(Prayer: Civil Revision Petitions filed under Article 227 of the Constitution of India challenging the proceedings in MSEFC/CR/43/2018, MSEFC/CR/39/2018, MSEFC/CR/42/2018, MSEFC/CR/40/2018, MSEFC/CR/41/2018, MSEFC/CR/37/2018 respectively, on the file of the MSME Council, under the MSMED Act, 2006.)
1. Challenging the summons issued by the First Respondent for hearing dated 20.11.2018 as one of without jurisdiction, the above Civil Revision Petitions have been preferred.
2. The Petitioner is a buyer in terms of Section 2(d) of Micro, Small and Medium Enterprises Development Act, 2006 (hereinafter called “the Act”). The Second Respondent supplied goods to the Petitioner, as such it falls within the definition “Supplier” under Section 2(n) of the Act. The crucial dispute involved in this case is as to whether the Second Respondent falls within the definition of Section 2(n) and about maintainability, scope and jurisdiction of reference before the Council constituted as per Section 20 of the Act.
3. According to the learned Senior Counsel appearing for the Petitioner, the Petition filed by the Second Respondent before the First Respondent “Council” is not maintainable for the reason that the Second Respondent was not a registered entrepreneur as per the Act on the date of agreement between them and is bound by the conditions of the Contract entered between the parties. The Act will apply only in respect of the Agreements entered between the parties after the registration and the Council will have jurisdiction only for the Contracts entered between the parties. As such, the Second Respondent cannot be construed as a “Supplier”. Therefore, the Council has no jurisdiction to entertain the present Petition. Apart from that, the claim is barred by limitation, which issue can be decided only by a Competent Civil Court or through arbitration. The Scheme of the Act is unilateral and confers blanket power on the Council safeguarding the interest of the “supplier” alone and leaves the buyer unarmed without any protection. Insofar as it does not provide any safeguard and protection to the buyers even to defend the illegal claims, it is arbitrary and ultra vires and liable to be struck down. In support of his contention, he would rely on the Judgment of this Court in Prodigy Hydro Power Pvt. Ltd. v. N.S. Thiruvambalam, O.P. No.617 of 2017 dated 6.9.2017.
4. Countering the contention, the learned Counsel for the Second Respondent would contend that there is no dispute with regard to the factum of supply of materials by the Second Respondent and purchase made by the Petitioner and the outstanding to be paid. It is also not disputed that the Second Respondent is a supplier as per Section 2(n) and a registered entrepreneur on the dates of supplies made and received by the Petitioner herein. The only dispute is as to whether the Second Respondent is entitled to avail the benefits of the provisions of the Act or is bound only by the terms and conditions of the agreement between the parties.
5. In Ramky Infrastructure Private Limited v. Micro and Small Enterprises Facilitation Council and another, W.P.(C) No.5004 of 2017 & C.M. No.21615 of 2017, dated 4.7.2018, the High Court of Delhi has elaborately discussed the issue and held that so long as there is supply of goods or services by the Micro or Small Enterprises falling within the purview of Section 2(n)(iii), reference under Section 18 is available to the “Supplier”. Hence, he would contend that the contention of the purchaser that the benevolence of the provisions are not applicable in this case is not sustainable. The very Act has been enacted for the object of providing an appropriate legal frame work for sector to facilitate its growth and development. In order to promote, develop and enhance competitiveness of Small, Medium enterprises and to create funds, ensure smooth and timely flow of credit and to improve payment of interest on delay payments to minimize sickness. Only with the above objects, to bring in the Micro, Small and Medium Enterprises, in a single frame, the Act has been enacted. The Judgment of this Court in Prodigy Hydro Power Limited v. Khyaati Engineering, 2017 SCC online (Mad), dated 4.7.2018, does not apply to the case on hand and it was decided on a different context. As long as it does not discuss the scope and ambit of Section 2(n)(iii) of the Act, it does not have binding effect. Therefore, according to him, the Revision Petitions are liable to be dismissed.
6. Heard the submissions of both sides.
7. The issues arise for consideration is (i) as to whether the Second Respondent can be construed as "Supplier", as defined under Section 2(n) of the Act or not? and (ii) as to whether the Act of the safeguards deprives the buyer from defending the unilateral, exorbitant and illegal claims made by the supplier.
8. There is no dispute about the registration of the Second Respondent as an entrepreneur. The dispute is only with the date of registration and scope and jurisdiction of the Council constituted as per Section 20 of the Act. It is beneficial to look into the words and their meaning provided under the definitions under Section 2.
9. Sub-section (b) reads as under:
"2(b). "appointed day" means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier."
10. A reading of the above definition makes it very clear that the date of supply of goods or any services by a buyer from supplier is relevant and not the date of registration.
