Supreme Court: Limitation Act is applicable to the arbitration proceedings under MSME Act

The SC on June 11, 2021 {M/s. Silpi Industries etc. vs. Kerala State Road Transport Corporation & Anr. etc.} held that a reading of Section 43 of the Arbitration and Conciliation Act, 1996 itself makes it clear that the Limitation Act, 1963 shall apply to the arbitrations, as it applies to proceedings in court. It was held that when the settlement with regard to a dispute between the parties is not arrived at under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, necessarily, the Micro and Small Enterprises Facilitation Council shall take up the dispute for arbitration under Section 18(3) of the 2006 Act or it may refer to institution or centre to provide alternate dispute resolution services, and provisions of Arbitration and Conciliation Act 1996 are made applicable as if there was an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act. It was held that in view of the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation Act, 1996, the Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006. 

It was also held by the Bench, comprising of Justice Ashok Bhushan and Justice R. Subhash Reddy that Section 18(3) of the 2006 Act also makes it clear that the provisions of 1996 Act are made applicable as if there is an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act. It was held that Section 23 of the 1996 Act deals with the statement of claim and defence and Section 23(2A) gives a right to respondent to submit a counter claim or plead set-off with regard to claims within the scope of the arbitration agreement.

It was held that when Section 18(3) makes it clear that in the event of failure by the Council under Section 18(2) if proceedings are initiated under Section 18(3) of the 1996 Act, the provisions of 1996 Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in sub-section (1) of Section 7 of the 1996 Act. It was held that when there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.

The questions, inter alia, falling for consideration before the SC in present case were whether the provisions of Indian Limitation Act, 1963 is applicable to arbitration proceedings initiated under Section 18(3) of Micro, Small and Medium Enterprises Development Act, 2006 and also whether, counter claim is maintainable in such arbitration proceedings.

It was held that it is to be noted that if the SC does not allow the counter-claim made by the buyer in the proceedings arising out of claims made by the seller, it may lead to parallel proceedings before the various fora. It was observed that on one hand, in view of beneficial legislation, seller may approach the Facilitation Council for claims, in the event of failure of payment by the buyer under provisions of 2006 Act, at the same time, if there is no separate agreement between the parties for any arbitration in a given case, 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. It was held that in such event, it may result in conflicting findings, by various forums. 

The SC held that the Arbitration and Conciliation Act, 1996 is a general law whereas the Micro, Small and Medium Enterprises Development Act, 2006 is a special beneficial legislation which is intended to benefit micro, small and medium enterprises covered by the said Act. The Act of 2006 contemplates a statutory arbitration when conciliation fails. It was held that When such beneficial provisions are there in the special enactment, such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council. It was held that in any case, taking any other view means whenever buyer wish to avoid the jurisdiction of the Council, the buyer can do on the spacious plea of counter-claim, without responding to the claims of the seller. It was also held that when the provisions of Sections 15 to 23 are given overriding effect under Section 24 of the Act and further the 2006 Act is a beneficial legislation, the court is of the view that even the buyer, if any claim is there, can very well subject to the jurisdiction before the Council and make its claim/ counter claim, as otherwise, it will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises. It was held that otherwise even in cases where there is no agreement for resolution of disputes by way of arbitration, if the seller is a party covered by Micro, Small and Medium Enterprises Development Act, 2006, if such party approaches the Council for resolution of dispute, other party may approach the civil court or any other forum making claims on the same issue. It was held that if two parallel proceedings are allowed, it may result in conflicting findings and if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and 75% pre-deposit contemplated under Sections 16 and 19 of the MSMED Act.

The SC concluded that on a harmonious construction of Section 18(3) of the 2006 Act and Section 7(1) and Section 23(2A) of the 1996 Act, it is of the view that counter-claim is maintainable before the statutory authorities under MSMED Act.

Registration 

The SC held that the appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSMED Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services. It was held that if any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. It was held that any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.