Gujarat High Court: Dispute Between Supplier and Buyer being MSME May be Referred to Facilitation Council in Accordance with Arbitration Act

Gujarat High Court: Dispute Between Supplier and Buyer being MSME May be Referred to Facilitation Council in Accordance with Arbitration Act

The Gujarat High Court by its single judge Justice Biren Vaishnav observed that merely because the borrower happened to be a Micro, Small & Medium Enterprises (MSME) the same would not be governed by the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), including the arbitral mechanism envisaged under the said Act.

In the present case the petitioner- Indian Bank, issued a term loan in favor of respondent no.2, M/s Ekta Enterprise, who allegedly defaulted in payment of the loan and therefore, the same was declared as a non-performing asset.

Subsequently, under Section 13(2) of the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 (SARFAESI Act) a notice was issued for recovery of the amount was issued by the bank. Later the respondent no. 2 failed to pay the amount, a notice under Section 13(4) of the SARFAESI Act was issued, proposing to take symbolic possession of the immovable properties of the respondent no.2 which was mortgaged to the bank.

Aggrieved by these notices, the respondent no.2 approached the respondent no.1 Shri Morris Samuel Christian 'Sole Arbitrator' who by an interim award dated 11.11.2020 granted a stay of the notices under the SARFAESI Act. This led the petitioner to file the present petition.

Mr.Neeraj Vasu learned counsel for the petitioner submitted that, without invoking the remedy available to the respondent no.2 of approaching the Debt Recovery Tribunal under Section 17 of the SARFAESI Act, the respondent no.2 invoked the jurisdiction of the Sole Arbitrator. He further submitted that an arbitrator can be appointed only when the parties to the contract mutually agree to such appointment, that too, if there is a stipulation for arbitration in a contract entered into between the parties.

According to him neither there was a contract between the parties and more so, the contract never provided for an arbitration clause so as to subject the dispute referred to at the hands of the respondent no.2 to arbitration. Lastly, the counsel submitted that this was a case of a bank being the creditor and the respondent no.2 who had availed of such loan and based on the outstanding amounts that the respondent no.2 owed to the bank, provisions of the SARFAESI Act were invoked and the Arbitration and Conciliation Act, 1996, (A&C Act) had no role to play in the mechanism to resolve the dispute.

The respondent no. 2, Ekta Enterprise, claimed before the Court that it is a small enterprise who was granted the loan for being an MSME. Referring to Sections 15, 16 and 17 of the MSMED Act, it averred that being an MSME, the arbitral mechanism provided under the MSMED Act could be invoked to resolve the dispute between the parties.

The Court noted that under the mechanism of the SARFAESI Act, on a notice issued under Section 13, remedy is provided to any person who is aggrieved by the measures so taken for seeking resort to Section 17 of the Act. Having failed to invoke such provisions as required under Section 17 of the Act, on this first count alone, it was not open for the respondent no.2 to invoke the jurisdiction of 'the Sole Arbitrator' as was so done, stated the Court.

Next the Court dealt with the question that whether even otherwise, could the respondent no.2 invoke the arbitration clause, if any, in a contract between the parties, if any.

The Court reiterated that before the two parties which is the matter of dispute was a loan transferred between the bank and the borrower had failed to honor the terms of the loan agreement and repay the amount. The contention of the other side - the borrower is that the loan agreement itself had an inbuilt clause providing for resorting to arbitration.

The Court observed, "it is only when a dispute arises with regard to adjustment, settlement or a compromise in connection with the dispute between an insurance company and the insured that the arbitration clause would come into play. Therefore, existence of a clause cannot be said to be an inbuilt mechanism provided in the term loan agreement in context of the borrowings and therefore invocation of the arbitration and the proceedings thereunder which were held continued and resulted in passing of the award are totally without jurisdiction."

Moreover, the Court with respect to the contention raised by the respective parties that it being an MSME and therefore ipso-facto being a dispute falling for consideration with the arbitrator.

The judge explained that, MSME Act 2006 was an act provided for facilitating the permission and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith. Sections 15, 16 and 17 of the MSME Act when read indicate that when there is a transaction or a contract between a supplier or a buyer of goods and services, payments had to be made in accordance with the schedule, failing which, such payments shall accrue interest.

The Court while holding the contention of the counsel for the respondents purely misconceived observed, "in the event a dispute arises between the parties i.e., the supplier and the buyer of goods or services, the dispute may be referred to a facilitation council which would adjudicate upon the dispute in accordance with the provisions of the Arbitration Act. Essentially this is a mechanism to resolve disputes between the suppliers and buyers of goods and services inter-se between the two enterprises and not in the nature of the dispute of a loan transaction which is a subject matter of a special Act that is the SARFAESI Act, 2002. Merely because the borrower happens to be an MSME would not be governed by the provisions of the Act in question."

The Court was of the view that Sole Arbitrator had a completely misconceived notion regarding the existence of an arbitration agreement. The Court found that there was nothing on record to indicate that the parties had agreed to appoint the respondent no.1 as the Sole Arbitrator or that the mechanism under Section 11 of the A&C Act was resorted to by the borrower/2nd respondent to appoint the said Sole Arbitrator.

The Court referred to the decision passed by the Division Bench of Gujarat High Court in Varshaben Naranbhai Dantani vs. Radheshyam Tarachand Agarwal (2022) held, when it comes to adjudication of such awards passed by this masquerading Arbitrator – respondent no.1, this Court under Article 226 of the Constitution of India has to step in and set aside such award passed by an arbitrator 'Sole Arbitrator' who is in fact not 'Sole' but 'Self Appointed Arbitrator.'

For the aforesaid reasons, the Court allowed the petition and set aside the arbitral award.