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MSME Act : Legal Conundrum In Definition of 'Supplier' Under Micro, Small and Medium Enterprises Development Act

Anuj P. Agarwala & Nitya Gupta
19 May 2020 3:48 AM GMT
MSME Act : Legal Conundrum In Definition of Supplier Under Micro, Small and Medium Enterprises Development Act
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1. This article aims to address the conflict in the interpretations of various High Courts of India to the definition of 'supplier' as enumerated under Section 2(n) of the Micro, Small and Medium Enterprises Development Act of 2006, and its impact on reference of disputes to the Micro and Small Enterprises Facilitation Council (Facilitation Council).

2. The Micro, Small and Medium Enterprises Development Act of 2006 (The Act) was brought into force by the government to facilitate the promotion, development and enhancing the competitiveness of micro, small and medium enterprises. The Act defines Micro, Small and Medium Enterprises under Section 7 and provides for filing of memorandum by these enterprises under Section 8. Chapter V of the Act deals with provisions regarding delayed payments to a Supplier by a Buyer. Section 15 provides the time-frame within which payments are to be made to a Supplier by a Buyer. If the payments are not made in time, Section 16 provides that the same are liable to be paid along with an interest which is three times the bank rate notified by the Reserve Bank. Section 18 of the Act provides for reference of disputes between a Buyer and a Supplier to the Facilitation Council. Once disputes are referred to the Facilitation Council, the same are resolved by conciliation, failing which they are referred to Arbitration.

Relevant provisions of the Act

3. A 'buyer' has been defined under Section 2(d) of the Act as under:-

Section 2(d)

"buyer" means whoever buys any goods or receives any services from a supplier for consideration;

4. On the other hand, a 'supplier' has been defined under Section 2(n) of the Act as under:-

Section 2(n)

"supplier" means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,--

(i) the National Small Industries Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);

(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act, 1956 (1 of 1956);

(iii) any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises;

A perusal of Section 2(n) evinces that the definition of Supplier is limited to micro/small enterprises and does not cover medium enterprises.

5. Section 7(1) of the Act lays down the criteria for an entity to qualify as a micro/small enterprise based on the value of investment in plant, machinery or equipment. Section 8 of the Act provides for filing of the Memorandum by micro, small and medium enterprises. The relevant portion of Section 8 is set out as under:-

Section 8

(1) Any person who intends to establish,--

(a) a micro or small enterprise, may, at his discretion; or

(b) a medium enterprise engaged in providing or rendering of services may, at his discretion; or

(c) a medium enterprise engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951), shall file the memorandum of micro, small or, as the case may be, of medium enterprise with such authority as may be specified by the State Government under sub-section (4) or the Central Government under sub-section (3):

Provided that any person who, before the commencement of this Act, established--

(a) a small scale industry and obtained a registration certificate, may, at his discretion; and

(b) an industry engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 (65 of 1951),having investment in plant and machinery of more than one crore rupees but not exceeding ten crore rupees and, in pursuance of the notification of the Government of India in the erstwhile Ministry of Industry (Department of Industrial Development) number S.O. 477(E), dated the 25th July, 1991 filed an Industrial Entrepreneur's Memorandum, shall within one hundred and eighty days from the commencement of this Act, file the memorandum, in accordance with the provisions of this Act.

…………

6. The legislature in its wisdom has made filing of memorandum mandatory in some cases, and discretionary in others. As seen above, filing of memorandum for a micro/small enterprise engaged in producing goods or rendering services is discretionary. Though filing of memorandum is discretionary and does not take away the legal status of a micro/small enterprise as long as it falls within the ambit of Section 7, in our view it is mandatory for a micro/small enterprise to file the memorandum in order to qualify as a 'Supplier' as defined under Section 2(n) of the Act and avail subsequent benefits under Sections 15, 16, 17 and 18 of the Act.

7. The provisions of the Act make it clear that for a dispute to be referred to the Facilitation Council, at least one party must fall within the definition of a Supplier. However, the inconsistency between decisions of various High Courts dealing with the definition of Supplier has created a legal conundrum as to whether filing of memorandum under Section 8(1) by a micro or small enterprise is a mandatory requirement to fall within the definition of a Supplier under Section 2(n) of the Act.

Conflicting judgments

8. The High Court for the State of Telangana and the State of Andhra Pradesh in the decision of The Indur District Cooperative Marketing Society Ltd. V. Microplex (India), Hyderabad and others[1] (Indur Case) while interpreting the definition of Supplier under Section 2(n) of the Act held that as long as a enterprise falls within the four corners of Section 7 relating to micro and small enterprises, it shall be a 'Supplier' for the purpose of reference of disputes to the Facilitation Council, whether or not it has filed a memorandum under Section 8(1) of the Act.

