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Micro, Small And Medium Enterprises Development Act, 2006: How much more the Parliament needs to travel

With the Executive rolling out the red carpet for MSMEs in AATMANIRBHAR BHARAT, does Parliament need to make any introspection in the existing law

The Micro, Small and Medium Enterprises Development Act, 2006 [1] (hereinafter,  MSMED Act, 2006  or  the 2006 Act ) was enacted to provide for facilitating the promotion and development and enhancing the competitiveness of Micro, Small and Medium Enterprises (MSMEs).

As per the Statement of Objects and Reasons of the MSMED Act, 2006, one of the primary objects is to make provision for ensuring timely and smooth flow of credit to small and medium enterprises to minimize the incidence of sickness among and enhancing the competitiveness of such enterprises.

Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993[2] (hereinafter,  the IDPSSAIU Act, 1993  or  the 1993 Act ) was earlier the governing legislation in this field, which was repealed by the 2006 Act.

At present, Aatmanirbhar Bharat has brought a slew of incentives including financial stimulus to MSMEs, in order to neutralise the effect of Covid-19 on the dream project Make in India. (It brings no surprise, as MSMEs are one of the emergent priorities for the present regime.)

Though beneficial in its objective, announcement of the above economic concession is an acknowledgment of the lack of robust economic health of our MSMEs.

The need to provide for special and faster mechanism in the 2006 Act as well as the 1993 Act (since repealed) for recovery of amount due to MSMEs from their defaulting customers/buyers is another acknowledgement of the economic fragility existing in MSME sector.

MSME sector, though presently crutched, will be a key factor for India's economic growth in times ahead. The purpose of this write-up is to juxtapose the 1993 Act (since repealed) with the 2006 Act and further mark the progress made in law by the 2006 Act, and then to suggest reforms in the existing 2006 Act for the Legislature to consider.

To begin with, Section 15 of the MSMED Act, 2006 is an advancement over Section 3 of the IDPSSAIU Act, 1993 (since repealed), inasmuch as the liability of a buyer to make payment to the supplier/MSME is now within 45 days from the day of actual delivery of goods/rendering of services vis-à-vis 120 days in the 1993 Act. The period of 120 days in the earlier law was thus found to be much more than what is endurable for a supplier/MSME.

Sections 16 and 17 of the MSMED Act, 2006 are also in the nature of substantial advancement over Sections 4 and 5 of the 1993 Act, inasmuch as under the 2006 Act, the defaulting buyer, in case of failure to make payment as per Section 15 above, must pay compound interest with monthly rests at 3 times of the Bank Rates notified by the Reserve Bank of India.

Thus, not only that the MSMED Act, 2006 got with itself the significant amendment in rate of interest, it also made such interest payable from after expiry of just fifteen days from the day of actual delivery of goods/rendering of service [See Section 16 with Section 2(b)], notwithstanding any contrary clause in any agreement between MSME supplier and its client/buyer or even in any law for the time being in force.

However, success of substantive beneficial law requires an equally efficacious mechanism of enforcement. This is where the 2006 Act fails to rise upto the expectation, and, in the opinion of the authors, requires immediate attention of the Legislature.

Section 18 of the MSMED Act, 2006 contains the mechanism of recovery of dues by MSME/supplier, from a defaulting client/buyer. As per the provision, either the supplier or the client/buyer may make a reference to the Facilitation Council in case of a dispute. The Council (to be established by the State Governments as per Sections 20 and 21 of the 2006 Act), upon receipt of a reference of a dispute, shall conduct conciliation itself or through any other ADR Institution in terms of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (hereinafter,  the 1996 Act ].In case the conciliation is not successful, the Facilitation Council shall take up the dispute for Arbitration either itself or refer it to any ADR Institution for arbitration under the 1996 Act, as if the arbitration is in pursuance of an arbitration agreement under section 7(1) of the 1996 Act.

Though, Section 18 (1) & (4) [read with Section 24] of the MSMED Act, 2006 contain a non obstante clause providing that the above mechanism shall apply over and above anything contrary in any other law, there still remains ambiguity as to whether the non obstante clause would also apply if there is an agreed arbitration mechanism between the parties other than that provided under the 2006 Act.

In other words, would an arbitration clause/agreement between the parties to a dispute exclude the recovery mechanism under the MSMED Act, 2006? This apprehension stems out of conspicuous absence of the words  or in any agreement  in the non-obstante clause in Section 18(1) & (4) as also Section 24 of the 2006 Act. In our opinion, the purpose of the 2006 Act would stand defeated in a case where the defaulting buyer would cite the arbitration clause/agreement against the supplier/MSME to wriggle out of the stringent provisions of the 2006 Act.

It is common knowledge that most commercial agreements nowadays come with an arbitration clause. The worst affected suppliers/MSMEs would be those dealing with the Public Sector Undertakings whose contracts are Standard Form contracts providing for their preferred arbitration mechanism.

Fortunately, for the time being, the courts of law have now supplied the casus omissus in Section 18(1) & (4) and Section 24 of the MSMED Act, 2006 and have held that despite existence of an arbitration agreement, a party to a dispute (which dispute is otherwise covered under the 2006 Act) shall be competent to refer the dispute as per the mechanism provided under Section 18 of the 2006 Act.