11. As per sub-section (d), "buyer" means whoever buys any goods or receives any services from a supplier for consideration."
12. As per sub-section (n), "supplier" means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes:
(i) the National Small Industries Development Corporation, being a company, registered under the Companies Act, 1956 (1 of 1956);
(ii) the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a Company Registered under the Companies Act, 1956 (1 of 1956);
(iii) any company, cooperative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.
13. As per the above definitions, as observed above, there is no dispute with regard to registration of the Second Respondent and its classification as entrepreneur under Section 7(1)(a) of the Act. As long as the Petitioner buying the goods from the Second Respondent, who is a registered entrepreneur, he shall be construed as a "buyer" within the ambit of Section 2(d) and the Second Respondent as "supplier" under Section 2(n) of the Act. The date of supply and acceptance of the goods as defined under Section 2(b) is the relevant factor. In that view of the matter, for making a reference, it is enough that the supplier was a registered entrepreneur on the date of supply of goods and payments fell due. The Agreement entered between the parties will be relevant at the time of negotiations or conciliation or Arbitration or during resolution through other methods of Alternative Dispute Resolution. As such, the Agreement will not stand in the way of making reference.
14. Section 15 amplifies the position further. Section 15 reads as under:
"15. Liability of buyer to make payment.-Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance."
15. As per the above provision, the buyer is liable to make payment on the agreed date as per the Agreement between the parties and if there is no Agreement in this behalf, before the appointed day. Proviso to the above Section makes it mandatory that payment shall not exceed forty five days from the day of acceptance.
16. Therefore, any supplier supplies the good and any buyer purchases the goods, irrespective of Agreement, is liable to make payment within the agreed time limit. The Judgment relied on by the Petitioner in Prodigy Hydro Power Pvt. Ltd. v. N.S. Thiruvambalam, O.P. No.617 of 2017, dated 6.9.2017, dealt with an application under Section 11(6) of Arbitration and Conciliation Act, wherein, it is observed as under:
"6. I find force in the Petitioner's arguments. The Respondent is a -supplier-, as per the definition of the term under Section 2(n) of the Micro, Small and Medium Enterprises Development Act, 2006 (in short-MSMED Act-). The recovery of amounts due are dealt with in terms of Section 17 of the MSMED Act in the following terms:
"17. Recovery of amount due.-For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under Section 16."
7. Thereafter, Section 18 dealing with-Reference to the Micro and Small Enterprises Facilitation Council-states in sub-section (1) that, notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under Section 17, make a reference to the Micro and Small Enterprises Facilitation Council. Sections 17 & 18 read in conjunction appear to indicate that it is only the supplier that is entitled to approach the Council and as such, the proceedings before the Council do not include the adjudication of claims by any other party to the transaction.
8. Moreover, I note that the Respondent has, in fact, registered itself as a member of the MSMEDC only on 25.3.2015, much after the date of Contract between the parties which is 23.7.2011. As such, the parties have, at the time of entering into the Contract Agreement crystallized a certain procedure for the resolution of disputes that does not include within its ambit resort to the MSMEDC. A party cannot, unilaterally, and by a subsequent act frustrate or modify the terms consciously agreed upon by the parties originally. Thus, I am of the considered view that the present Petition is liable to be ordered.“
17. In the above case, the Hon'ble Judge dealt with a situation, where appointment of arbitrator under Section 11(6) of the Arbitration and Conciliation Act, 1996, was sought for by the Petitioner. Even as per the scheme of MSMED Act, if the matter is not settled in conciliation, the method of alternate dispute resolution has to be adopted. The Petitioner in the above cited Judgment invoked the Arbitration clause. In that case, the matter had crossed the stage of conciliation and reached the stage of resolution of dispute by Arbitration as per the terms of Contract. At that stage, it is observed that a supplier cannot take shelter under the provision of Section 18 and seek to start the proceedings from the beginning and he is bound by the conditions of Contract. But, in the present case, the issue is entirely different. Here, the reference under Section 18 of the Act is under question. The Petitioner has not invoked the Arbitration clause or taken any preliminary measures for invoking the provisions of Arbitration and Conciliation Act. Still, the case is in the beginning stage of conciliation. By participating in conciliation proceedings, no prejudice will be caused to the Petitioner. Hence, the above Judgment is not applicable to the instant case. As rightly contended by the learned Counsel for the Second Respondent, it was decided on a different context.
