Claims Settlement Proceedings Under MSME Act 2006

In the month of February, the Government of India released the Draft National Micro Small Medium Enterprises (MSME) Policy, to promote competitiveness, technology up-gradation, infrastructure, cluster development, dedicated credit, procurement of products & financial assistance to MSME. The Policy was issued with the objective of fostering a conducive business ecosystem to enable ease of doing business for MSMEs and to develop appropriate dispute resolution mechanisms. One of the key observations made in the policy was that the dispute resolution mechanism for the sector was not ‘industry-friendly.’

 

The Micro, Small, and Medium Enterprises (MSME) Development Act was notified in 2006 to address different issues affecting MSMEs, inter alia, the coverage and investment ceiling of the sector. The MSME Act seeks to facilitate the development of these enterprises and also enhance their competitiveness. It provides the legal framework for recognition of the concept of “enterprise”, which comprises both manufacturing and service entities. It defines medium enterprises for the first time and seeks to integrate the three tiers of these enterprises, namely, Micro, Small and Medium. It empowers the Central Government to undertake programmes and issue guidelines and instructions to develop and enhance the competitiveness of MSMEs.

Definitions of Micro, Small & Medium Enterprises

In India, the enterprises are classified broadly into two categories: (i) Manufacturing and (ii) Services. These categories of enterprises have been further classified into Micro, Small and Medium enterprises under Section 7 of the MSME Act as follows:

Enterprise Category

Investment in Plant & Machinery

Not Exceeding

Annual Turnover

Not Exceeding

Micro

INR 1 Crore

INR 5 Crore

Small

INR 10 Crore

INR 50 Crore

Medium

INR 50 Crore

INR 250 Crore

 

Registration of MSME/Memorandum of MSME

Any micro, small and medium enterprise, before starting an enterprise, may file a Udyog Aadhaar Memorandum (the “UAM” or “Memorandum”) in Form-I. The UAM may be filed online on the website of the Ministry of Micro, Small and Medium Enterprises, Government of India at http://udyogaadhaar.gov.in in order to instantly get a unique Udyog Aadhaar Number (UAN); or a hard copy of the duly filled Form I, shall be submitted to the concerned District Industries Centre (DIC) or to the Office of the Micro, Small and Medium Enterprise-Development Institute (MSME-DI) under the Development Commissioner, MSME. Consequent thereto, a Udyog Aadhaar Registration Certificate in Form II will be generated and mailed to the email address of the enterprise as provided in the UAM. 

The existing MSMEs have to file the Memorandum within One Hundred and Twenty (120) days from the commencement of the Act. UAM/MEMORANDUM is a one-page online registration system for MSMEs based on self – certification. This is a path-breaking step to promote ease-of-doing-business for MSMEs in India as the UAM replaces the filing of Entrepreneurs’ Memorandum (EM part-I & II).

While examining the purpose and intent of the MSME Act, the Andhra Pradesh High Court vide common order in P. Nos. 27670, 27673, 27691, 27693, 27826, 27829, 28010, 28034 of 2021 and 4721, 6249 and 7616 of 2022 observed inter alia, an ‘Enterprise’ is one by whatever name called, which is engaged in the manufacture or production of goods in any manner pertaining to any industry specified in the first schedule of Act 65 of 1951 or engaged in providing or rendering of any services.

Additionally, a supplier, as per the definition of the Act, should be engaged in selling goods “produced by micro or small enterprises and rendering services that are provided by such enterprises.” Here, the emphasis has also been placed on services required for the purpose of selling etc. goods produced by micro or small enterprises. “The conjunction ‘and’ used in section 2(n) (iii) makes it clear that the services that are rendered are services related to the goods that are produced by micro and small enterprises. The legislature used the conjunction and therefore, in the opinion of this Court, the services which are rendered are those pertaining to the goods manufactured and produced by the enterprises.”

