Allahabad High Court: Registration under the MSMED Act for Financial Activity Necessary to Provide Financial Services under Section 22 of the Act

Allahabad High Court: Registration under the MSMED Act for Financial Activity Necessary to Provide Financial Services under Section 22 of the Act

The Allahabad High Court has determined that the petitioner’s loan cannot be subject to recovery under the U.P. Regulation of Cold Storage Act, 1976, and the Micro, Small, and Medium Enterprises Development Act, 2006, (MSMED Act) unless proper registration for financial services under Section 22 of these acts is obtained. In the absence of such registration, the court deemed the loan to be a private contract outside the scope of the mentioned laws.

The bench consisting of Justices Mahesh Chandra Tripathi and Prashant Kumar observed that for the petitioner to avail the provisions of the MSMED Act, particularly regarding financial services under Section 22 of the U.P. Regulation of Cold Storage Act, 1976, they need to be registered under the MSMED Act for ‘financial activity’. Since the petitioner failed to provide an explanation for such registration, it was inferred that they were not registered for financial activity under the MSMED Act.

Given this lack of registration and the existence of a private agreement between the petitioner and the respondents, the court concluded that the petitioner could not seek recovery for an alleged loan granted under Section 22 of the U.P. Regulation of Cold Storage Act, 1976, using the provisions of the MSMED Act. Essentially, without proper registration under the MSMED Act for financial activity, the petitioner’s claim for loan recovery under the MSMED Act is not tenable.

The petitioner operates a cold storage facility in Shivrajpur, where local farmers store their potatoes in exchange for a fee. Additionally, the petitioner offers financial aid to farmers who utilize their storage services, aiding them in planting new crops after storing their produce in the petitioner’s facility.

The respondent farmers stored their crops at the petitioner’s storage facility and borrowed Rs. 4,09,022/- from the petitioner. However, when the respondent farmers defaulted on their loan payments, the petitioner filed a claim petition with the U.P. Micro, Small, and Medium Enterprises Facilitation Council, Kanpur Nagar, under the MSMED Act, 2006, seeking recovery of the loan amount along with accrued interest.

In the course of conciliation proceedings, the respondent farmers failed to participate, resulting in an inconclusive resolution. Subsequently, the matter was referred to arbitration, As the Council deliberated on the petitioner’s claim, two pivotal issues were framed for adjudication: firstly, determining the entitlement to the principal amount, and secondly, addressing the question of entitlement to interest.

The Council determined that based on the petitioner’s Udyog Aadhar Registration Certificate, their business activities were limited to running warehousing and storage facilities. Additionally, there was a lack of documentation to substantiate the loan extended by the petitioner to the respondent farmers. Moreover, the Council concluded that, under the provisions of the MSMED Act, it lacked jurisdiction to address issues related to the recovery of loans or financial services. Consequently, the Council directed the petitioner to pursue an alternative legal recourse for resolution.

The Council ruled against the petitioner on the matter of interest, citing that since no principal amount was demonstrated to be outstanding, the question of interest did not warrant consideration in favor of the petitioner.

The counsel representing the petitioner contended that Section 22 of the U.P. Regulation of Cold Storage Act, 1976, grants the petitioner company the authority to provide financial services to individuals engaged in business or agricultural activities, such as storing agricultural produce. It was further argued that since the cold storage operations of the petitioner fall within the purview of the MSMED Act, the recovery of financial services provided by the petitioner is permissible under Section 24 of the MSMED Act, which stipulates an overriding effect.

The petitioner’s argument is that both banking regulations and the provisions of the U.P. Regulation of Cold Storage Act, 1976, authorize the petitioner to offer short-term financial assistance to farmers to cover their expenses. Additionally, it was emphasized that there exists an amicable agreement between the petitioner and the farmers regarding such financial arrangements. Further, the argument was presented that since the petitioner is duly registered under the MSMED Act, the Council possesses the requisite jurisdiction to adjudicate on the matter at hand.

The counsel representing the respondent argued that according to the petitioner’s Udyog Aadhar Registration Certificate, the petitioner is solely registered for warehousing and storage services, with no authorization for providing financial services. Therefore, it was asserted that the Council lacked jurisdiction to adjudicate on the matter under the MSMED Act, as it pertained to financial services not covered by the petitioner’s registration.

The court delineated three key issues for its deliberation: Firstly, whether the loan and financial services fell within the ambit of activities associated with ‘Cold Storage’; secondly, whether the petitioner was duly registered to provide financial services under the MSMED Act; and finally, whether the writ petition was legally sustainable.

Regarding the maintainability of the writ petition, the Court concluded that it was indeed maintainable. This decision was grounded in the fact that the Facilitation Council had declined to address the matter, and no award had been issued in accordance with the provisions of the MSMED Act.

Section 22 of the U.P. Regulation of Cold Storage Act, 1976 stipulates the conditions for lending money by the licensee (owner/operator) of a cold storage facility to a hirer (individual storing goods in the facility). According to this section, if money is lent by the licensee to a hirer against the goods stored in the cold storage, the interest rate charged cannot exceed one-half of one percent per annum simple interest over the prevailing rate of interest charged by the State Bank of India at the time of the loan. This provision ensures that the interest rates charged by the licensee remain reasonable and are not excessively higher than the prevailing market rates for similar purposes.

The Court noted that the loan in question was provided at an interest rate of 18% per annum, which significantly exceeded the rate charged by the State Bank of India. The Court concluded that the terms of the loan, which included a condition that in case of non-payment, the farmer would have to deposit his goods in the next season as well, did not fall within the scope of Section 22 of the U.P. Regulation of Cold Storage Act, 1976. Section 22 specifically outlines limitations on the interest rates for loans against goods stored in cold storage, and the observed terms of the loan did not align with the conditions specified in that section.

The Court ruled that in order to provide loans, the petitioner was required to be registered under the MSMED Act for offering financial activities. As the petitioner had not obtained such registration, the court determined that the petitioner could not pursue recovery of the purported loan extended to the respondent farmers.

The Court determined that the U.P. Regulation of Cold Storage (Licensing) Rules, 1976, established under the Act of 1976, outline the terms and conditions of licensing for cold storage facilities. These rules include specifications for cold storage operations but do not encompass the provision of credit facilities. Therefore, the Court concluded that the petitioner, by providing credit facilities without being registered under the appropriate legislation, was acting beyond the scope of the regulations governing cold storage facilities.

The court observed that “the grant of a loan is not incidental to a cold storage service, which is explicit from a bare perusal of the definition clauses, the license, terms and conditions, and specification of cold storage. Therefore, cold storage service and credit facilities by pledging the produce stored in the cold storage are two different services that are not directly linked with each other. Therefore, the grant of loan will not be covered under cold storage services.”

In accordance with the findings, the court concluded that no loan was owed to the petitioner. Consequently, the Court dismissed the writ petition, asserting that the Facilitation Council lacked jurisdiction over unregistered services purportedly provided by the petitioner.