JSW_MSEFC

Investment made in all the units of an Enterprises needs to be considered for the purpose of categorizing it as Micro or Small Enterprise under Section – 18 of the MSMED Act: High Court of Orissa

FACTUAL BACKGROUND

• Between 2009-2013, M/s JSW Steel Ltd. (Appellant) placed several purchase orders with M/s Gupta Power Infrastructure Ltd. (Respondent No. 2) for the supply of articles at Bellary, Karnataka for which it had raised bills on various dates. The Appellant had made part payment and there was an outstanding. All the Purchase orders contained an Arbitration clause as per which any dispute between the parties would be resolved through arbitration and the seat of arbitration shall be Mumbai.

• Pertinently, Respondent No. 2 has 4 units in different states across India: one at Khordha, two at Kashipur and one at Chennai. However, all the Purchase Orders were placed from the corporate office and not from any specific units of the Respondent No. 2.

• On 24.04.2014, the Respondent No. 2 claiming to be “small scale industry” filed a claim before Micro Small Enterprise Facilitation Council (MSEFC) against the Appellant. Council directed the appellant to have amicable settlement with the Respondent No.2 within seven days and if no communication was received from it within the stipulated period, award would be given for payment with due interest.

• On 28.06.2019 an award was passed directing the Appellant to make payment of the principal amount and interest calculated up to 31.12.2014 with compound interest to the Respondent No. 2. It was stated in the award that the Appellant had alleged that the Respondent No 2 was not an SSI unit but after examining necessary evidences, the Council concluded that it was an SSI Unit. It is also stated that the conciliation failed due to non-compliance of the order dated 20.01.2023 of MSEFC.

• On 14.07.2016, the Appellant filed a writ petition challenging that the claim was not maintainable as the Respondent No.2 was not a “small enterprise”. It further stated that to be classified as a “small enterprise”, the total investment made by the entity in plant and machinery has to be more than Rs. 25 lakhs but cannot exceed Rs. 5 crores. However, the Respondent’s investment is more than 5 crores. Appellant also raised the procedural irregularity where the Council did not conduct any conciliation or arbitration before proceeding to grant an award.   

• Hon’ble Single Judge held that the investments in plant and machinery of different units of Respondent No. 2 Company were not required to be clubbed together for the purposes of determining whether it is a “small enterprise”. Challenging the Judgement of the Hon’ble Single Judge, the Appellant preferred Writ Appeal.

FINDING OF THE WRIT APPELLATE COURT

1. Whether the Claim was maintainable before the Council?

The Court while answering this question held that if medium enterprises or larger enterprises are allowed to avail the benefit under Section – 18 of the MSMED Act, by claiming to be micro or small industries by cleverly dividing themselves into smaller units and obtaining a certificate of registration as “micro” or “small”, in order to avail the benefits which are meant for micro or small enterprises, that would defeat the purpose of enactment of MSMED Act and Section – 18 of the said Act.

2. Whether the provisions under Section 15 to 18 of the MSMED Act prevail over the Arbitration and Conciliation Act?

The Court held that the specific non-obstante clauses in Section 18 (1) and (4) of the MSMED Act 2006 will have an overriding effect over any other law in force.

3. Whether the Council has delivered the impugned award after following the prescribed procedure Pfizer conciliation and arbitration?

Hon’ble Division bench was pleased to hold that neither the provisions of Rule 4 (x) of the MSFEC Rules, nor the MSMED Act or the procedure under the Arbitration & Conciliation Act have been followed before passing the impugned award. On 28.06.2016, after recording that the conciliation has failed, the Council has decided to pass award on the same day. So, it is apparent that arbitration proceedings have not been initiated after failure of conciliation. Award has been passed on the same day, so it is evident that that the procedure for arbitration has not been followed and the parties have not been given an opportunity to file their claims or adduce evidence, for which the principles of natural justice have been violated. The Hon’ble Division bench was therefore persuaded to hold that the impugned award is a nullity and not an arbitral award in the eye of law. And further stated that, the Council waspre-determined to pass the award even before failure of the conciliation proceedings.

4. Was the writ petition maintainable?

The award was not an arbitral award in the eye of law and that in the absence of arbitration proceedings, the award is a nullity.

JUDGEMENT

• The four units of the Respondent No.2 constitute a single enterprise and in view of the total value of the investment towards plant and machinery for the relevant years, the classification of Respondent No.2 cannot be “small enterprise” for the purpose of maintaining the claim under Section – 18 , for which the impugned award is liable to be set aside as it is without jurisdiction. The writ petition was maintainable for which the impugned order dated 04.06.2022 of the learned Single Judge, holding that it was not maintainable, is liable to be quashed.

• Consequently, the impugned award dated 28.06.2016 passed by the Council in MSEFC Case No. 17 of 2014 is liable to be quashed and orders dated 04.03.2022 and 07.04.2022 passed by the learned Single Judge in W.P. (C) No.21943 of 2016 are liable to be set aside.

• Hon’ble Court held that as the arbitration has not been followed by the Council, the same should have been remanded back for fresh consideration but as the enterprise is clearly not a ‘small’ enterprise, the Hon’ble Court was not included to remand the matter.  

• The Writ Appeal was accordingly allowed, and the award dated 28.06.2016 passed by the Micro and Small Enterprises Facilitation Council, Cuttack in MSEFC Case No. 17 / 2014 and the orders dated 04.03.2022 and 07.04.2022 passed by the learned Single Judge in W.P.(C) 21943 of 2016 were set aside, but without any cost.

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