A Division Bench of the Supreme Court comprising of Chief Justice UU Lalit and Justice Bela M. Trivedi today held that the reference to the Facilitation Council is maintainable despite the existence of an independent arbitration agreement between the parties to whom the Micro, Small and Medium Enterprises Development Act, 2006 applies.

The court observed that "The Facilitation Council, which had initiated the Conciliation proceedings under Section 18(2) of the MSMED Act, 2006 would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act."

The division bench also held that "a party who was not the "supplier" as per Section 2 (n) of the MSMED Act, 2006 on the date of entering into the contract, could not seek any benefit as a supplier under the MSMED Act, 2006. A party cannot become a micro or small enterprise or a supplier to claim the benefit under the MSMED Act, 2006 by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods or rendering services. If any registration is obtained subsequently, the same would have the effect prospectively and would apply for the supply of goods and rendering services subsequent to the registration. The same cannot operate retrospectively. However, such issue being jurisdictional issue, if raised could also be decided by the Facilitation Council/Institute/Centre acting as an arbitral tribunal under the MSMED Act, 2006."

The buyers contended before the Apex Court that the remedy of referral to the facilitation council would be available only if there was no clause in the contract providing for dispute resolution through arbitration under the Arbitration Act, 1996. On behalf of the suppliers, it was argued that Section 18 of the MSMED Act, 2006 gives the party a statutory right to approach the council and that such a right cannot be revoked simply because the parties entered into an arbitration agreement.

The issues that were raised before the court were:

(i) Would the provisions of Chapter V of the MSMED Act, 2006 supersede the provisions of the Arbitration Act, 1996?

(ii) Whether any party to a dispute over any amount due under Section 17 of the MSMED Act, 2006 would be barred from referring the matter to the Micro and Small Enterprises Facilitation Council under sub-section (1) of Section 18 of the said Act if the parties had entered into an independent arbitration agreement as contemplated by Section 7 of the Arbitration Act, 1996?

(iii) In light of the bar contained in Section 80 of the Arbitration Act, 1996, could the Micro and Small Enterprises Facilitation Council itself take up the dispute for arbitration and act as an arbitrator when the council itself had conducted the conciliation proceedings under sub-section (2) of Section 18 of the MSMED Act, 2006? 

Case Details:-

SLP (C) No. 12884/2020

Gujarat State Civil Supplies Corporation vs Mahakali Foods Pvt. Ltd.