MSME Council Cannot Hear Buyer's Claims Over Defective Supply By MSME Supplier: Madras High Court

The Madras High Court has recently ruled that the Micro and Small Enterprises Facilitation Council cannot deal with a buyer's claim against an MSME supplier for defective or failed supply.

Such claims fall outside the recovery mechanism under the Micro, Small and Medium Enterprises Development Act, 2006.

Justice K. Kumaresh Babu observed, “The MSMED Act restricts itself to the scope of recovery of unpaid amount that is liable to be paid by the buyer under Section 15 together with interest under Section 16 alone and not otherwise. The restrictions imposed under Section 18 deals with only the claim under Section 17, which would itself show that the supplier cannot also invoke the provisions of the Section 18 for any relief that falls outside the scope of Section 17 of the Act.”

The ruling came in a dispute between TI Clean Mobility Pvt. Ltd. and Senatla Innovative EV Components Pvt. Ltd. The dispute concerned defective chargers supplied under a Basic Purchase Agreement dated July 5, 2024 and related purchase orders.

TI alleged that the defective chargers had seriously affected its brand reputation.

It issued a debit note for ₹7,08,98,892 on October 30, 2025 towards the cost of replacing the chargers. It adjusted ₹2,00,83,628 towards invoices raised by Senatla. It then claimed ₹5,08,15,264 from Senatla.

It also relied on a communication from Senatla seeking waiver of the debit notes. Senatla had expressed financial distress and an inability to replace the chargers.

TI Clean Mobility further pointed to a Memorandum of Understanding between Senatla and Prudential Sugar Corporation Ltd. The MoU concerned the acquisition of a 76% stake in Senatla.

Alleging that Senatla was attempting to transfer its assets in connection with the proposed sale of its stake to a third party, TI Clean Mobility approached the high court under Section 9 of the Arbitration and Conciliation Act, 1996.

On November 11, 2025, the high court directed Senatla to furnish security of ₹5,08,15,264. TI Clean Mobility then issued a notice under Section 21 of the Arbitration Act on November 28, 2025.

On the same day, Senatla approached the Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act. It claimed ₹2,16,80,730.17 as unpaid dues for supplies made to TI Clean Mobility.

The dispute before the high court was whether Senatla's MSMED proceedings prevented TI Clean Mobility from pursuing its claims under the separate arbitration agreement.

Senatla argued that the MSMED Act, being a special legislation, overrides the Arbitration and Conciliation Act. It relied particularly on the non-obstante clause at the beginning of Section 18.

It contended that once the Facilitation Council had been approached, TI Clean Mobility's applications under Sections 9 and 11 of the Arbitration Act could not continue.

The high court rejected that argument. It drew a distinction between the two sets of claims.

It noted that Section 17 of the MSMED Act concerns recovery of amounts due for goods supplied or services rendered by an MSME supplier. Section 15 places the payment obligation on the buyer. Section 16 provides for interest on delayed payments.

Reading Sections 17 and 18 together, the high court held that a supplier can approach the Facilitation Council for recovery of amounts covered by Section 17. Conciliation and, if necessary, arbitration under Section 18 can follow only in relation to such claims.

The mechanism, however, does not cover a claim made by a buyer against an MSME supplier for defective or failed supply.

“Any other disputes outside Section 17 of the Act cannot be resolved by the facilitator of the council,” the high court observed. It held that disputes outside Section 17 read with Section 18 cannot be taken to conciliation or arbitration under Section 18.

The court therefore held that TI Clean Mobility's dispute arising from the defective chargers could be resolved under the independent arbitration agreement in the purchase agreement.

The high court also noted that the ₹2,16,80,730.17 claim before the MSME Council related to supplies made by Senatla that remained unpaid. TI Clean Mobility's arbitration claim, meanwhile, was for ₹5,08,15,264.

The latter amount was arrived at after adjusting ₹2,00,83,628 from the ₹7,08,98,892 debit note.

The high court also noted that TI Clean Mobility had admitted its liability to pay ₹2,00,83,628. This was reflected in its claim before the MSME Council.

It further took note of Senatla's email seeking waiver of the debit note. The high court observed that this would amount to an admission of liability under Clause 17 of the agreement.

“In that regard, an independent Arbitration Agreement which deals with the other rights and liabilities of the party cannot be overridden by the provisions of the MSMED Act,” the high court held.

The high court accordingly appointed former judge Justice V. Sivagnanam as the sole arbitrator. He was appointed to resolve the dispute independently of the conciliation proceedings initiated by Senatla under the MSMED Act.

The high court also made the November 11, 2025 direction for security absolute pending arbitration.

A correction order dated August 13, 2026 clarified that the November 11 order had been wrongly described in the July 31 order as an “order of injunction”. The earlier order had, in fact, directed Senatla to furnish security of ₹5,08,15,264.

The correction order requires Senatla to furnish the security within eight weeks of receiving a copy of the order. If it fails to do so, the property mentioned in the Judges' Summons will stand attached pending disposal of the arbitration proceedings.

For Petitioner (TI Clean Mobility Pvt. Ltd.): Advocate P.J. Rishikesh.

For Respondent (Senatla Innovative EV Components Pvt. Ltd.): Advocate T.T. Ravichandran for Advocate Sharukumar.