The High Court firmly observed that the services that are referred to under the said Act cannot be treated as every service that is rendered. The services referred to must have a direct connection with the manufacture and production of goods.  

Provisions Dealing with Claim Settlement Proceedings Under MSME Act

 

Sections 15-24 of the Micro, Small and Medium Enterprises Development (MSME) Act, 2006 deal with the issues relating to the Delayed Payments to Micro and Small Enterprises (MSEs) by the Buyers to the MSE supplier. As per Section 15 of the MSME Act, the Buyer shall make payment to the Supplier as per their commercial understanding. However, the same shall not exceed forty-five (45) days from the day of acceptance or deemed acceptance of goods and services. Further, under Section 16 of the MSME Act, delayed payment to Supplier units, attracts compound interest with monthly interests at three times the bank rate notified by the Reserve Bank. In the event of any dispute with regard to any amount due, the procedure stipulated in Section 18 has to be followed, which is enumerated hereunder. Any case/reference under Section 18 of the MSME Act has to be decided in ninety (90) days.  Further, in case, the Buyer decides to challenge the award or decree passed, then as per Section 19 of the MSME Act, the Buyer has to deposit 75% of the amount in terms of the decree, award or order of the court, as the case may be.

MSME Samadhaan is a Portal created by the Office of DC(MSME), Ministry of Micro, Small and Medium Enterprises (MSME), where Micro and Small Enterprises (MSEs) can file their applications online regarding delayed payments. The portal gives information about individual CPSEs/Central Ministries, State Governments, etc. and other Buyers regarding the payments pending with them in respect of the MSEs. The said portal also facilitates MSEs to file their delayed payments related complaints online. These will be viewed by MSEFC Council for their actions. These will also be visible to Concerned Central Ministries, Departments, CPSEs, State governments, etc. for pro-active actions. The portal was established with a vision to facilitate the monitoring of delayed payments in an efficient manner as disputes over delayed payments were a primary concern amongst the Sellers across the sector. The information on this portal is made available in the public domain to exert moral pressure on the defaulting parties. The MSMEs can also access the portal and monitor their cases.

The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of Delayed Payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments (Section 20 and 21).

What are the Prerequisites for Making a Claim before MSEFC?

 

To file a complaint with the MSEFC, the concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration prior to the dispute or contract with the Supplier. Secondly, the MSME should have a valid and strong claim against the Buyer. A well-founded claim comprises a written purchase agreement and a valid invoice post-UAM or Udyam registration. Additionally, it is also crucial that the statutory duration (45 days) from the date of acceptance or deemed acceptance of the goods/service, within which the payment should have been made, stands lapsed.

While examining the requisites to invoke the jurisdiction of the Facilitation Council, the Hon’ble High Court of Andhra Pradesh vide Common Order in P.Nos.27670, 27673, 27691, 27693, 27826, 27829, 28010, 28034 of 2021 and 4721, 6249 and 7616 of 2022 – held inter alia, “this Court has to hold that unless the ‘memorandum’ is filed under section 8 of Act 27 of 2006 and the contract is a pure and simple supply contract, a party cannot move the facilitation council nor can the council entertain and decide any dispute. 

The Hon’ble Court relied on the observations made by the Hon’ble Supreme Court in the case of Silpi Industries, which stated that, “………………. In our view, to seek the benefit of provisions under MSME 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 MSME Act, no benefit can be sought by such entity, as contemplated under MSME Act. ………………… The appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSME Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services. 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.”

Hence, to adjure the provisions of the MSME Act, 2006 and to move to the facilitation council for grievance redressal, an Entrepreneurs Memorandum as envisaged under Section 8 has to be filed by the Micro, Small and Medium Enterprise before the authorities specified by the Central Government.

What is the Process for Filing a Complaint through the Samadhaan Portal?

 

As per Section 18 of the MSME Act, in the case of delay in payment beyond 45 days from the day of acceptance or deemed acceptance, MSEs Suppliers may approach the Micro and Small Enterprises Facilitation Council (MSEFC) constituted under the Act in all State/UTs.

