Arbitration In IndiaProvisions of MSMED Act overrides the Contractual Obligations between the Parties

The Allahabad High Court, in Marsons Electrical Industries v. Chairman, Madhya Pradesh Electricity Board (Madhya Pradesh State Electricity Board) And Anr.  [Appeal under Section 37 of Arbitration and Conciliation Act 1996 No. – 701 of 2023 decided on 12.12.2023], held that the provisions of the MSMED Act would prevail over any other contractual obligations as agreed by the parties.

FACTS

Marsons Electrical Industries, (hereinafter referred to as “the Appellant”), was engaged in the business of manufacturing transformers of various capacities, and had set up a small-scale manufacturing industry in Agra and held a “small scale industry certificate” since 09.02.1971 under the Industrial Development and Regulation Act, 1951 (hereinafter referred to as the “1951 Act”). In continuation of 1951 Act, the Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993 (hereinafter referred to as ‘1993 Act’) was enacted, which is now known as the Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as ‘MSMED Act, 2006’).

In continuation to the certificate, on the enactment of the MSMED Act, a certificate was issued to the Appellant on 29.10.2007. Furthermore, a fresh Udyog Aadhar Number was issued to the Appellant in continuation to the small-scale industry certificate dated 09.02.1971.

A contract was executed between the Appellant and  Madhya Pradesh State Electricity Board (hereinafter referred to as  “the Respondent”) and in pursuance to the contract, various work orders were issued to the Appellant for supply of transformers.

The Appellant supplied the goods in the stipulated time, but payment was not made by the Respondent as per the terms of Clause 8(5) of the Contract even after repeated representations and reminders made by the Appellant.

On-demand of interest on delayed payment, the Appellant was blacklisted by the Respondent. Being aggrieved by the blacklisting, the Appellant filed a writ petition before Jabalpur High Court vide Writ Petition No.742 of 2008.

The State of UP on 22.01.2000, notified the establishment of the U.P. Industry Facilitation Council at Kanpur (hereinafter referred to as ‘Council’) under the 1993 Act.

The Appellant filed a claim petition for delayed payment vide Claim Petition No. 25 of 2001 (hereinafter referred to as the “Claim Petition”) before the Council. During the pendency of the claim petition, the Respondent offered to enter into a negotiation regarding the claim. In pursuance to this offer, the Appellant filed a withdrawal application on 17.05.2002. However, during the pendency of the withdrawal application, the MSMED Act was enacted and the 1993 Act was repealed.

Hence, the Appellant preferred a fresh claim application on 19.12.2006 before the Council requested to restart the proceedings of the said claim. On 19.06.2007, the Facilitation Council under the MSMED Act rejected the aforesaid Claim Petition of the Appellant with the liberty to file a fresh claim under the MSMED Act.

Accordingly, the Appellant filed another Claim Petition under the MSMED Act before the Facilitation Council on 31.07.2007, against which an Award was passed by the Facilitation Council on 02.07.2009, which was signed on 09.07.2011 and published on 03.02.2012 (hereinafter referred to as the “Impugned Award”).

The Respondent challenged the Impugned Award under Section 34 of the Arbitration and Conciliation Act, 1996 (hereinafter referred to as the ‘A&C Act’) before the Ld. District Judge, Kanpur Nagar vide Arbitration Case No.76/70/12, which was further transferred to Commercial Court, Kanpur.

The Commercial Court allowed the appeal of the Respondent on the ground of jurisdiction vide order dated 23.06.2023 (hereinafter referred to as the “Impugned Order”). Hence, being aggrieved by the Impugned Order, the Appellant has filed the present appeal under Section 37 of the A&C Act.

ISSUES BEFORE THE HIGH COURT

1. Whether the Appellant can be considered to be registered under MSMED Act from the beginning?

2. Whether MSMED Act overrides/prevails over the statutory provisions/ A&C Act and any agreement entered into between parties?

3. Whether the Courts of Jabalpur had exclusive jurisdiction to entertain the disputes between the parties?

CONTENTIONS OF THE PARTIES

The Appellant contended that a Contract cannot prevail over the provisions of MSMED Act and hence, the finding in the Impugned Order regarding the exclusive jurisdiction to the Courts of Jabalpur is inapplicable.

It was submitted that, no objection was ever raised, about the Appellant being not registered under the provision of Section 8(1) of the MSMED Act, either before the Facilitation Council or before the Commercial Court, therefore, no fresh objections can be raised at the appellate stage.

Furthermore, as per the provision of Section 18(4) of the MSMED Act, 2006,  the Impugned Award passed by the Facilitation Council was within jurisdiction. It was further submitted that MSMED Act being a special legislation would prevail over the A&C Act.

The Respondent contended that the work orders were issued to the Appellant way before the enactment of MSMED Act and hence, the provisions of MSMED Act cannot have retrospective applicability. Moreover, the Claim was filed by the Appellant after 3 years of work order.

DECISION AND FINDINGS

The Allahabad High Court observed that the Appellant was acknowledged and registered as “Small Scale Industry” since  09.02.1971 and it is considered to be continued registration under the MSMED Act as well.

It was further observed that the Section 32 of the MSMED Act clearly provides that the actions taken under the 1993 Act would be deemed to be taken under the provisions of the MSMED Act. The High Court relied on M/s Silpi Industries vs. Kerala State Road Transport Corporation [2021 SCC Online SC 439] and held that MSMED Act being specific act would prevail over the Contract. Therefore, the Commercial Court would have jurisdiction to entertain an application under Section 34 of the A&C Act.

The High Court allowed the appeal and restored the Impugned Award and quashed the Impugned Order as the Commercial Court had merely held that Courts of Jabalpur would have exclusive jurisdiction to entertain the disputes.

AMLEGALS REMARKS

The Allahabad High Court held that MSMED Act being a specific legislation would prevail over the A&C Act as well as the clauses envisaged in a contract. Moreover, whenever, a legislation is replaced by another legislation, the  status provided by the previous legislation would continue to exist in the newly enacted legislation as well.

 It was held that the Commercial Court had jurisdiction to deal with the appeal of the Arbitral Award, however, as it was passed merely on the ground of jurisdiction, it was unsustainable and the Award of the Facilitation Council was upheld.

-Team AMLEGALS, assisted by Mr. Sahaj Desai (Intern)

For any query or feedback, please feel free to get in touch with rohit.lalwani@amlegals.com or himanshi.patwa@amlegals.com