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Disputes Before Registration Cannot Be Referred To Arbitration By MSME Council: Delhi HC

Bench comprising Justice Subramonium Prasad heard a petition challenging decision passed by the Micro and Small Enterprises Facilitation Council, accepting the reference of dispute against the Petitioner under Section 18 of the MSME Act and further referring the dispute in the said case to Respondent Delhi International Arbitration Centre (DIAC)

The Delhi High Court recently held that registration under the MSME Act (Micro, Small and Medium Enterprises Development Act, 2006) will apply prospectively and the disputes arising prior to registration cannot be referred to Arbitration by the MSME Council.

Bench comprising Justice Subramonium Prasad heard a petition challenging decision passed by the Micro and Small Enterprises Facilitation Council, accepting the reference of dispute against the Petitioner under Section 18 of the MSME Act and further referring the dispute in the said case to Respondent Delhi International Arbitration Centre (DIAC).

The Petitioner approached the Court stating that on the day the contract was entered into between the parties, the Petitioner was not an MSME and, therefore, MSME Council could not have entertained the request for referring the dispute to the DIAC for arbitration. Counsel for the Petitioner contended that it was now well settled that the benefit of the MSME Act could not be claimed if the person claiming the benefit under the said Act was not registered as an MSME.

The Court observed that, "It is stated that the purpose of Section 17 and 18 of the MSME Act is to grant a cost-effective dispute resolution mechanism for recovery of unpaid dues of the supplier, which is a micro, small and medium level enterprise. The said Section gives the right to a micro, small and medium enterprise to have its disputes adjudicated by approaching the Facilitation Councils and it cannot be obliterated on account of any other contract to the contrary."

The Supreme Court, in Gujarat State Civil Supplies Corporation Limited v. Mahakali Foods Private Limited (Unit 2) & Anr. , 2023 (6) SCC 401, held that if any registration under MSME Act is obtained subsequently, the same would have effect prospectively and apply to the supply of goods and rendering services subsequent to the registration and this issue could be decided by the Facilitation Council/Institutes/Centre acting as an Arbitral Tribunal under the MSME Act.

The Court left the issues open for the Arbitral Tribunal leaving it open the Petitioner to raise the dispute between the parties before the Arbitrator by filing appropriate applications under the Arbitration & Conciliation Act, 1996.



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