At present, the MSME Samadhaan portal enables Micro and Small Enterprises (MSEs) to file their applications online regarding delayed payments. Application in the prescribed form under the provisions of the MSME Act can be filed online on the Samadhaan Portal, which can be accessed at https://MSME.gov.in/. The Applicant shall furnish all the details as specified in the Act in the Application. The application process mandates intensive scrutiny of relevant documents such as the purchase agreements, invoices, notices served, etc. Hence, it is important to attach all the required documents along with the Application in the prescribed form. The application, once filed, is forwarded automatically online to the concerned Micro and Small Enterprise Facilitation Council (MSEFC) established by the State/UTs as per the provisions of the MSME Act 2006. After 15 days of online filing of the case, it is registered by the MSEFC concerned and action on the applications regarding delayed payment is taken by the concerned MSEFC only.

Following acceptance of the application in the prescribed form, the relevant MSEFC sends a notice to the buyer demanding immediate payment of the due amount within a specified time frame. If no payment is initiated by the Buyer within the stipulated time mentioned in the notice, the MSME can proceed with the filing of an application for the default in payment by annexing the requisite documents on the portal as per provisions of the Act.

Once a reference application for a dispute under Section 17 (Recovery of delayed payments) has been made under Section 18 of the MSME Act, the Council shall either conduct conciliation in the matter by itself or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre. It is imperative to note that, for conducting such conciliation, the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of the 1996 Act.

Furthermore, if conciliation is unsuccessful and the parties are unable to reach an agreement, the Council shall either take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration, and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the dispute as if the arbitration was conducted in accordance with an arbitration agreement referred to in the arbitration agreement.

In the case of Jharkhand Urja Vikas Nigam Limited Vs State of Rajasthan & Ors. [Civil Appeal No. 2899 of 2021] the Hon’ble Supreme Court observed that the conciliation and arbitration proceedings under the MSME Act cannot be clubbed if the appellant did not submit a response during the conciliation stage. As per the legislative mandate, the Council is under the obligation to initiate an arbitration procedure if the conciliation procedure fails.

While observing fundamental differences between the two processes, the Apex Court in this case held that; “In conciliation, the conciliator assists the parties to arrive at an amicable settlement, in an impartial and independent manner. In arbitration, the Arbitral Tribunal/ arbitrator adjudicates the disputes between the parties. The claim has to be proved before the arbitrator, if necessary, by adducing evidence, even though the rules of the Civil Procedure Code or the Indian Evidence Act may not apply. Unless otherwise agreed, oral hearings are to be held.

Further, while placing reliance on Section 18(3) of the MSME Act, it was also maintained that, “The said Section itself makes it clear that when arbitration is initiated all the provisions of the Arbitration and Conciliation Act, 1996 will apply, as if arbitration were in pursuance of an arbitration agreement referred to under sub-section (1) of Section 7 of the said Act”

According to Section 18 of the MSME Act 2006, the arbitrator has to adjudicate upon the dispute and conclude the proceedings within the statutory period of ninety days from making such reference. 

Pre-deposit of Award Amount

 

The provisions of section 19 state, “No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court.”

Hence, in case the Buyer goes for an appeal against the award/decree, they have to deposit 75% of the award amount. The requirement was held to be mandatory in nature by the Supreme Court in the case of Gujarat State Disaster Management Authority Vs. Aska Equipments Limited (2022) 1 SCC 61

The Apex Court observed that “On a plain/fair reading of Section 19 of the MSME Act, 2006, reproduced hereinabove, at the time/before entertaining the application for setting aside the award made under Section 34 of the Arbitration & Conciliation Act, the applicant/appellant has to deposit 75% of the amount in terms of the award as a pre-deposit. The requirement of a deposit of 75% of the amount in terms of the award as a pre-deposit is mandatory. However, at the same time, considering the hardship which may be projected before the appellate court, if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a pre-deposit at a time, the court may allow the pre-deposit to be made in instalments.”