The High Court noticed that filing of memorandum by a micro/small enterprise is discretionary under Section 8(1). It further reasoned that whereas the 'means' part of Section 2(n) requires a micro/small enterprise to file a memorandum to qualify as a Supplier, the 'includes' part under sub-clause (iii) qualifies any entity dealing with a micro/small enterprise as a 'Supplier', irrespective of whether or not such a micro/small enterprise has filed a memorandum under Section 8(1) of the Act. The Court concluded that it would be anomalous to read the requirement of filing a memorandum as mandatory for a micro or small enterprise under the 'means' part, when the 'includes' part does away with the said requirement under sub-clause (iii).

9. In another decision, the Delhi High Court in Ramky Infrastructure Pvt. Ltd v. Micro and Small Enterprises Facilitation Council[2] (Ramky) was faced with a situation where the entity in question was a micro/small enterprise engaged in dealing with its own goods and services, and had not filed a memorandum under Section 8(1) of the Act. The Court firstly interpreted Section 2(n) to comprise of all four categories exhaustively, meaning that an entity falling within any of the four categories would qualify as a Supplier. The Court thereafter reasoned that since the entities set out in sub-clause (i) and (ii) are not required to file the memorandum, such requirement cannot be read into sub-clause (iii).

10. The Court interpreted sub-clause (iii) of Section 2(n) to bring within its ambit any micro/small enterprise dealing with its own goods and services. The court repelled the submission that that entities falling under sub-clause (iii) are only those who source goods/services from other micro/small enterprises, stating:-

27. The Contention that the entities falling under Section 2(n)(iii) of the Act, are only those entities that source goods/services from another micro/small enterprises, is not persuasive as it is difficult to accept that an entity sourcing goods/services from a third party micro/small enterprise would be a 'supplier' but would cease to be one if it sources the same from its undertaking'

Effectively, the court held that a micro/small enterprise dealing with its own goods and services would also fall within sub-clause (iii) irrespective of whether or not it has filed a memorandum under Section 8(1) of the Act.

11. The High Court of Gujarat in the case of Easun Reyrolle Limited v. Nik San Engineering Pvt. Ltd.[3] (Nik San) was deciding whether an entity qualified as a Supplier within the Act who had not filed a memorandum prior to the completion of contract with a Buyer. The facts of the case made it clear that till the subsistence of the contract, the micro/small enterprise in question had not filed a memorandum under Section 8(1) of the Act. The High Court relying upon Section 2(n) held that since the unit had not complied with Section 8(1) of the Act, it cannot take advantage of the remedy provided under the act, i.e, reference of dispute under Section 18 of the Act. In effect, the High Court held that a micro/small enterprise which has not filed a memorandum under Section 8(1) till the subsistence of the Contract does not qualify as a Supplier. However, it is relevant to note that in the present decision, the High Court did not consider Section 2(n)(iii) of the Act.

12. In another similar decision by the High Court of Bombay in the case of Scigen Biopharma Pvt. Ltd. v. Jagtap Horticulateur Pvt. Ltd[4] (Scigen Biopharma), it was held that subsequent filing of memorandum by a micro/small enterprise pursuant to a contract having been entered into between the parties would not allow such micro/small enterprise to take advantage of reference of dispute under Section 18 of the Act. The High Court has held that registration under Section 8(1) of the Act is not retrospective, and since the micro/small enterprise seeking reference had not filed a memorandum on the day on which the contract was entered, such micro/small enterprise cannot be termed as a Supplier to take recourse to Section 18 pursuant to disputes having arisen between the parties.

13. The Delhi High Court in the case of GE T&D India Limited v Reliable Engineering Projects and Marketing[5] (GE T&D) held that although registration under Section 8 of the Act entitles a micro/small unit to avail benefit of reference under the Act, such registration can also be granted during the subsistence of the contract when the supply has continued beyond the registration of the Supplier.

The views expressed in Nik San, Scigen Biopharma and GE T&D, relate to the time-frame of filing memorandum under Section 8(1) by a micro/small enterprise and its consequences. However, unlike the decisions in Indur and Ramky, in none of these cases have the courts accepted the proposition that a micro/small enterprise is deemed to be a Supplier without filing memorandum under Section 8(1) of the Act.

Way forward

14. The legal position with respect to a 'means' and 'and includes' definition clause was most recently considered by the Supreme Court in the decision of Anuj Jain (IRP) v. Axis Bank Limited[6]. The Court in the said case was dealing with the interpretation of the term "financial debt" under the Insolvency and Bankruptcy Code. The said term is akin to the term "supplier" under Section 2(n) of the Act, having a 'means' and 'and includes' definition. The Supreme Court laboured through, and distinguished, the ratios of previous decisions to come to a finding that the expression 'and includes' speaks of subject matters which are not reflected in the 'means' part of the definition.

