The Supreme Court recently passed a common judgement in two Civil Appeals¹ being M/s. Silpi Industries etc. Versus Kerala State Road Transport Corporation & Anr. and M/s. Khyaati Engineering Versus Prodigy Hydro Power Pvt. Ltd. wherein the following issues pertaining to the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as “the MSMED Act”) were addressed:

(i) Whether the provisions of the Limitation Act, 1963 are applicable to arbitration proceedings initiated under Section 18(3) of the said Act?

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

With respect to the limitation issue, the Hon’ble Apex Court observed that when any party has a dispute with regard to any amount due under Section 17 of the said Act, and a reference is made to the Micro and Small Enterprises Facilitation Council; if the conciliation is not successful, then as per Section 18(2) of the MSMED Act, the Council shall either itself 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 (hereinafter referred to as “the 1996 Act”) will be applicable as if the arbitration was in pursuance of an arbitration agreement between the parties, under sub-section (1) of Section 7 of the 1996 Act. The Division Bench held that since Section 43 of the 1996 Act itself makes it clear that the Limitation Act, 1963 shall apply to arbitrations, as it applies to proceedings in court, it will also be applicable to the arbitration proceedings under Section 18(3) of the MSMED Act.

With respect to the second issue, the Hon’ble Apex Court held that since Section 18(3) of the MSMED Act states that the 1996 Act shall apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in Section 7(1) of the 1996 Act; and since there is a provision for filing counter-claim and set-off under Section 23(2A) of the 1996 Act, there was no reason to curtail the right of making a counter-claim or set-off in the proceedings before the Facilitation Council. The Division Bench further examined that if a counter-claim made by the buyer in the proceedings arising out of claims made by the seller were not allowed, it may lead to parallel proceedings before various fora. A seller may approach the Facilitation Council for claims, at the same time, if there is no separate agreement between the parties for any arbitration in a given case, the buyer may approach the civil court for making claims against the seller, or else if there is an agreement between the parties for arbitration in the event of dispute between the parties, parties may seek appointment of arbitrator and such events may result in conflicting findings, by various forums. The Hon’ble Apex Court thus held that on a harmonious construction of Section 18(3) of the MSMED Act and Section 7(1) and Section 23(2A) of the 1996 Act, a counter-claim is maintainable before the statutory authorities under the MSMED Act.

The Division Bench further held that the MSMED Act, being a special Statute, will have an overriding effect vis-a-vis the Arbitration and Conciliation Act, 1996, which is a general Act and even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by the MSMED Act, the seller can certainly approach the competent authority to make its claim. However, in order to seek the benefit of the provisions under the MSMED Act, the seller should have been registered under the provisions of the MSMED Act, as on the date of entering into the contract.

1. CIVIL APPEAL NOS.1570-1578 OF 2021 and CIVIL APPEAL NOS.1620-1622 OF 2021

By - Lakshmi Raman