[Bata India Ltd. Vs AVS International Private Ltd.,[3] 2019 (4) ARB.L.R 216 (Delhi)] [Also see Principal Chief Engineer v Mani Bhai and Brothers[4], a judgment of Gujarat High Court, upheld and affirmed by Supreme Court of India in SLP (C) No. 17434/2017 on 5.7.2017].[5] A Division Bench of the Allahabad High Court has on 22.4.2020 held in TBEA (India) Transformer Private Limited V/S U.P.Micro And Small Enterprises And Another[6] that the arbitration clause, if any between the parties will not prevail over the Section 18 of the 2006 Act.

However, it is possible for any other Court to take a contrary view, as it is settled position in law that dispute resolution through arbitration can only be a creature of an arbitration agreement between the parties. Therefore, in order to avoid any ambiguity in law and to put at rest any possible conflict of judicial views, the Legislature must provide in Section 18 and Section 24 of the 2006 Act for a more comprehensive non-obstante clause so as to expressly exclude any contrary dispute resolution/arbitration clause between a supplier/MSME and its client/buyer. In this manner, the absence of level playing field would be neutralized to the extent that the ‘convenient' forum chosen by the dominant client/buyer in the agreement between the parties, would necessarily have to surrender its jurisdiction to Facilitation Council.

Next stop in our analysis is Section 19 of the 2006 Act as per which the Decree/Award made by the Facilitation Council or by the referred ADR Institution, as the case may be, shall not be appealed against unless the defaulting buyer–judgment debtor has deposited 75% of the decretal/award amount. The appeal court also has the power under Section 19 to release/pay any portion of the amount so deposited to the supplier/MSME during the pendency of appeal, subject to necessary conditions.

The moot point, however, is what if a supplier/MSME instead proceeds for recovery as per the non-MSME mechanism (as per its arbitration clause with the buyer) and gets an arbitration award in its favour. Then as per Section 36 of the 1996 Act, appeal Court has the discretion to impose any condition as it may deem fit to grant stay of operation of the arbitral award by deriving guidance from provisions of Order XLI Rule 5 of the Code of Civil Procedure, 1908.

A Ld. Single Judge of the Delhi High Court has held in AVR Enterprises Vs Union of India [7] judgment 08.05.2020], that 75% pre-deposit provision in Section 19 of the 2006 Act does not apply if the arbitration proceedings for recovery are not under the MSMED Act, 2006. The same anomaly will arise if the MSME adopts the remedy of a Civil Suit and earns a Civil Court decree for recovery of its dues.

We must mention here, however, the contrary opinion of a Division Bench of the Gujarat High Court in Saryu Plastics Private Limited & Ors. Versus Gujarat Water Supply and Sewerage Board[8] [MANU/GJ/1526/2017].

This disparity in the two mechanisms (one within the 2006 Act and the other outside it) needs to be done away with, by the Legislature, to ensure timely flow of capital to MSMEs. Even under the 1993 Act (since repealed), the provision of pre-deposit of 75% of amount by the judgment-debtor/buyer while filing appeal against a decree/award was applicable to the recovery mechanism available within the 1993 Act (Facilitation Council) or even outside it.

[See Snehadeep Structures Private Limited V/S Maharashtra Small Scale Industries Development Corporation Limited [9] 2010 (3) SCC 34]. The disparity is a failure to acknowledge the need to timely secure the amount due to MSME even when the award/decree/decision is by any Court/forum other than Facilitation Council or ADR Institution as provided in the 2006 Act.

There certainly cannot be any discrimination within the beneficiary/MSME class only on the basis of the mechanism of recovery adopted. Else, it may result in defeating one of the primary objects of the 2006 Act, that is, to make further improvements in the 1993 Act.

To be fair, Section 18(5) of the MSMED Act, 2006 prescribing the decision by the Facilitation Council or the referred ADR Institution to be within a period of 90 days, and Section 19 (Proviso) providing for disbursal of part of the pre-deposited amount to supplier/MSME during pendency of appeal by the judgment-debtor/buyer, are definitely a significant improvement over the 1993 Act (since repealed).

To sum up, the MSMED Act, 2006 needs to be in perfect consonance with its laudable and comprehensive Statement of Objects and Reasons to achieve the desired growth of MSMEs. If the reforms suggested hereby, and even more as per the legislative wisdom, are incorporated in the 2006 Act, it would not only enhance the fiscal health of the MSME sector, but would also be a significant factor in our GDP growth rate.

End-Notes:
  1. https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/MSMED2006act.pdf
  2. https://indiankanoon.org/doc/1005016/
  3. https://indiankanoon.org/doc/149926774/
  4. https://www.lawyerservices.in/Principal-Chief-Engineer-Versus-Ms-Manibhai-and-Brothers-Sleeper-and-Another-2016-06-20
  5. https://indiankanoon.org/doc/33248780/
  6. https://indiankanoon.org/doc/94888384/
  7. https://indiahttps://www.casemine.com/judgement/in/5a3c7ba44a93266a5afb64efnkanoon.org/doc/6971295/
  8. https://www.legalcrystal.com/case/640000/snehadeep-structures-private-limited-vs-maharashtra-development
Written By:
  1. Gagan Gupta - Advocate-On-Record Practising Before The Supreme Court Of India And
  2. Ankit Swarup - Advocate-On-Record Practising Before The Supreme Court Of India

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