LEGAL UPDATE| SUPREME COURT VIEW ON MSME ACT VS ARBITRATION ACT
The Supreme Court in a recent case of Ramkrishna Electricals Limited Vs Maharashtra State Electricity Distribution Company Limited & Another (along with six other appeals) held that Section 15 to Section 23 of the Micro, Small & Medium Enterprises Development Act, 2006 (MSME Act) would override provisions of the Arbitration and Conciliation Act, 1996 (Arbitration Act). Further, the Apex Court also held that a party would not be precluded from making a reference to the Council under the MSME Act even if an independent arbitration agreement existed between the parties. The Apex Court further held that that the Council itself could take up the dispute for arbitration and act as an arbitrator even if when the Council itself had conducted the conciliation proceedings under the MSME Act.
The present appeals were preferred by each of the respective suppliers and buyers whereby though factually different, involved certain common questions of law and were therefore heard together.
Issue for Adjudication
- Whether Section 15 to Section 23 of the MSME Act would override provisions of the Arbitration Act?
- Whether a party would be precluded from making a reference to the Council under sub-section (1) of Section 18 of the MSME Act, if an independent arbitration agreement existed between the parties as contemplated in Section 7 of the Arbitration Act?
- Whether the Council itself could take up the dispute for arbitration and act as an arbitrator, when the council itself had conducted the conciliation proceedings under Section 18 of the MSME Act in view of the bar contained in Section 80 of the Arbitration Act?
- Can a party who is not the a ‘supplier’ as per the definition contained in the MSME Act on the date of entering into contract seek any benefit as the ‘supplier’ under the MSME Act, after its registration?
The Supreme Court held that Chapter-V of the MSME Act would override the provisions of the Arbitration Act on account of the Arbitration Act being general law and the MSME Act being a special statute therefore the provisions of MSME Act would have precedence over or prevail over the Arbitration Act.
Further, the Apex Court also held that no party to a dispute with regard to any amount due under Section 17 of the MSME Act would be precluded from making a reference to the MSME Council even if an independent arbitration agreement as contemplated under Section 7 of the Arbitration Act exists between the parties.
In light of it being held that Section 15 to Section 23 of the MSME Act overrides the Arbitration Act, the Supreme Court further held that the restriction under Section 80 of the Arbitration Act, whereby a conciliator cannot act as an arbitrator or as a representative or counsel of a party in any arbitral or judicial proceeding in respect of a dispute that is the subject of the conciliation proceedings stands overridden against Section 18 of MSME Act which confers the MSME Council to itself take up the dispute for arbitration if conciliation proceedings fail.
The Supreme Court also reiterated that a party who is not the ‘supplier’ as per the definition contained in Section 2(n) of the MSME Act on the date of entering into contract cannot seek any benefit as the ‘supplier’ under the MSME Act, 2006. They however expressed that such issue being a jurisdictional issue, if raised, could also be decided by the Council acting as an arbitral tribunal under the MSME Act.
The Supreme Court vide the judgement has conferred special law status to the MSME Act, thereby granting an overriding effect to the said MSME Act over any other law for the time being in force. The said judgment has cleared the ambiguity previously present on the applicability of the MSME Act and Arbitration Act.
It is pertinent to note at this juncture however that even though the MSME Act has statutorily stated that references made under Section 18 of the MSME Act shall be decided within a period of 90 days of making such reference, in reality, actual time to adjudicate any issue is much longer. Accordingly, it is only over a period of time one will come to know which legislation is faster and cost effective.
This update was released on 07 Dec 2022.
Legal Update Team
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