Jurisdictional Uncertainty Under Section 18 MSMED Act: Time For Authoritative Clarification

The role of micro, small and medium enterprises has been internationally recognised in reducing levels of poverty through job creation and economic growth. In view of their significance the Indian Parliament provided appropriate frame work for their growth and development by enacting 'the Micro, Small and Medium Enterprises Development Act, of 2006'. It replaced earlier legislation, 'the Interest on Delayed Payment to Small Scale and Ancillary Industries Undertakings Act, 1993'. The new Act of 2006 aimed to ensure timely and smooth flow of credit to micro, small and medium enterprises and thereby minimise the incidences of their financial sickness.

The MSMED Act included stringent provisions for resolving disputes of delayed and non-payment of dues for goods supplied or services rendered by micro and small enterprises to the buyers. This enactment ensured that limited resources of micro and small enterprises do not get blocked for long time. When finances of micro and small enterprises remain in circulation it could enable them to develop and grow into medium entities. Hence, the object of enacting MSMED Act has been to facilitate the promotion and development of mice, small and medium enterprises and to enhance their competitiveness.

In Chapter V of the MSMED Act, Sections 15 to 25 provide remedy for delay in payments to micro and small enterprises. Under Section 15, liability is fastened on the buyer to make payments to the supplier, who supplies goods or renders any services to the buyer, within specified time limits. As per Sections 16 and 17, on failure to make payment the buyer would be liable to pay compound interest, with monthly rests, at the rate three times of the bank rate notified by the Reserve Bank of India, for the relevant period. This liability is irrespective of any agreement between the parties or in any other provisions of law, for the time being in force. Section 18 of the MSMED Act, provides the mechanism to enable the party to dispute to make reference to the Micro and Small Enterprises Facilitation Council for an Arbitral Award.

Here the pertinent question is, who can make a reference under Section 18 of the MSMED Act to the Micro and Small Enterprises Facilitation Council? Under section 7 of the MSMED Act enterprises are classified as micro, small and medium enterprises on the criteria of their respective investment. As defined under the MSMED Act 'supplier' means a micro or small enterprise which has filed a memorandum under Section 8 with the authority specified by the Government. Undisputedly, this special remedy under Section 18 of the MSMED Act is available only to micro and small enterprises and not to medium enterprise, However, the vexed question that remains is that whether micro and small enterprises qualifying specified criteria, but not registered under Section 8 of the MSMED Act, on the date of agreement or on the date of rendering of services / supply of goods are entitled to make reference under Section 18 or not? This issue has gained prominence due to some conflicting judicial pronouncements of the Supreme Court in the recent past.

The Supreme Court in Silpi Industries and Ors. v. Kerala State Road Transport Corporation and Ors. (2021) 18 SCC 790 and Gujarat State Civil Supply Corporation Limited v. Mahakali Foods Private Limited, (2023) 6 SCC 401 has held that registration under Section 8 of MSMED Act, must predate the contract for the micro and small enterprise to invoke Section 18 of this MSMED Act. But in January 2025 a two-judge bench of the Supreme Court comprising Justice P.S. Narasimha and Justice Pankaj Mithal while hearing NBCC (India) Ltd. v. State of West Bengal, Civil Appeal No. 3705 of 2024, expressed a different view from earlier decisions referred above. Hence, this two-judge bench on 10.01.2025 referred this jurisdictional question to three judge bench for authoritative decision thereon.

In Silpi case supra the Court observed that by taking recourse to filing memorandum under sub-section (1) of Section 8 of the MSMED Act, subsequent to entering into contract and supply of goods and services, one cannot become an enterprise entitled to claim benefit from the date on which appellant entered into contract with the respondent. If any registration is obtained, same will be prospective and applies for supply of goods and services subsequent to registration but cannot operate retrospectively. Any other interpretation of the provision would lead to absurdity and confer unwarranted benefit in favour of a party not intended by legislation.

The Supreme Court in Gujarat Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt Ltd supra relied on the aforesaid observations of the Court in the Silpi Industries and opined that a party who was not the “supplier” as per Section 2 (n) of the MSMED Act, 2006 on the date of entering into the contract, could not seek any benefit as a supplier. A party cannot become a micro or small enterprise or a supplier to claim the benefit under the MSMED Act, 2006 by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods or rendering services. If any registration, is obtained subsequently, the same would have the effect prospectively and would apply for the supply of goods and rendering services after the registration. The same cannot operate retrospectively.

On the other hand the two judge bench of the Supreme in NBCC (India) Ltd. v. The State of West Bengal and Others, 2025 INSC 54, in its judgment dated 10.01.2025 concluded that an application by a micro or a small enterprise to the Facilitation Council under Section 18 cannot be rejected on the ground that the said enterprise has not registered itself as per section 8 of the MSMED Act. It observered that Section 18 is not restrictive and is a remedy for the resolution of disputes, and as such, it is kept open-ended to enable 'any party' to refer the dispute to seek redressal. The Court rejected the submission that 'any party to a dispute' is confined to a 'supplier' who has filed a memorandum under Section 8 of the MSMED Act. The Court said that issue(s) before the Court in Silpi Industries and Mahakali cases were very different from the issue that has arisen for its consideration. However, for clarity and legal certainty, the Court directed the appeal to be placed before the Chief Justice of India for referring the matter to a bench of three Judges for an authoritative pronouncement”

It is noticed that earlier two-judge benches of the Supreme Court in Silpi Industries and Mahakali Foods cases (supra) have held that registration under Section 8 of MSMED Act must predate the contract for the MSME to invoke Section 18. Now, in NBCC, the another two-judge bench of Supreme Court expressed doubt over the correctness of these rulings and referred the matter to be decided by three-judge bench for authoritative clarity. In this situation findings in Silpi and Mahakali cases on the question in hand still technically represent binding nature until explicitly overruled. At the same time interim findings in NBCC case cannot be ignored especially when decision from larger bench decision is awaited

Surely, Supreme Court in NBCC case has adopted a pragmatic approach to bring in authoritative clarity as to jurisdiction of MSEF Councils, in matters where any small or micro enterprise was not registered, under the MSMED Act, 2006, on the date of contract. It is understood that reference to a larger bench of' Supreme Court made is yet to be listed before the larger bench.

In this situation difficulty is being faced in pending matters where similar issues are coming up between suppliers and buyers, before the lower forums. The matter becomes significant when mechanism provided under the MSMED Act aims to ensure timely payment to the small and micro enterprise. Therefore, in the larger public interest and financial hardship of the micro and small enterprises this jurisdictional issue under Section 18 of the MSMED needs earlier attention to bring in certainty.

Author is MSEFC Empaneled Arbitrator & Former Registrar-cum-Professor of Law, Rajiv Gandhi National University of Law, Punjab (Patiala).

Views Are Personal.