18. Therefore, the contention that the”supplier“namely the Second Respondent is bound only by the Agreement and he is not entitled to make a reference is not sustainable and the further contention that the Council has no jurisdiction, cannot also be accepted. The same view has been expressed in Ramky Infrastructure Private Limited v. Micro and Small Enterprises Facilitation Council and another, W.P.(C) No.5004/2017 & C.M. No.21615 of 2017 dated 4.7.2018, wherein the High Court of Delhi observed as under:
”13. In view of the above, it is necessary that the disputes that can be referred under Section 18(1) of the Act arise in respect of non payment of goods supplied or services rendered by a supplier. It obviously follows that for a reference to be made to the Council under Section 18(1) of the Act, it must relate to the disputes arising out of amounts due for goods supplied or services rendered by a supplier at the material time.
14. The contention that if a party to the dispute falls within the definition of “supplier” at the time of making the reference, the Council would have jurisdiction to resolve the disputes or refer the same to arbitration, is unmerited. Section 18(1) of the Act does not refer to a reference being made by a supplier, it enables “any party” to a dispute to make a reference to the Council. ....“
19. Insofar as the next contention that blanket powers are conferred under Section 17 of the Act is concerned, it is pertinent to read Sections 16 to 18 conjointly. The provisions read as under:
”16. Date from which and rate at which interest is payable.-Where any buyer fails to make payment of the amount to the supplier, as required under Section 15, the buyer shall, notwithstanding anything contained in any Agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the Bank rate notified by the Reserve Bank.
17. Recovery of amount due.-For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under Section 16.“
18. Reference to Micro and Small Enterprises Facilitation Council.- (1) Notwithstanding anything contained in any other law for the time being in force, any Party to a dispute may, with regard to any amount due under Section 17, make• a reference to the Micro and Small Enterprises Facilitation Council.
(2) On receipt of a reference under sub-section (1) the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for Arbitration or refer it to any institution or centre providing alternate dispute resolution services for such Arbitration and the provisions of the Arbitration and Conciliation Act, 1996 (26 of 1996) shall then apply to the disputes as if the Arbitration was in pursuance of an Arbitration Agreement referred to in sub-section (1) of Section 7 of that Act.
(4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.
(5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.”
20. Section 18 of the Act provides for reference to Micro and Small Enterprises Facilitation Council. As per Section 18(1) of the Act, any party to a dispute, with regard to any amount due under Section 17, can make a reference to the Micro and Small Enterprises Facilitation Council (Shortly “the Council”).
As per sub-section (2) of Section 18 of the Act, the Council, shall either itself conduct conciliation or seek the assistance of any institution or Centre providing alternate dispute resolution services by making reference to such institution for conducting conciliation. It is specifically mentioned that provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 (Act 26 of 1996) shall apply to such a dispute, as if conciliation was initiated under Part-III of that Act.
As per sub-section (3) of Section 18 of the Act, if the conciliation initiated is not successful and stands terminated without any settlement between the parties, the Council either itself take up the dispute for Arbitration or refer it to any institution or Centre providing alternate dispute resolution services for such Arbitration under the provisions of the Arbitration and Conciliation Act, 1996.
As per sub-section (4) of Section 18 of the Act, the Council has jurisdiction to act as an Arbitrator or Conciliator in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.
21. Accordingly, the above scheme of Section 18 of the Act clearly provides for conciliation by the Council by itself or to any other institution and in case of failure, for Arbitration by itself or any other institution and the seat of Arbitration.
22. It has to be noted that sub-section (2) of Section 18 of the Act clearly spells out that the provisions governing the Conciliation proceedings, as per Sections 65 to 81 of Act 26 of 1996. Accordingly, the process of conciliation and role and powers of the Conciliator has to be seen.
23. As per Section 65 of Arbitration and Conciliation Act, 1996, the procedure for receiving Written Statement from the parties is specified. Section 67 of the Arbitration and Conciliation Act, 1996, specifies the role of Conciliator. Sub-section (1) of Section 67 of the Arbitration and Conciliation Act, specifically mentions that the Conciliator shall assist the parties in an independent and impartial manner in their attempt to reach an amicable settlement of their dispute. It means that the Conciliator plays a role in assisting the parties to arrive at an amicable settlement, to be reached by themselves, on their own. In that process, the Conciliator as per sub-section (2) of Section 67 of the Arbitration and Conciliation Act is guided by the principles of objectivity, fairness and justice, giving consideration to the rights and obligations of the parties. The Conciliator, thus, assist the parties in making proposals for settlement of dispute. Therefore, it is very clear that the first stage of reference is conciliation. The procedure of conciliation is only to assist the parties to arrive at an amicable settlement. However, the statutory force of the Act compels the buyer to appear before it and participate in the Conciliation proceedings. It does not mean that the party is bound by the dictates of the Conciliator.
