The Supreme Court in its judgment dated 31 October 2022 has held, that Chapter-V of the Micro, Small, and Medium Enterprises Development Act, 2006 (‘MSMED Act’), dealing with delayed payments to micro and small enterprises would override the provisions of the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’).
It also ruled that no party to a dispute with regard to any amount due under Section 17 of the MSMED Act, would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council, even though an independent arbitration agreement existed between the parties.
In this regard, the Court further held that Micro and Small Enterprises Facilitation Council can itself take up the dispute for arbitration and act as an arbitrator, even when the council had conducted the conciliation proceedings under Section 18(2) of the MSMED Act, as the bar under Section 80 of the Arbitration Act would stand superseded by the provisions contained in Section 18 read with Section 24 of the MSMED Act.
It also clarified that the provisions of the Arbitration Act would apply to the proceedings conducted by the Facilitation Council only after the process of conciliation initiated by the council under Section 18(2) fails. The Court added that such Facilitation Council would also be competent to rule on its own jurisdiction as also the other issues in view of Section 16 of the Arbitration Act.
Hearing a bunch of appeals arising out of High Court judgments that gave varying opinions on the jurisdiction of Facilitation Councils under the MSMED Act where parties also entered into separate agreements for arbitration proceedings, the Supreme Court was of the view that, the MSMED Act being a special law and Arbitration Act, being a general law, the provisions of MSMED Act would have precedence over or prevail over the Arbitration Act.
Accordingly, the Court in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. held that once the statutory mechanism under Section 18(1) of the MSMED Act is triggered by any party, it would override any other agreement independently entered into between the parties, in view of the non-obstante clauses contained in sub-sections 18(1) and 18(4).
Relying upon its earlier decision in the case of Silpi Industries, the Court also reiterated that a party who was not the ‘supplier’ as per the definition contained in Section 2(n) of the MSMED Act, on the date of entering the contract cannot seek any benefit as the ‘supplier’ under the Act.
