Supreme Court decides ‘Whether the Provisions contained in Chapter V of the MSME Act, 2006 with regard to Delayed Payments to Micro and Small Enterprises would have precedence over the provisions contained in the Arbitration Act, 1996?’

The Hon’ble Supreme Court recently decided 7 Appeals in the case of Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., though factually distinct, however, involving common questions of law.

Upon hearing and considering the submissions, both in favour and against the proposition that ‘the provisions regarding delayed payments under the MSME Act would have precedence over the provisions of the Arbitration Act, the Apex Court observed and held the following’:

Chapter-V of the MSME Act would override the provisions of the Arbitration Act having been enacted subsequent to the enactment of the Arbitration Act and more particularly in view of Section 24 of the MSME Act which specifically gives an overriding effect to the provisions of Sections 15 to 23 of the Act over any other law for the time being in force, which would also include Arbitration Act.

Once the statutory mechanism under sub-section (1) of Section 18 is triggered by any party, it would override any other agreement independently entered into between the parties, including an Arbitration Agreement. Therefore, even in the existence of an Arbitration Agreement, any party can resort to making a reference to the Micro and Small Enterprises Facilitation Council (“Facilitation Council”) under Section 18 of the MSME Act.

The provisions of Arbitration Act would apply to the proceedings conducted by the Facilitation Council only after the process of conciliation initiated by the same under Section 18(2) fails. Further, the Facilitation Council either can itself take up the dispute for arbitration or refer it to any institute or centre for such arbitration as contemplated under Section 18(3) of the MSME Act and would be competent to rule on its own jurisdiction as also other issues in view of Section 16 of the Arbitration Act.

The Facilitation Council, which initiates the conciliation proceedings under Section 18(2) of the MSME Act would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act.

A party who is not a ‘Supplier’ as per the definition contained in Section 2(n) of the MSME Act on the date of entering into contract cannot seek any benefit as the ‘Supplier’ under the MSME Act. If any registration is obtained subsequently, the same would have a prospective effect and would apply to the supply of goods and rendering services subsequent to the said registration.