Further, the Delhi High Court in AVR Enterprises vs Union of India observed that “Section 19 of the MSME Act would apply only to proceedings initiated under section 18 of the MSME Act and would not apply to an award published by an arbitrator appointed by the parties otherwise than in accordance with section 18 of the MSME Act.”

Under Section 20, the MSME Act states that the respective State Governments are duty-bound to establish Micro and Small Enterprises Facilitation Councils while also laying down their jurisdictions. These Councils shall have the jurisdiction to adjudicate upon disputes that are between the Suppliers (within their jurisdiction as specified by the State Government) and Buyers from anywhere in India.

As per the provisions of Section 21, the Council shall consist of a minimum of three and a maximum of five members. The members of the Council must be appointed from amongst the following categories:

  • Chairman: Director of Industries or any other officer not below the rank of such Director, who is having administrative control of small-scale industries.
  • Member: One or more office-bearers or representatives of Associations of micro and small industries.
  • Member: One or more representatives from Banks and financial institutions, who are lending to micro, small or medium enterprises.
  • Member: One or more persons having special knowledge in the field of industry, finance, law, trade, or commerce.

 

Overriding Effect of Claim Settlement Proceedings Under MSME Act over Arbitration and other Applicable Laws

 

It is relevant to note that as per Section 24, the provisions of sections 15 to 23 of the MSME Act have an overriding effect over the provisions of the Arbitration Act and the said section has undergone intensive judicial scrutiny.

In the case of Principal Chief Engineer M/s. Manibhai and Bros (Sleeper) [Diary 16845/2017], the Hon’ble Supreme Court upheld the judgement of the Gujarat High Court in the matter of interpretation of Section 18. The Gujarat High Court opined that since the MSME Act is special legislation, it has an overriding effect and the parties governed by it are bound to follow the mechanism provided under Section 18 of the Act.

Similarly, in M/s. Porwal Sales M/s. Flame Control Industries [Arbitration Petition No. 77 of 2017], the Bombay High Court held that Section 18 (1) should be read with sub-section (4). Section 18 is only attracted when the jurisdiction of the Council is invoked by a party for an amount due under Section 17. The jurisdiction clause of Section 18(4) does not create a bar on the appointment of an arbitrator under Section 11 of the Arbitration Act. Further, since under Section 18(1) the word “may” has been used, it is not mandatory for the Supplier or Buyer to initiate proceedings under Section 18. However, the Court also opined that if a reference has already been made to the Council in a case, the application for the appointment of an arbitrator should not be maintainable.

The Delhi High Court in the case of AVR Enterprises vs Union of India [CM APPL. 27219/2018], observed inter alia that if the arbitration proceedings are initiated by the parties as per the arbitration agreement and no proceedings have been initiated per Section 18, then the statutory provisions of the MSME Act shall not come into force.

Further, with respect to the contention of whether the Facilitation Council can act as both Arbitrator and Conciliator under Section 18; the High Court of Bombay in the case of Gujarat State Petronet Ltd MSEFC [WRIT PETITION NO.5459 OF 2015] opined that by virtue of sub-sections (2) and (3) of Section 18, Section 80 of the Arbitration Act (which bars a conciliator from acting as an arbitrator in the same dispute), it is applicable to the proceedings initiated under Section 18. Hence, on a harmonious interpretation of both these provisions, the Council cannot act as both and may refer the matter to any centre or institution that provides alternate dispute resolution services. 

However, in the case of Best Towers Private Limited v. Reliance Communications Limited [C.W.J.C. No. 8086 of 2018], the Patna High Court was of the view that the overriding effect extended to Section 18(3) with respect to Section 24 of the Act, which clearly overrides any bar under Section 80 of the Arbitration Act. 

