In a significant ruling, the Supreme Court of India addressed the eligibility of micro, small, and medium enterprises (MSMEs) to access the payment dispute resolution mechanism under Section 18 of the Micro, Small, and Medium Enterprises Development Act, 2006 (MSMED Act). The Court clarified that MSMEs do not need to have prior registration under Section 8 of the Act (filing of an Entrepreneur’s Memorandum) to invoke dispute resolution provisions. This judgment ensures broader access to justice for MSMEs, even those unregistered at the time of contract execution.
Understanding MSMEs, the MSMED Act, and MSME Dispute Resolution
MSMEs form the backbone of the Indian economy, contributing significantly to employment and GDP. The MSMED Act, 2006, was enacted to promote, develop, and support MSMEs while ensuring their rights and interests are protected.
What is Section 8?
Section 8 allows MSMEs to voluntarily file an Entrepreneur’s Memorandum with the concerned authorities to gain recognition and avail of specific benefits.
What is Section 18?
Section 18 provides a mechanism for resolving disputes relating to delayed payments between MSMEs and their clients. It allows “any party to a dispute” to approach the Facilitation Council for resolution.
The recent Supreme Court ruling clarified that both registered and unregistered MSMEs can use Section 18 for dispute resolution. The Court emphasized that the term “any party to a dispute” should include unregistered MSMEs, ensuring they can access this legal remedy without needing prior registration. This decision strengthens the legal framework for MSMEs, making the dispute resolution process more inclusive and accessible, and ensuring timely justice for small businesses.
Case Background
The case titled NBCC (India) Ltd. v. State of West Bengal & Ors. (Civil Appeal No. 3705 of 2024) arose from a dispute between NBCC (India) Ltd., a public sector company, and M/s Saket Infra Developers Pvt. Ltd., a construction firm registered as an MSME.
The issue arose when NBCC contested the jurisdiction of the West Bengal Micro and Small Enterprises Facilitation Council, arguing that Saket Infra’s registration as an MSME occurred after the contracts were executed. NBCC claimed this post-contract registration barred the company from invoking Section 18 for dispute resolution.
Key Legal Issues
Scope of Section 18: Does the term “any party to a dispute” in Section 18 include only MSMEs registered at the time of contract execution?
Role of Section 8 Registration: Is filing a memorandum under Section 8 mandatory to invoke statutory remedies under the MSMED Act?
Conflicts in Precedents: The Court examined conflicting interpretations in prior rulings, including:
Silpi Industries v. Kerala State Road Transport Corporation (2021): Held registration under Section 8 is mandatory before entering a contract.
Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2023): Did not explicitly address unregistered enterprises' access to Section 18.
Supreme Court’s Observations
The Division Bench comprising Justice Pamidighantam Sri Narasimha and Justice Pankaj Mithal clarified critical aspects of the MSMED Act:
Expansive Interpretation of Section 18:
The Court emphasized that the phrase “any party to a dispute” in Section 18 is deliberately broad, designed to include both registered and unregistered MSMEs.
Role of Registration:
The Court observed that registration under Section 8 is discretionary, as indicated by the term “may” in the statute. An MSME’s ability to invoke Section 18 cannot be retroactively affected by its registration status.
Legislative Intent:
The Court highlighted that the MSMED Act aims to support MSMEs, many of which operate informally. Restricting dispute resolution to only registered enterprises would contradict the Act’s purpose.
Supreme Court’s Ruling
The Court ruled that:
The absence of Section 8 registration does not bar MSMEs from accessing remedies under Section 18.
Statutory remedies under the MSMED Act must be interpreted to ensure justice, affordability, and inclusivity.
Procedural barriers should not hinder MSMEs’ access to dispute resolution.
However, given conflicting interpretations in previous judgments, the Court referred the matter to a larger Bench for a definitive ruling on the issue.
Critical Observations
The judgment included noteworthy observations on access to justice and the MSMED Act’s intent:
“Statutory remedies must bridge the gap between rights and remedies, ensuring justice is accessible and effective.”
“The phrase ‘any party to a dispute’ reflects a deliberate legislative intent to create an inclusive framework for dispute resolution.”
Conclusion
This important judgment makes it clear that MSMEs can use the dispute resolution process under the MSMED Act even if they were not registered at the time of the contract. By focusing on fairness and accessibility, the Supreme Court has upheld the purpose of the MSMED Act, which is to support and protect small businesses.
The decision clears up confusion in the law and shows how the judiciary plays a crucial role in ensuring justice for small businesses. Since the matter is now referred to a larger Bench, we can expect further clarity and stronger legal support for MSMEs in the future.
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