of the Supreme Court would have the unintended consequence of exacerbating issues relating to non-payment of dues to MSMEs, which were badly affected by the COVID-19 pandemic. It is respectfully submitted that a revisiting of the decision is required.

Tariq Khan, Public Policy
Tariq Khan, Public Policy

The author is a Delhi-based advocate. He can be reached at advocate.tariqkhan@gmail.com. Views are personal.

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