MSME Registration and Dispute Resolution: Supreme Court Calls for Larger Bench Review

In a significant judgment, the Supreme Court of India addressed the issue of whether a Micro, Small, and Medium Enterprise (MSME) must be registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) before executing a contract to avail dispute resolution mechanisms under Section 18 of the Act. The case, NBCC (India) Ltd. v. The State of West Bengal & Ors., involved a dispute over delayed payments under work contracts awarded by NBCC to M/s Saket Infra Developers Private Limited.

Background of the Case

The appellant, NBCC (India) Ltd., awarded five work orders to M/s Saket Infra Developers Private Limited between July 2015 and September 2017. The enterprise was registered as a small enterprise under Section 8 of the MSMED Act on November 19, 2016, after executing four contracts but before the execution of the fifth contract. When payment disputes arose, the enterprise sought arbitration under Section 18 of the MSMED Act through the West Bengal State Micro and Small Enterprises Facilitation Council.

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NBCC challenged the jurisdiction of the Facilitation Council, arguing that the enterprise was not registered before the contracts were executed, making its claim inadmissible under Section 18. The Calcutta High Court dismissed the petition, stating that jurisdictional objections could be raised before the Arbitral Tribunal. NBCC appealed to the Supreme Court.

Key Legal Issues

• Whether an MSME must be registered before entering into a contract to seek dispute resolution under Section 18 of the MSMED Act.
• Whether the Facilitation Council had jurisdiction over disputes related to work contracts.
• Whether the MSMED Act, 2006 overrides other laws, including the Arbitration and Conciliation Act, 1996.

Arguments of the Petitioner (NBCC)

• The petitioner argued that the phrase “any party to a dispute” in Section 18 of the MSMED Act should be interpreted restrictively to include only “suppliers” registered under Section 8 of the Act.
• NBCC relied on previous Supreme Court rulings in Silpi Industries v. Kerala State Road Transport Corporation and Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., which suggested that only MSMEs registered at the time of contract execution could claim benefits under the MSMED Act.
• The petitioner contended that retrospective registration should not allow an enterprise to seek statutory remedies.

Arguments of the Respondent (State of West Bengal & Saket Infra Developers)

• The respondent countered that Section 18 of the MSMED Act allows “any party” to a dispute to seek arbitration, irrespective of the date of registration.
• It argued that the purpose of the MSMED Act is to facilitate quick resolution of payment disputes and ensure protection for small enterprises.
• The respondent maintained that requiring registration before contract execution would defeat the beneficial intent of the Act.

Supreme Court’s Observations

• “The words ‘any party to a dispute’ in Section 18 cannot be restricted to only registered suppliers. Such an interpretation would defeat the legislative intent of providing protection to MSMEs.”
• “The MSMED Act was enacted to ensure that small enterprises receive payments on time, and creating artificial barriers like mandatory pre-contract registration would undermine this objective.”
• “The issue at hand was not directly considered in previous rulings such as Silpi Industries and Mahakali Foods. The present case requires a detailed examination to establish a binding precedent.”

Judgment and Reference to a Larger Bench

The Supreme Court, after extensive deliberation, decided that the issue warranted a deeper judicial review and referred the matter to a three-judge bench for authoritative interpretation. The court emphasized that the interpretation of Section 18 should align with the Act’s objective of supporting small enterprises and ensuring timely payments.

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Conclusion

This case highlights a crucial issue in MSME dispute resolution: whether an enterprise must be registered before entering into a contract to avail the benefits of the MSMED Act. The Supreme Court’s decision to refer the matter to a larger bench underscores the need for a clear and authoritative ruling on this subject.

With small enterprises contributing significantly to India’s economy, the forthcoming ruling will have far-reaching implications for contract enforcement and payment security in the MSME sector.

Petitioner Name: NBCC (India) Ltd..
Respondent Name: State of West Bengal & Ors..
Judgment By: Justice Pamidighantam Sri Narasimha, Justice Pankaj Mithal.
Place Of Incident: West Bengal.
Judgment Date: 10-01-2025.

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