24. Therefore, as per sub-section (3) of Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, a provision is made for referring the matter for arbitration, if the conciliation is not successful. It is also made clear that once the Conciliator involves in the process of conciliation, he communicates both the parties and receives confidential informations from both the parties. In that process, the Conciliator is expected to maintain confidentiality, which, as per Section 75 of the Arbitration and Conciliation Act, 1996, shall extend also to the Settlement Agreement, except where its disclosure is necessary for the purpose of implementation and enforcement of the settlement.
25. Section 80 of the Arbitration and Conciliation Act, 1996, specifically mentions that unless and otherwise agreed by the parties the Conciliator shall not act as an Arbitrator or as a representative of the Council of the party in any Arbitral or Judicial proceedings, in respect of a dispute that is the subject of the Conciliation proceedings and he shall not act as a Witness in any such proceedings also.
26. If the matter is viewed from that angle, it is very clear that the conciliation is a different confidential process and a person, who acted as a Conciliator, is expected to maintain confidentiality and not to act as an Arbitrator or a representative or as a witness in the same subject matter in an Arbitration or Judicial proceedings. Therefore, the contention of the Petitioner that Sections 15, 16 & 17 of the Act confer blanket powers in favour of the supplier and does not provide for any safeguard to the buyer is not sustainable, for the reason, that the recovery proceedings are made in a phased manner and at the first stage, it is only "Conciliation" and in case of failure, it is referred to Arbitration. The inbuilt provisions of Arbitration and Conciliation Act provides scope, for all the parties to Arbitration, for getting protection orders from the Arbitral Tribunal. Therefore, the contention that the Act does not provide for any safeguards to the buyers is not sustainable.
27. The contents of the impugned notices issued by the Micro Small Enterprises Facilitation Council reads as under:
"WHEREAS the above named Petitioner has filed a Petition to this Council against the Respondent for the payment due against the materials supplied to the Respondent and interest thereon, the Petitioner as well as the Respondent are hereby summoned to appear in this Council in person or by a Pleader duly authorized (Vakkalat shall be produced by the Counsel, who appears before Council meeting) and able to answer all material questions relating to this Suit or who shall be accompanied by some person able to answer all such questions on 20th day of November 2018, at 10.00 a.m., at Mini Conference Hall, Office of the Industries Commissioner and Director of Industries and Commerce, 1st Floor, SIDCO Corporate Building, Guindy, Chennai-600 032 to answer the claim, and you are directed to produce on that day all the documents upon which you intend to rely in support of your defense.
Take notice that, in default of your appearance on the day before mentioned, the Suit will be heard and determined in your absence as ex
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parte. Given under my hand and the seal of the Council this 2nd day of November 2018." 28. The notices, particularly in the penultimate paragraph, indicate that if the buyer/Petitioner does not appear, the Suit will be heard and determined in their absence as ex parte, which does not conform with the object of the Conciliation proceedings. 29. As discussed above, in the process of Conciliation, the provisions of the Arbitration and Conciliation Act, 1996, are mandatorily, to be followed by the Council. But the tenor of the notice that "if buyer does not participate in the proceedings, Council will pass orders on merits, setting the Respondent ex parte and determine the liability", appear like an adversarial proceedings and not as a Conciliation proceedings. Perhaps, it was drafted by a semi literate copying and pasting formats of Civil Court mechanically, without Applicant of mind. As such, the notices issued under proceedings in MSEFC/CR/43/2018, MSEFC/CR/39/2018, MSEFC/CR/42/2018, MSEFC/ CR/40/2018, MSEFC/CR/41/2018 and MSEFC/CR/37/2018 respectively are contrary to the procedure contemplated under Section 18 of the MSME Act. 30. The Council is expected to invite the parties for conciliation. However, the appearance of the Petitioner and Second Respondent is mandatory. The Council shall assist the parties to reach an amicable settlement. Only in case of failure, it can be referred to Arbitration. Even in that case, the person, who acted as a Conciliator in that particular matter, is not entitled to act as an Arbitrator. In that view of the matter, the impugned Notices do not stand the test of scrutiny of law and are liable to be set aside. 31. In fine,- (i) the reference made under Section 18 of the Act by the Second Respondent herein before the Council is sustainable. (ii) the proceedings initiated by the Micro Small Enterprises Facilitation Council is within the scope and ambit of the Act. (iii) the impugned Notices, as such, issued by the First Respondent Council are not in conformity with the object of Section 18 of the Act. Therefore, the impugned Notices are set aside and a direction is given to the First Respondent Council to act in accordance with Section 18 of the Act and issue notice in conformity with sub-section (1) of Section 18 of the Act and proceed further. 32. The Civil Revision Petitions are disposed of with the above observation and direction. No Costs. Consequently, connected Civil Miscellaneous Petitions are closed.