Delhi High Court: Disputes Of Entities Registered Under MSME Occurring Before Registration Cannot Be Referred to MSME Arbitration

Delhi High Court: Disputes Of Entities Registered Under MSME Occurring Before Registration Cannot Be Referred to MSME Arbitration

In a ruling by Justice Subramonium Prasad of the Delhi High Court, it was determined that an organization registered under the Micro, Small, and Medium Enterprises Development Act, 2006, (MSME Act) subsequent to the initiation of a contract cannot be directed to arbitration by the MSME Council under Sections 17 and 18 of the Act for claims that arose prior to its registration. The court emphasized that this objection must be raised before the arbitrator in accordance with the provisions of the Arbitration and Conciliation Act, 1996.

Respondent No. 3 received a Letter of Intent from the Petitioner Mahanagar Telephone Nigam Ltd., for Architectural Consultancy Services related to a construction project, with a consultancy fee set at 2.95% of the project's estimated cost. Despite submitting architectural drawings and invoicing for completed work, the Petitioner failed to make timely payments. Respondent No. 3, aggrieved by this, initiated arbitration through the MSME Council claiming non-payment of a total sum of Rs. 2,15,96,273.86. The dispute was subsequently referred to the Delhi International Arbitration Centre (DIAC) for resolution. In response, the Petitioner approached the Delhi High Court and lodged a writ petition contesting the MSME Council's decision to refer the dispute to arbitration.

The Petitioner maintained that it was not registered as MSME at the time of contract inception, thus asserting that the referral of the dispute to DIAC by the MSME Council was illegitimate. Furthermore, it argued that benefits conferred by the MSME Act cannot be pursued unless the entity is officially registered as an MSME.

The High Court observed that Sections 17 and 18 of the MSME Act establish a cost-effective dispute resolution mechanism aimed at recovering unpaid dues owed to suppliers, notably micro, small, and medium-level enterprises. It noted that these sections afford such enterprises the entitlement to have their disputes adjudicated by Facilitation Councils, regardless of any conflicting contractual provisions.

The High Court addressed the question of whether an enterprise, although not registered at the time of entering into a contract but registered subsequently during the contract's term, is eligible for benefits under the MSME Act. In doing so, it referenced Supreme Court rulings in Silpi Industries v. Kerala State Road Transport Corporation and Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited . The High Court observed that if registration is acquired subsequently, its effects would be prospective. Consequently, the MSME Act would apply only to goods and services supplied after registration.

Hence, the High Court concluded that the benefits afforded by the MSME Act do not retroactively apply in cases where registration is acquired after the commencement of the contract.

The High Court observed that the contract originated in 2006, and Respondent No. 3 registered as a micro-enterprise in 2018, with only one RA bill issued after registration. However, the High Court determined that assessing the services rendered after registration and examining the contract's nature involved complex legal and factual considerations. Consequently, the High Court concluded that these matters should be brought before the arbitrator by submitting relevant applications under the Arbitration & Conciliation Act, 1996. Accordingly, the High Court dismissed the writ petition.

Case Title: Mahanagar Telephone Nigam Ltd. v. Delhi International Arbitration Centre, Through Its Co-Ordinator & Ors.