The resolution of disputes by arbitration has become one of the preferred modes of dispute resolution in India. The reasons for the popularity of arbitration as a mode of dispute resolution are three-fold: one, arbitration provides for a quick resolution of the disputes between the parties by a mutually (sometimes also unilaterally appointed) appointed arbitrator(s), respecting party autonomy and consent of the parties; two, the evolution of arbitration-friendly approach of courts and legislature in India; and three, the provisions of compulsory/optional arbitration under different statutory instruments in India. The Micro, Small and Medium Enterprises Act, 2006 (MSMED Act) passed by the Indian Parliament with the objective of the promotion, development, and enhancement of competitiveness of micro, small and medium enterprises enunciates statutory arbitration as a recovery mechanism in cases of disputes concerning payment of dues between the parties.
One of the central objectives of the MSMED Act is to provide for speedy disposal of the claims of the suppliers (micro, small and medium enterprises under the MSMED Act) with regards to recovery of dues. Chapter V of the MSMED Act enacts the provisions regarding delayed payments to MSMEs. Section 18 of the MSMED Act lays down the procedure to be followed for the resolution of disputes concerning payments due to be paid by a buyer to a supplier under the MSMED Act. Section 18 of Chapter V enunciates a two-tier dispute resolution mechanism for the settlement of payment disputes between the parties: first, the parties may make a reference to the Micro and Small Enterprises Facilitation Council (Facilitation Council) and the Facilitation Council shall then, either itself or through any other institution or centre providing alternate dispute resolution services, conduct conciliation in the matter under the provisions of Part III of the Arbitration and Conciliation Act, 1996 (ACA); and second, if the conciliation is unsuccessful and there is no settlement of disputes between the parties, the Felicitation Council is mandated to either itself conduct an arbitration or refer the parties to any institution or centre for conducting such arbitration under the provisions of ACA.
Recently, the Hon’ble Supreme Court of India (SCI) in M/s Silpi Industries & Ors. v. Kerala State Road Transport Corporation & Ors., Civil Appeals Nos. 1570-1578 of 2021 (Silpi Industries) decided upon two important questions of law regarding statutory arbitration under the MSMED Act read with the ACA. The following were the questions answered by the SCI in its judgement: (1) Whether or not the provisions of the Indian Limitation Act, 1963 apply to arbitration proceedings initiated under Section 18(3) of the MSMED Act; and (2) Whether or not, a counter-claim is maintainable in such arbitration proceedings. In this article, the authors shall be analysing the judgement of the SCI in Silpi Industries, and its potential implication on Micro and Small industries registered and unregistered under the MSMED Act.
FACTUAL MATRIX
There were two batches of appeals heard by the SCI in Silpi Industries. In the first batch of appeals, the appellants were aggrieved by the judgement of the High Court (HC) of Kerala in an arbitration appeal matter wherein the HC had held that Limitation Act, 1963 is applicable on proceedings initiated under Section 18(3) of the MSMED Act read together with ACA. Further, following the judgement of the Allahabad HC in M/s B.H.P. Engineers Pvt. Ltd. v. Director, Industries, UP Facilitation Centre, Kanpur & Ors., 2009 SCC OnLine All 565 and the Nagpur Bench of Bombay HC in M/s Steel Authority of India Ltd. & Anr. v. Micro, Small Enterprise Facilitation Council, 2010 SCC OnLine Bom 2208, the Kerala HC had held that owing to the provisions of Section 23(2A) of the ACA, counterclaim and set off is maintainable in an arbitration proceeding arising out of institutional arbitration under Section 18(3) of the MSMED Act.
In the second batch of appeals, i.e., Civil Appeals No. 1620-22 of 2021, the appellant was aggrieved by the judgement of the Madras HC in which a second arbitrator was appointed by the HC under Section 11(6) of the ACA. The relevant facts were such that the appellants had filed a claim petition against the respondent before the Facilitation Council under the MSMED Act. Although the respondent appeared before the Facilitation Council, the respondent, in furtherance of its arbitration agreement with the appellant, had made an application before the Madras HC for the appointment of a second arbitrator under Section 11(6) of the ACA. The Madras HC allowed the application of the respondent for the appointment of a second arbitrator, and owing to the provisions of the MSMED Act, did not agree with the case of the appellant that the application of respondent is liable to be dismissed given the pending claim petition before the Facilitation Council. Aggrieved by the order of the Madras HC, the appellant had preferred Civil Appeals No. 1620-22 before the SCI.
