Merely Because The Borrower Is An MSME, It Would Not Be Governed By The Arbitral Mechanism Provided Under MSMED Act: Gujarat High Court

The Gujarat High Court has ruled that merely because the borrower is an MSME, it would not be governed by the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), including the arbitral mechanism envisaged under the said Act. The bench of Justice Biren Vaishnav observed that though, as per the mechanism provided under the MSMED Act, the dispute between the supplier and the buyer of goods or services may be adjudicated through arbitration in accordance with the Arbitration and Conciliation Act, 1996 (A&C Act), however, the same does not contemplate adjudication of disputes arising from a loan transaction, which is the subject matter of a special Act such as the SARFAESI Act. The Court remarked that under Article 226 of the Constitution of India, the Court must step in and set aside arbitral awards passed by a ‘Sole Arbitrator’ who is, in fact, not a ‘Sole’ but a ‘Self Appointed Arbitrator’ and is thus, masquerading as an Arbitrator. The petitioner, Indian Bank, issued a term loan in favour of respondent no.2, M/s Ekta Enterprise, who allegedly defaulted in payment of the loan and therefore, the same was declared as a non-performing asset. Thereafter, a notice under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) for recovery of the amount was issued by the bank. After the 2nd respondent failed to pay the amount, a notice under Section 13(4) of the SARFAESI Act was issued, proposing to take symbolic possession of the immovable properties of the respondent no.2 which was mortgaged to the bank. The respondent no. 2 invoked arbitration proceedings against the petitioner bank. The Sole Arbitrator passed an interim award granting a stay of the notices issued under the SARFAESI Act. Against this, the petitioner bank filed a writ petition before the Gujarat High Court. During the pendency of the petition, the Sole Arbitrator (respondent no.1) passed the final award in favour of the 2nd respondent, which was also challenged by the petitioner in the writ petition. The petitioner, Indian Bank, submitted before the Court that the 2nd respondent, without invoking the remedy available to it under Section 17 of the SARFAESI Act before the Debt Recovery Tribunal, invoked the jurisdiction of the Sole Arbitrator. The bank added that there is no contract between the parties containing an arbitration clause. Further, no appointment can be made without resorting to the provisions of Section 11 of the A&C Act, it averred. It argued that under Article 226 of the Constitution of India, the High Court can interfere in the arbitral awards which are passed by the Arbitral Tribunals without jurisdiction. The respondent no. 2, Ekta Enterprise, claimed before the Court that it is a small enterprise who was granted the loan for being an MSME. Referring to Sections 15, 16 and 17 of the MSMED Act, it averred that being an MSME, the arbitral mechanism provided under the MSMED Act could be invoked to resolve the dispute between the parties. The 2nd respondent further argued that the relevant clause of the term loan agreement contained an inbuilt mechanism for referring the dispute to arbitration. The High Court observed that under Section 17 of the SARFAESI Act, a remedy is provided to any person who is aggrieved by the measures taken under Section 13 (4) of the Act. Having failed to invoke the provisions under Section 17 of the SARFAESI Act, it was not open for the 2nd respondent (the borrower) to invoke the jurisdiction of the ‘Sole Arbitrator’, the Court held. Dismissing the borrower’s contention that the loan agreement itself had an inbuilt clause providing for reference to arbitration, the Court took note that the agreement required the borrower to keep the hypothecated assets insured. Further, the applicability of the arbitration clause was limited to the dispute arsing between the insurance company and the insured (the petitioner bank and the borrower). Concluding that the arbitration clause was not incorporated in context of the borrowings, the bench ruled that invocation of arbitration and the arbitral proceedings were totally without jurisdiction. The Court observed that as per the mechanism envisaged under the MSMED Act, the dispute between the supplier and the buyer of goods or services may be adjudicated through arbitration in accordance with the A&C Act. However, the same does not contemplate adjudication of disputes arising from a loan transaction, which is the subject matter of a special Act such as the SARFAESI Act. The Court added, “Merely because the borrower happens to be an MSME would not be governed by the provisions of the Act in question. The contention of the counsel for the respondents therefore of seeking resort to such a provision is purely misconceived.” The bench held that ...

Merely Because The Borrower Is An MSME, It Would Not Be Governed By The Arbitral Mechanism Provided Under MSMED Act: Gujarat High Court

Parina Katyal

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