15. Further, it is a settled rule of law that an interpretation which renders one or more of the provisions otiose must be rejected. In the case of Patel Chunibhai Dajibha v. Narayanrao Khanderao Jambekar,[7] the Supreme Court held as under:-

"An interpretation which renders a provision otiose should be avoided otherwise it would mean that in enacting such a provision, the legislature was involved in "an exercise in futility" and the product came as a "purposeless piece" of legislation and that the provision had been enacted without any purpose and the entire exercise to enact such a provision was "most unwarranted besides being uncharitable".

16. Reverting to Section 2(n) of the Act, it is seen that whereas the 'means' part relates to a micro/small enterprise which has filed a memorandum under Section 8(1) of the Act, the 'includes' part relates to entities, which are not micro/small enterprises, but are involved in aiding, promoting or facilitating the businesses of micro/small enterprises.

17. The decisions in the cases of Ramky and Indur have both included in the definition of a Supplier any micro/small enterprise, notwithstanding whether or not it has filed a memorandum under Section 8(1) of the Act. The impact of these decisions is significant and far reaching as they allow any micro/small enterprise to qualify as a Supplier under the Act without filing memorandum under Section 8(1).

18. In our view, the said decisions render the 'means' part of Section 2(n) completely redundant, which mandates filing of memorandum under Section 8(1) by a micro/small enterprise. In other words, if every micro/small enterprise is entitled to qualify as a Supplier without filing the memorandum, the 'means' part of Section 2(n) becomes a 'purposeless piece of legislation'.

19. The courts also seem to have overlooked that while an entity qualifies as a micro/small enterprise as per Section 7(1), it does not qualify as a Supplier without adhering to the requirement of filing memorandum under Section 8(1). The element distinguishing a micro/small enterprise from a 'supplier' is the filing of memorandum under Section 8(1). The scheme of the Act makes it clear that although filing of memorandum is discretionary for a micro/small enterprise, it is a prerequisite to fall within the definition of Supplier and to avail the advantages under Sections 15, 16, 17 and 18 of the Act.

20. Further, both the decisions seem to have not considered that the 'includes' part of a definition contains matters that are not covered by the 'means' part of the definition. The 'means' part of the Section 2(n) deals with micro/small enterprises, and the 'includes' part comprises of entities which are otherwise not micro/small enterprises but facilitate the businesses of micro/small enterprise. The National Small Industries Corporation referred to in sub-section (i) and the State Industries Development Corporation referred to in sub-section (ii) are not micro/small enterprises. These corporations have been incorporated by the government to aid, promote and facilitate the business of micro/small enterprises. On a harmonious construction, keeping in mind the purpose behind the 'includes' part of Section 2(n), it is clear that sub-clause (iii) would cover any legal entity that aids, promotes or facilitates the business of a micro/small enterprise. The said sub-clause (iii) cannot include within its ambit a micro/small enterprise, because the same has been expressly included within the 'means' part of Section 2(n). Such legal entities, promoting the businesses of micro/small enterprises are not required to file a memorandum under the Act to qualify as a Supplier.

21. In the Ramky decision, the entity was a micro/small entity dealing with its own goods and services. Hence, it fell under the 'means' part of the Section and was required to file a memorandum under Section 8(1) of the Act. Similarly, in the Indur Decision, the court held that the requirement to file memorandum under the 'means' part is not mandatory. In our view, the Court seems to have overlooked that the said requirement is not mandatory only when a legal entity is dealing with goods and services of another micro/small enterprise under sub-clause (iii) of Section 2(n).

22. In conclusion, it is our view that it is mandatory for a micro/small enterprise to file a memorandum under Section 8(1) of the Act to fall within the definition of Supplier under Section 2(n), thereby enabling such micro/small enterprises to avail the benefits enumerated under Sections 15, 16, 17 and 18 of the Act. Doing away with the said requirement would be contrary to the settled rules of interpretation, and would be in conflict with the scheme, objective and intent of the legislation.

(The authors are Delhi-based advocates. They may be reached at [email protected] and [email protected])

[1] 2016 (3) ALD 588

[2] 2018 SCC OnLine Del 9671

[3] (2019) 2 GLR 1175

[4] 2019 SCC OnLine Bom 4542

[5] (2017) 238 DLT 79

[6] 2020 SCC OnLine SC 237

[7] AIR 1965 SC 1457

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