ANALYSIS
Applicability of Limitation Act, 1963 on arbitral proceedings under the MSMED Act-
To begin with, the first issue which concerns the applicability of the Limitation Act on the arbitral proceedings under the MSMED Act, the Supreme Court concurred with the decision of the High Court and reiterated the ratio laid down in one of its previous judgments. Taking note of the provisions of Section 43 of the ACA, the SCI propounded that Limitation Act, 1963 will also be applicable on arbitrations arising out of Section 18(3) of the MSMED Act. The apex court observed that when the parties to a dispute, one of whom is qualified as an MSME enterprise, fail to come to terms under the MSMED Act, Section 18(3) of MSMED Act obliges the Facilitation Council to refer the parties to arbitration as per the ACA. Once arbitration is invoked as per Section 18(3) of the MSMED Act, all the provisions of the ACA will automatically become applicable to it. Accordingly, every such arbitral proceeding shall be deemed to be construed as arising out of an arbitration agreement stipulated under Section 7(1) of ACA, even when the parties had not incorporated such arbitration agreement at the time of entering into a contract. The stance taken by the Supreme Court on this particular issue seems to be settled from the beginning as a variety of judgments by courts ranging from High Courts to the Supreme Court have consistently followed this approach. Furthermore, a contrary view to the above-stated position is not feasible as the law on such an issue is clear, categorical, and longstanding. Any contrary view would sabotage the primary purpose of limitation contemplated under the Limitation Act, 1963.
Maintainability of counter-claim & set-off in an arbitration proceeding under the MSMED Act-
Another very important aspect that constitutes the heart of the judgment is the issue of the maintainability of counterclaim in arbitral proceedings initiated under Section 18(3) of the MSMED Act. In this regard, the Court had delved into the legislative intent underlying the MSMED Act, 2006 which is to safeguard the interests of the MSMEs. The said legislation confers benefits upon the sellers which qualify to be MSMEs, in pursuance of a beneficial object that it purports. Such conferment of benefits can find its roots within various provisions of Chapter V of MSMED Act which not only prescribes the rights and obligations of the seller and the buyer, respectively, but it also provides for the mechanism for recovery of any unpaid amount to the seller. Sections 15 and 17 of the MSMED Act 2006 require the buyer to make payment of the amount due to the seller (MSME) within the time agreed by the parties or time prescribed under the Act, failure of which would render the buyer liable to pay the due amount in addition to compound interest at the rate three times of the bank rate. Additionally, Section 19 enables the buyer/applicant to apply for setting aside an award, decree, or order passed in favour of the seller, only when she deposits 75% of the amount in terms of the award or decree.
Given the aforesaid provisions, the court opined that ousting the jurisdiction of the Facilitation Council merely on the ground of inadmissibility of the counterclaim by the buyer/Respondent under proceedings under section 18(3) of MSMED Act would defeat the very purpose of the MSMED Act as the seller (MSME) would not be able to enforce its rights against the buyer in case of any default in payment by the latter. That is to say, if counter-claim is not allowed, the buyer can easily evade its statutory obligation of payment of compound interest at the rate three times of the bank rate and security deposit of 75% envisaged under Sections 16 and 19 of MSMED, respectively, by filing a counter-claim in the proceedings under Section 18(3) of MSMED Act. Such a decision implies that even when there is a separate agreement for the resolution of disputes between the parties, the parties are bound to follow the recovery mechanism stipulated under the statute of the MSMED Act.
The mechanism for the recovery of the unpaid amount provided within Section 18 of MSMED Act stipulates that in case of any dispute with regards to the non-payment of amount due to the seller, any party may refer to the Facilitation Council which will then conduct conciliation between the parties as per subsection (2) Section 18 of MSMED Act. It is only when the parties fail to conciliate, the parties are mandatorily referred to arbitration under Section 18(3) as a result of which all the provisions of ACA will become applicable to such arbitration as if there is an arbitration agreement between the parties under Section 7(1) of ACA. While making special reference to Section 23(2A) of the ACA, the Supreme Court has highlighted that when there is already a provision for filing a counterclaim under Section 23(2A) of the ACA, there is no point in denying the right of the buyer/respondent to file a counterclaim in the arbitration proceedings before the Facilitation Council under Section 18(3) of MSMED Act. The rationale behind the insertion of the provision of counterclaim within the ACA was to prevent multiplicity of proceedings and diverse claims. Curtailing the right of buyer/respondent in the arbitration proceedings under Section 18(3) would initiate parallel proceedings in distinct forums. In this way, the seller who is a beneficiary under the MSMED Act would claim before Facilitation Council under the provisions of the MSMED Act, while the buyer would either approach the civil court for making its claims or seek the appointment of an arbitrator if there is an arbitration agreement between the parties. Hence, refusal to admit the counterclaim in the arbitral proceedings before the Facilitation Council under Section 18(3) of MSMED Act, 2006 will lead to conflicting findings by different forums and render such proceedings redundant.