The Micro and Small Enterprises Facilitation Council – a forum for Suppliers, not Buyers

On 05.07.2023, the Delhi High Court decided two cases pertaining to the jurisdiction of the Micro and Small Enterprises Facilitation Council (MSEFC) to entertain claims under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). The Court tackled two questions:

• Whether an independent claim can be entertained by the MSEFC at the instance of the Buyer?
• Whether the MSEFC can entertain references to arbitration from Medium Enterprises, in addition to those made by Micro or Small Enterprises?

Facts

Uniseven Engineering and Infrastructure Pvt. Ltd. v. Micro and Small Enterprises Facilitation (MSEF) Council District (South) and Anr.[1]

• Uniseven Engineering and Infrastructure Pvt. Ltd. (“Uniseven”) entered into an agreement with Harji Engineering Works Pvt. Ltd. (“Harji”) for providing Combined Station Works (CSW).
• Under the agreement, Uniseven was the Supplier and Harji was the Buyer.
• Disputes arose between the parties pursuant to which Harji/the Buyer raised a claim before the MSEFC for delayed payment.
• The MSEFC passed an order advising Uniseven/the Supplier to pay monies to Harji/the Buyer.
• Aggrieved by the order, Uniseven filed a Writ Petition before the Delhi High Court arguing that Harji was the Buyer and not the Supplier under the agreement, and therefore could not invoke the jurisdiction of the MSEFC.

Sterlite Power Transmission Limited v. M/s EPC Solutions LLP & Anr.[2]

• On 15.09.2017, Sterlite Power Transmission Limited (“Sterlite”) entered into an agreement with M/s. EPC Solutions LLP (“EPC”) for providing vacuum pumps and engineers for a project.
• Disputes arose between the parties pursuant to which EPC raised a claim before the MSEFC.
• Along with its claim, EPC filed its Registration Certificate dated 12.06.2019 indicating its status as a Medium Enterprise.
• Sterlite objected to the jurisdiction of the MSEFC in respect of EPC’s claim. It argued that the MSEFC can only entertain claims from Micro and Small Enterprises, not Medium Enterprises.
• Conciliation proceedings before the MSEFC failed. Accordingly, the MSEFC referred the matter for arbitration to the DIAC.
• Aggrieved by the order, Sterlite filed a Writ Petition before the Delhi High Court

Findings of the Court

In both cases, the Delhi High Court examined the language of Chapter V of the MSMED Act, 2006 – particularly the interlinkage between the title of the Chapter and Sections 15 to 18 thereof. Chapter V of the MSMED Act specifically deals with delayed payments to Suppliers who are Micro and Small Enterprises. Sections 15 to 17 of the MSMED Act make it clear that the obligation is on the Buyer to make prompt payment to the Supplier (i.e. a Micro or Small Enterprise), failing which the Buyer would be liable to pay an increased rate of interest to the Supplier (i.e. a Micro or Small Enterprise). Section 18 provides that a party to a dispute can make a reference to the MSEFC in respect of any amount due under Section 17. Accordingly, the Court found it clear that (i) the provisions do not contemplate any claims for payment by the Buyer against the Supplier, and (ii) the scheme of Chapter V of the MSMED Act excludes Medium Enterprises and only applies to Micro and Small Enterprises.

The Court then considered the Supreme Court’s decision in the case of Silpi Industries Etc. v. Kerala State Road Transport Corporation & Anr.[3] and found that the case (i) was rendered only in the context of a counter claim by the Buyer and not an independent proceeding by the Buyer, and (ii) held that the relevant date to confirm the applicability of the MSMED Act is the date of the contract and the date of supply of goods/ rendering of services could also be taken into account.

Accordingly, in Uniseven Engineering (supra), the Court concluded that a literal reading of the various provisions shows that a Buyer cannot maintain an independent claim against the Supplier under the MSMED Act. In Sterlite Power (supra), the Court held that to confirm the applicability of the MSMED Act, the relevant date would be the date of the agreement between the parties and the date of supply of goods/services. Therefore, the Court concluded that since EPC/the Supplier was registered as a Micro Enterprise as on the date of the agreement between the parties, it cannot be deprived of the benefits of the provisions of the MSMED Act even if, on the date when the reference application was filed before the MSEFC, EPC/the Supplier had upgraded itself to the status of a Medium Enterprise.

Analysis

The Delhi High Court’s position in the two decisions re-affirms the intent of the MSMED Act as a beneficial legislation to protect Micro, Small and Medium Enterprises. The finding that Buyers cannot raise independent claims against Micro or Small Enterprise Suppliers ensures that the MSEFC remains a forum to address and remedy the grievances of Micro and Small Enterprise Suppliers. However, it also limits the scope of the MSEFC’s powers. Such a limitation may create a situation in which Micro and Small Enterprise Suppliers, that are defending claims from Buyers, are compelled to defend themselves in resource intensive and financially burdensome litigation proceedings.

The Court’s finding that a Medium Enterprise may make a reference to the MSEFC if it had Micro or Small Enterprise status at the time of entering into the agreement, is in line with previous Supreme Court decisions. However, the Court’s reference to the notification of the Ministry of Micro, Small and Medium Enterprises dated 18.10.2022 is noteworthy. The notification says that in case of an enterprise’s upward change and consequent re-classification, it shall continue to avail of all non-tax benefits of the category it was before the re-classification, for a period of 3 years from the date of such upward change. The Court found, that in light of this notification too, an enterprise which acquired Medium status only in 2019, was entitled to avail the benefits of the MSMED Act as if it were a Micro or Small Enterprise until 2022. The implication of this on Medium Enterprises that wish to approach the MSEFC with claims arising from agreements that were entered into within 3 years of them acquiring Medium status, may be significant and remains to be seen.

Disclaimer: The information contained in this document is intended for informational purposes only and does not constitute legal opinion or advice. This document is not intended to address the circumstances of any individual or corporate body. Readers should not act on the information provided herein without appropriate professional advice after a thorough examination of the facts and circumstances of a situation. There can be no assurance that the judicial/quasi-judicial authorities may not take a position contrary to the views mentioned herein.

We hope you have found this information useful. For any queries/clarifications please write to us at insights@elp-in.com  or write to our authors:

Ashna Contractor, Senior Associate – Email –  ashnacontractor@elp-in.com
Atharva Diwe, Associate – Email – atharvadiwe@elp-in.com

References:
[1] Pronounced on 05 July 2023 by the Delhi High Court in W.P.(C) 11233/2021 and CM APPL. 34581
[2] Pronounced on 05 July 2023 by the Delhi High Court in W.P.(C) 13758/2021 and CM APPL. 43444/2021
[3] 2021 SCC OnLine SC 439