MSME Registration Cannot Revive Abandoned Arbitration Claims: Delhi High Court

The Delhi High Court has ruled that a supplier cannot revive claims abandoned in an earlier arbitration merely by subsequently obtaining registration under the Micro, Small, and Medium Enterprises Development Act, 2006.

Justice Tushar Rao Gedela observed that a party that did not challenge the termination of the earlier arbitration cannot use subsequent MSME registration to reopen the same claims.

The court held, “Having not availed the same, in the opinion of this Court, a party cannot be permitted to re-open such abandoned claims by mere registration under the MSME Act, 2006, subsequently.”

The ruling came in an appeal against a tribunal order dated September 13, 2021. The tribunal had held that it had no jurisdiction to hear the claims and that the arbitration was not maintainable.

The dispute arose between Shri Krishan Grit Co., a sole proprietorship of Sanjeev Gupta, and Continental Engineering Corporation, a Taiwan-incorporated company with a project office in India. Shri Krishan Grit Co. supplied aggregates, sand and TMT steel bars for construction and infrastructure projects.

The supplies were made under contractual arrangements, including a memorandum of understanding and purchase orders. TMT bar supplies were completed in 2016, while sand and aggregate supplies continued until June 2017.

After disputes arose over unpaid dues, Shri Krishan Grit Co. invoked arbitration through a legal notice dated November 3, 2018. Justice Devendra Gupta, former Chief Justice of the Andhra Pradesh High Court, was appointed sole arbitrator. The supplier participated in the proceedings but did not file its Statement of Claim. The arbitration was consequently terminated with costs.

During the pendency of those proceedings, Shri Krishan Grit Co. obtained MSME registration and approached the Micro and Small Enterprises Facilitation Council. Conciliation failed, following which the dispute was referred to the Delhi International Arbitration Centre. A former Delhi High Court judge was appointed as the sole arbitrator.

Continental Engineering challenged the tribunal's jurisdiction under Section 16 of the Arbitration and Conciliation Act, 1996. This provision allows an arbitral tribunal to decide objections to its own jurisdiction. The company argued that the claims related to supplies made before the supplier's relevant MSME registration. It also argued that the same claims had already been pursued in the earlier arbitration.

The tribunal accepted the objection on September 13, 2021, and held that it had no jurisdiction. Shri Krishan Grit Co. then appealed to the high court under Section 37(2)(a) of the Arbitration and Conciliation Act.

Before the high court, Shri Krishan Grit Co. relied on an MSME certificate concerning its manufacturing unit in Sikar, Rajasthan. It argued that the unit had applied for registration on October 20, 2016. It also contended that the place of registration was irrelevant to the maintainability of its claims.

The court, however, noted that the document showed the application was filed on October 20, 2016, while the registration appeared to have been granted only on February 16, 2019. It also noted that the Delhi registration relied upon in the Statement of Claim was dated February 26, 2019 and related to services, while the Rajasthan certificate related to manufacturing activity.

The court applied the Supreme Court's ruling in Silpi Industries v. Kerala State Road Transport Corporation. It held that registration under the MSME Act operates prospectively and cannot confer statutory benefits for supplies made before registration.

“It is settled law, which brooks no ambiguity, that only such claims which may arise post the registration of any entity as a Micro or Small industry under the MSME Act, 2006, would be maintainable,” the court observed.

The claims related to supplies made in 2016 and 2017, all before the February 2019 Delhi registration relied upon by the supplier. The court therefore held that the claims were not actionable under the MSME Act.

The court also declined to interfere with the tribunal's finding on the Rajasthan certificate. The tribunal had considered the document and found that it related to an enterprise described as M/s Shri Krishan Grit Company, concerning manufacturing activity. It also found that the Delhi-based claimant had signed the MoU and supplied the material, rather than the entity described in the Rajasthan certificate.

The court separately considered the effect of the earlier arbitration. It noted that the appellant did not dispute that the claims in the earlier proceedings were the same claims raised in the later arbitration. It also did not dispute that the earlier proceedings had been terminated because it failed to file its Statement of Claim.

The supplier had not challenged the termination of those proceedings or pursued the remedies available against the termination. The high court therefore agreed that the abandoned claims could not be reopened through subsequent registration under the MSME Act.

“Ordinarily, when the arbitration proceedings itself are terminated for whatever reason, the party aggrieved has appropriate remedies under the law for setting aside such termination,” the court observed.

It added, “Having not availed the same, in the opinion of this Court, a party cannot be permitted to re-open such abandoned claims by mere registration under the MSME Act, 2006, subsequently.”

The court also clarified how territorial jurisdiction works under Section 18 of the MSME Act. The provision allows a party to a dispute concerning an amount due to make a reference to the Micro and Small Enterprises Facilitation Council.

If the settlement process fails, the Council can take up the dispute for arbitration itself or refer it to an institution or centre providing alternative dispute resolution services.

Under Section 18(5), the relevant Council or alternative dispute resolution centre has jurisdiction where the supplier is located, even if the buyer is located elsewhere in India. The court held that the Act does not envisage overlapping jurisdiction between Facilitation Councils in different States.

It observed, “In other words, a 'supplier' registered with a particular MSEF Council can seek reference of disputes before the same MSFE Council, which alone would have the jurisdiction to either resolve the disputes by itself or refer the same to any institution or centre which provides alternative dispute resolution where the 'supplier' is located.”

Finding the appeal unmerited, the Delhi High Court dismissed it and upheld the September 13, 2021 order holding that the arbitration was not maintainable.

For Shri Krishan Grit Co.: Advocates Rohan Jaitley, Kapil Rustagi, Akshay Sharma, Dev Pratap Shahi and Yogya Bhatia.

For Continental Engineering Corporation: Advocates Dr. Amit George, Kunal Kher, Amal A.R., Dushyant Kishan Kaul and Arnav Bhansali.