MSME Facilitation Council Can't Refer Enterprises To Arbitration For Contracts They Signed Before Registration Under MSME Act: Delhi H.C.

Brief Facts:

The arbitral proceedings were initiated by JKG Infratech Private Limited (“Appellant”) under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”). The Appellant's claim stemmed from contracts with Larsen and Toubro Limited (“Respondent”), through which it provided certain services to the respondent. Alleging non-release of its performance bank guarantee and retention money as per the contracts' terms, even after the stipulated defect liability period, the Appellant invoked arbitration under Section 18 of the MSME Act, despite having arbitration clauses in both contracts.

The Respondent countered by filing an application under Section 16 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”) before the arbitrator. It contended that proceedings under the MSME Act were barred because the Appellant was only registered under Section 8 of the MSME Act after the contract was signed. The arbitrator allowed the application filed by the Respondent. Feeling aggrieved, the Appellant filed an appeal under Section 37 of the Arbitration Act in the Delhi High Court (“High Court”).

The appellant contended that the arbitrator's decision misconstrued the significance of registration under the MSME Act. It contended that as beneficial legislation, the provisions of the MSME Act should extend to registered MSMEs, even if the registration occurred after the supply of goods/services.

Observations by the High Court:

The High Court referred to the decision of the Supreme Court in Silpi Industries Etc. vs. Kerala State Road Transport Corporation and Anr., and addressed the issue of whether an appellant could invoke the MSME Act after supplying goods and services before registration under its provisions. The Supreme Court in Silpi Industries held that to benefit from the MSME Act, the seller must have been registered at the time of entering into the contract. Furthermore, for supplies made before registration, no benefits could be claimed under the MSME Act. The High Court held that registration after contract execution cannot retroactively confer MSME status, as it would lead to absurd outcomes contrary to legislative intent.

Similarly, in Vaishno Enterprises vs. Hamilton Medical AG and Anr., the Supreme Court reiterated that the benefits of the MSME Act cannot be claimed by a party not registered under the Act at the time of contract execution. The Supreme Court emphasized that the laws applicable at the time of contract execution govern the parties' rights and obligations. Since the appellant in the present case was registered as an MSME only after the contract was executed, the High Court held that the MSME Act did not apply, and the dispute fell under the jurisdiction of the laws prevailing at the time of contract execution.

Therefore, considering the relevant provisions of the MSME Act and the timing of registration, the High Court affirmed that the MSME Act did not govern the dispute in question. Consequently, it held that the Micro and Small Enterprises Facilitation Council had no jurisdiction to entertain the dispute under Section 18 of the MSME Act, which refers the parties to arbitration under the Arbitration Act. The appeal was dismissed.

Case Title: JKG Infratech Private Limited vs Larsen and Toubro Limited

Citation: 2024 LiveLaw (Del) 166

Case Number: ARB. A. (COMM.) 8/2024

Advocate for the Appellant: Mr. Parvesh Bansal & Mr. Rahul Bansal.

Advocate for the Respondent: None.

Click Here To Read/Download Order