The Legislature clearly intended that the Council be able to act as an arbitrator and conciliator. Differing from the observations of the Court in the abovementioned case, in the case of M/S Cummins Technologies India Private Limited v. Micro and Small Enterprises Facilitation Council [C No. 7785 of 2020], the Allahabad High Court was of the opinion that the bar under Section 80 is subject to the existence of a contrary agreement between the parties, therefore it is not absolute in nature. 

Further, given the jurisdiction of the Council under Section 18(4) and its overriding effect under Section 24, the Court held that the Council can act as both. The Court also observed that the object behind introducing such a prohibition was to eliminate incidences of personal bias in the Arbitral Tribunal. However, since the Council is a statutory body, comprising of three to five members, the incidents of such bias or prejudice are absent, ergo, eliminating the requirement of the bar under Section 80 of the Arbitration Act.

Taking a similar view, the Madras High Court in the case of Ved Prakash vs. P Ponram [Original Side Appeal No.231 of 2019] held that the Council is not barred from proceeding to arbitration under Section 18(3) after conducting conciliation under Section 18(2). It must, however, ensure that the same member, who served as the conciliator in the previous conciliation proceeding does not serve as an arbitrator unless the relevant parties agree otherwise.        

Applicability of the Limitation Act to Disputes/Claim Settlement Proceedings Under the MSME Act 2006

 

The deliberation of the applicability of the Limitation Act on the proceedings under Section 18 of the MSME Act has always been a grey area. However, the Hon’ble Supreme Court of India in the recent case of Silpi Industries and Ors. Vs. Kerala State Road Transport Corporation and Ors. 2021(224) AIC 18 has afforded clarity to the discussion. The Court noted that if the dispute arises under Section 17 of the MSME Act, a reference shall be made to the Council. The parties will then be referred to conciliation by the Council. If the Conciliation process fails, the Council shall refer the case for arbitration (either administered by itself or by any institution or centre deemed fit by the Council) per the provisions of Section 18 of the MSME. 

Further, while keeping reliance on the case of Andhra Pradesh Power Coordination Committee & Ors. v. Lanco Kondapalli Power Ltd. & Ors., (2016) 3 SCC 468, the Supreme Court held that Section 43 of the Limitation Act clearly applies to arbitrations and that the provisions of the 1996 Act similarly apply to arbitrations initiated under the MSME Act as if an agreement between the parties under Section 7(1) of the 1996 Act exists. In light of the same, it was unequivocally held that the provisions of the Limitation Act apply to arbitration proceedings initiated under Section 18 of the MSME Act.

Structured Dispute Resolution Process

 

Filing complaints on the MSME Samadhaan Portal requires mandated document verification, such as work orders, agreements, invoices, etc. However, a significant number of MSMEs fail to keep a record of these requisite documents. Further, as of December 2021, only 20% of all applications filed have either been disposed of or mutually settled with Buyers, while nearly 39% of applications are yet to be addressed by the relevant authorities. Another 27% of total applications are currently under consideration[1]. This indicates that a significant number of cases have to wait for admission and then get approval to proceed further.

Conclusion

 

The observations made in the Draft National MSME Policy with respect to the inadequacy relating to the current dispute resolution mechanism catering to the needs of the MSME industry are hence confirmed by the statistics highlighted above. Hence, it has suggested a move towards establishing more facilitation councils, preferably at district levels to fast-track and aid the existing structure. Other relevant steps to establish a ‘vibrant ecosystem for the rapid growth of the MSME sector have also been envisaged to be undertaken in the near future, a development both necessary and noteworthy.

To file a complaint with the MSEFC, the concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration prior to the dispute or contract with the Supplier. Secondly, the MSME should have a valid and strong claim against the Buyer. A well-founded claim comprises of a written purchase agreement and a valid invoice post-UAM or Udyam registration. Additionally, it is also crucial that the statutory duration (45 days) from the date of acceptance or deemed acceptance of the goods/service, within which the payment should have been made, stands lapsed.

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