"Any Objection Regarding Non-Applicability Of MSMED Act Can Be Decided By Arbitral Tribunal U/S 16 Of A&C Act": Delhi High Court

The Delhi High Court division bench of Chief Justice Manmohan and Justice Tushar Rao Gadela, while hearing an appeal, has upheld the order passed by a single-judge bench wherein it was held that the question of whether an entity was an MSME at the relevant time was to determined by the tribunal under section 16 of A&C Act and not the writ court. Facts Overview: GAIL issued a tender for the service of HDD works at Kochi, Koottanad, Banglore, Manglore, Phase II Section VIIB. The appellant was awarded the contract under this tender. To fulfil the contractual obligations, the appellant subcontracted the work to Harji Engineering Pvt Ltd (HEWPL) for the installation of 24 PE coated pipe + 6 Dia Pipe with HDD works from Singasndra Banglore to Krishnagiri Section for RLNG Gas Pipeline Project (Phase-II), and a purchase order dated 10 July 2018 was issued by HEWPL in favour of Respondent No. 3. HWEPL sent a letter dated 30 November 2018 to the appellant, stipulating that M/S Knock Pro Infra Pvt Ltd bills would be paid directly by M/S CIPL from the R A bill raised by HEWPL. A settlement sheet, duly signed and agreed upon, will be provided. According to this letter, a settlement sheet dated 14 December 20218 was executed between HWEPL and Respondent No. 3. The settlement sheet contained a 'Direct Payment Agreement' for the HDD services provided by Respondent No. 3. Respondent No. 3 filed a case before the Micro and Small Enterprise Facilitation Council (MSFEC), alleging non-payment of dues by the appellant. The conciliation proceedings between the parties were unfruitful. Consequently, a reference was made to the Delhi International Arbitration Center (DIAC) under Section 18(3) of the MSMED Act to initiate arbitration proceedings. Regarding the reference, DIAC, vide notice dated 13 May 2024, called the parties to file their respective Statement of Claim (SoC). The parties were warned that failure to file the SoC would result in the closure of proceedings. DIAC vide communication dated 2 July 2024, and 2 August 2024 directed the parties to pay the arbitrator's fee and miscellaneous expenses with the DIAC. The appeal is filed under Clause X of the Letters Patent Act, 1866, challenging the judgment passed by the single judge dismissing the writ petition as non-maintainable. Submissions of the Parties: The appellant made the following submissions: Per Section 23(4) of the A&C Act, the parties were obligated to complete their pleadings within six months from the date of the arbitrator's appointment. Under Section 25(a), the proceedings would terminate if there was non-compliance with Section 23(4). Given that respondent no. 3/claimant failed to submit the SoC within the stipulated time frame, starting from the notice dated 11 November 2022. The proceedings are deemed to have been terminated. Consequently, the notice issued by respondent no. 1/DIAC, on 13 May 2024, was without jurisdiction and violated the provisions of the A&C Act.The period for completion of the arbitral proceedings under Section 29A(1) and 29A(3) of the A&C Act has expired. The respondent no. 1/DIAC could not extend the time limit independently as neither the Act nor the DIAC Rules confer any such authority. In the absence of the privity of contract, no reference to the dispute to arbitration could be maintained. When awarding the sub-contract, respondent no.3/claimant was not registered under the MSMED Act. When a party is not registered under the MSMED Act, the reference of the dispute under Section 18(3) is not allowed. In light of the Supreme Court judgement in Gujarat State Civil Supplies Corporation Ltd v. Mahakali Foods Pvt. Ltd., the provisions of the MSMED Act would apply prospectively from the date of registration. When the claimant is not an MSME, such claimant cannot make any claim under the MSMED Act. To buttress the argument, reliance was placed on Silpi Industries Etc. v. Kerala State Road Transport Corporation & Anr., and Vaishno Enterprises v. Hamilton Medical AG & Anr.The Courts, under Article 226/227 of the Constitution, cannot interfere in the arbitral proceedings; however, in exceptional circumstances, the High Court can intervene. The facts and the legal position in the present case make it an exception, and therefore, the writ petition be declared to be maintainable.If the application under Section 16 is dismissed, no provision to appeal is provided under the A&C Act to challenge the order. The only recourse left is waiting for the final award's passing to appeal under Section 34. The respondent no.3/claimant made the following submissions: The appellant has only advanced submissions regarding the disputed questions of fact and tried to portray the whole controversy from the lens of lack of jurisdiction on respondent no.1/DIAC or respondent no.2/MSEFC. There are documents showing the appellant's responsibility to make direct...

"Any Objection Regarding Non-Applicability Of MSMED Act Can Be Decided By Arbitral Tribunal U/S 16 Of A&C Act": Delhi High Court

Mohd Talha Hasan

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