Blog Details

Author - Abhishek Singh and Tushar Sharma

OVERVIEW:

Micro, Small, and Medium Enterprises are a huge contributor to the Indian economy. In addition to being the second largest generator of employment, they also contribute to 45% of India’s total export. However, in the midst of an acute recession and the persistent issue of delayed payments to sellers, the MSME sector took a massive hit. To address this issue, the government, in 2006, passed the Micro, Small, and Medium Enterprises Development Act, 2006 (“Act”) with a view to facilitating, promoting and enhancing the competitiveness of the MSME sector.  Through this legislation being in place, the legislators have persistently managed to address several issues surfacing regarding long sustainability of such micro, small and medium enterprises, these are not just only baby steps towards a self-reliant culture in industries to facilitate more development but to increase India’s capacity to export. Prior to the enactment of the Act, the major issue was of Delayed Payments attributed towards conduct of buyers who tend to drag supplier from pillar to post for recovery of amounts towards goods supplied and services rendered. In order to do away with the growing uncertainties and delay in recovery process, Chapter-V (Delayed Payments to Micro and Small Enterprises) was incorporated as a part of special legislation to do away with financial difficulties which micro and small scale industries face due to delayed payments which eventually leads to closure and dilution of industry due to non-availability of funds to ensure unstaggered growth. 

RELEVANT PROVISIONS FOR RECOVERY UNDER THE ACT

In accordance with obligations enumerated in Section 15, which deals with Liability of a buyer to make payment clearly stipulates that  every buyer is obligated to make payment towards goods supplied or services rendered on or before the date agreed in writing in view of the agreement, before the appointed day. The ‘appointed day’ is defined under Sec.2(a) which means a day immediately after expiry of period of fifteen days of acceptance of the day of deemed acceptance of any goods or any services by a buyer from a supplier. However, the proviso to Section 15 cast a statutory obligation that the period of payment between buyer and supplier shall not exceed 45 days from the day of acceptance and the day of deemed acceptance. This stipulated period of maximum 45 days overrides any contract or any other law in force. Upon failure to pay, the buyer must pay a compound interest at three times the rate notified by the RBI, with monthly rests to the supplier on that amount from the appointed day or from the date immediately following the date agreed upon.

The Act has provided for the establishment of Micro and Small Enterprise Facilitation Council (“the Council” or ”MSEFC”), in order to facilitate resolution of issues pertaining to delayed payment of dues. Here’s how the process flows:

• Any party to the dispute may make a reference to the Council, situated within the jurisdiction of the seller. As a Micro or Small Enterprise, you may file your complaint by approaching the Council. 
• Upon receiving such reference, the Council may either conduct conciliation by itself, or may seek assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre a reference to an alternative dispute resolution centre for conducting conciliation.
• If the process of conciliation is unsuccessful, the Council itself may take up the matter for arbitration or refer it to an alternative dispute resolution centre for arbitration. The arbitration shall be treated as if originating from an arbitration agreement even if there is none and the provisions of Arbitration and Conciliation Act, 1996 (as amended from time to time) shall apply.
• The Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India. The original jurisdiction of Civil Courts is effectively ousted. This mechanism must be exhausted before approaching the court.
• The timeline for deciding any reference made under these provisions is 90 days.
• Application for setting aside the decree, award or other award shall be entertained by a court only if the applicant deposits 75% of the sum decreed in whatever manner directed by that court.
• Pending the disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it sees fit, along with the imposition of certain conditions.

What If There Already Exists An Arbitration Agreement:

No arbitration agreement can override the provisions of this Act. Therefore, if one party makes a reference to the Council, conciliation and institutionalised arbitration will have an overriding effect on any other contract. The jurisdiction of the Council or whichever ADR Centre the matter is referred to cannot be ousted by any agreement or even through the consent of parties. This has been upheld in GET & D India Limited vs. Reliable Engineering (2017) SCC Online 6978, wherein, the parties had two supply contracts and in which one of it contained arbitration clause. The Respondent had filed a complaint being a small industry before the Council, the MSMED council on hearing both the parties passed the arbitration award and appellant then challenged the said award before the Delhi High Court under Sec.34 of Arbitration and Conciliation Act, 1996. The said award was challenged on various grounds but most importantly the questions of law as enumerated below:-

1. Whether the dispute resolution prescribed under Sec.19 of the MSME Act, 2006 overrides arbitration clause in the contract?
2. Whether the requirement of deposit of 75% of the value of the MSME award to challenge the same under Sec.34 of the Arbitration and Conciliation Act, 1996 can be waived by the High Court, on its discretion ?
3. Whether an Industry which could not register itself under MSME Act, within the 180 days’ time given in the Act, can claim the benefits under the said Act, by registering later?

The Hon’ble Delhi High Court held that Act being a special act, provides for special dispute resolution mechanism which is crafted for the benefit of micro and small industries, whereas the Arbitration and  Conciliation Act, 1996 is a general legislation and therefore, should be given preference over it. The dispute resolution mechanism provided under the Act would override the arbitration clause incorporated in any contract. The Supreme Court has not clarified the position of law on this matter. However, a majority of High Courts are in favour of this view.

Furthermore, the issue of pre-deposit of 75% which is a condition precedent for challenging any arbitral award under the Act cannot be waived by any court in India since the said issue is already settle by the Hon’ble Supreme Court of India in case titled as Good year India Limited Vs. Norton Rubbers Pvt. Limited 2012(6) SCC 345, wherein the Court held that waiving the above precondition to waive the pre-deposit provision, is not within the discretionary powers of the High Court and the said pre-condition cannot be waived for any reason.  

The court has further clarified on the benefits which could be derived under the Act. It has further stated that all those industries which have registered themselves under the Act are the ones entitled to derive the benefits guaranteed to them. The court has also clarified that all micro, small and medium industries which were existing at the time of enactment of the Act shall register themselves within the given period of 180 days from the date of commencement of Act and those who had failed to register will not be allowed to reap benefits under the said Act.

Additionally, Sections 15 to 23 pertaining to recovery of delayed payments to micro and small enterprises shall take precedence over any other law in force and shall have overriding effect to any other law for the time being in force.

Conclusion:

The mechanisms provided under this Act are definitely a step forward in addressing issues of delayed payments that have plagued the MSME Sector. The timeline of 90 days granted to complete both conciliation and arbitration procedures ensures a speedy redressal to the supplier/seller.