MSMED Act, 2006 : Important Features and Legal Principles

 MSMED Act, 2006 : Important Features and Legal Principles

Vishal Mishra

Introduction

Micro, Small and Medium Enterprises Development Act, 2006 ("MSMED Act, 2006") contains just 32 Sections ; it's a short Act of enormous significance. MSMED Act, 2006 has repealed Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 through S.32 of the MSMED Act, 2006.

Chapter V of MSMED Act, 2006 contains Sections 15-25. S.24 gives overriding effect to S.15 to S.23 of MSMED Act, 2006.

It was held in Guj. State Civil Supplies v. Mahakali Foods [2022] GCtR 1935 (SC) that Chap. 5 of MSMED Act, 2006 would prevail over Arbitration and Conciliation Act, 1996. Facilitation Council can also act as an arbitrator. Proceedings before Facilitation Council acting as an arbitrator will be governed by the Arbitration and Conciliation Act, 1996. A party who was not supplier under S.2(n) of MSMED Act on date of entering into contract cannot seek benefit of supplier under MSMED Act, 2006.

ITW Catalyst Pvt Ltd v. Marcadeo Enterprises [2023] GCtR 90885 (Karnataka) has held that S.24 of MSMED Act, 2006 will override Arbitration and Conciliation Act, 1996 ; the theory put forward was that MSMED Act, 2006 being a later law will override 1996 Act even if 1996 Act is a special law. The plea for appointment of arbitrator was rejected. 

S.20 of MSMED Act, 2006 talks about MSE Facilitation Councils which are established by State Government. S.21 talks about composition ; more than 3 but not more than 5 members. Director of Industries is the Chairman of MSE Facilitation Council under S.21 of MSMED Act, 2006. S.3 of MSMED Act, 2006 forms another body called as National Board for MSMEs whose head office under S.3(2) is to be in Delhi.

S.18 (2) gives power to MSE Facilitation Council to do conciliation. When conciliation fails, then power under S.18 (3) can be invoked by MSE Facilitation for arbitration. 

It was held in GPT Infra Projects Ltd v. Miki Wire Works Pvt Ltd [2023] GCtR 90665 (Calcutta) that merely because there were 8 members in the Council, that does not renders the order of MSE Facilitation Council under MSMED Act, 2006 illegal. It was held that it is not a case of inherent lack of jurisdiction. Further, in this case, the party never raised objection regarding composition during arbitral proceedings. S.4 of A&C Act, 1996 was invoked to explain the point. 

An important aspect of MSMED Act, 2006 is Section 16 which deals with interest at 3 times the bank rate notified by RBI. It was held in Shristi Infrastructure Development v. Scorpio Engg Pvt Ltd [2025] GCtR 50888 (Delhi) that "section 15 and 16 are substantive rights and are independent of section 18 of MSMED Act, 2006. In order to attract the rigors of section 15 and 16, it need not be that dispute redressal mechanism as provided under section 18 of the MSMED Act be initiated. Interest as contemplated under section 16 can be granted under ad-hoc arbitration."

The point regarding S.16 of MSMED Act, 2006 was also answered in 2021 by Single Judge Bench of Hon'ble J. Bakhru when he was in Delhi prior to his transfer to Karnataka HC. It was held in Indian Highways Management Co. Ltd v. SOWiL Ltd [2021] GCtR 60887 (Delhi) that the "proviso to Section 15 of the MSMED Act, 2006 makes it clear that under no circumstances, the period agreed between the supplier and buyer would exceed 45 days from the day of acceptance or day of deemed acceptance of the goods." "It is apparent that the provisions of Sections 15 and 16 of the MSMED Act, 2006 confer substantive rights and impose obligations, which are not contingent upon recourse to any dispute resolution mechanism."

Shristi Infrastructure Development v. Scorpio Engg. Pvt Ltd [2025] GCtR 50888 (Delhi) has answered what happens when one does not approaches Facilitation Council under MSMED Act, 2006 and there is an arbitration agreement and arbitrator is appointed. It was held that in such case, award passed by arbitrator cannot be said to violate S.18 of MSMED Act, 2006. MSEFC is not the only forum ; though it is an specialized forum. 

Another important section is S.19 of MSMED Act, 2006. S.19 requires deposit of at least 75% of amount which has to be deposited before the court if the applicant wants to file application to set aside the Order of Facilitation Council. It was held in AVR Enterprises v. Union of India [2020] GCtR 907776 (Delhi) that the "requirement of Section 19 of the MSMED Act, 2006 would be applicable only in cases where reference was made under Section 18 of the MSMED Act and would not apply to an award rendered by an arbitral tribunal appointed otherwise. . The plain language of Section 19 of the MSMED Act does not require a pre-deposit of seventy-five percent of the awarded amount in respect of an arbitral award rendered by an Arbitral Tribunal which has not been appointed pursuant to a reference under Section 18 of the MSMED Act, 2006."  The finding given in AVR Enterprises [2020] and the view of Hon'ble J. Sanjeev Sachdeva are controversial. The petition in AVR Enterprises was ultimately dismissed. Hon'ble J. Sanjeev Sachdeva before becoming a Judge was already designated as a Senior Advocate in 2011 and he became Judge in 2013 and got transferred to MP High Court in the year 2024. 

S.17 of MSMED Act, 2006 deals with recovery of amount with interest. S.18 (1) of MSMED Act, 2006 uses the word "any party to a dispute". S.2 (n) when defines supplier, only uses the words "micro or small" "which has filed a memorandum", the word medium is not mentioned in S. 2 (n). S.8 (1) uses words like "who intends to establish", "may at his discretion", "shall file the memorandum". The words like "party" or "dispute" which are used in S.18 are not defined in S.2 of MSMED Act, 2006.

In case of Uniseven Engineering & Infrastructure Pvt. Ltd v. MSEFC [2023] GCtR 2495 (Delhi), aspects of MSMED Act, 2006 were explained. This case answered issues related to buyer under MSMED Act, 2006. A reference under S.18 was filed. MSEFC passed Order directing payment. The Order of MSEFC was set aside. It was held at page no. 27 that "the amount due under Section 17 of MSMED Act, 2006 can only be an amount liable to be paid by the Buyer to the Supplier and not the other way round. Thus, it is clarified that the language in Section 18 i.e., “any party to a dispute” cannot be extended to a claim by a Buyer against the supplier as the same is qualified as being only in respect of the amount due under Section 17."

In the year 2019, Shanti Conductors v. ASEB [2019] GCtR 184 (SC), the issue arose in context of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993. The effect of Limitation Act, 1963 was explained and it was held that "S.3 (1) of Limitation Act, 1963 makes it clear that in event, a suit is instituted after the prescribed period, it shall be dismissed although limitation has not been set up as a defence. The Court by mandate of law, is obliged to dismiss the suit, which is filed beyond limitation even though no pleading or arguments are raised to that effect."

The finding in the year 2025 where Hon'ble J. Narasimha and Hon'ble J. Pankaj Mithal has decided to refer the matter to CJI for forming an appropriate Bench was also discussed a lot due to its impact on MSMEs and its huge relevance for MSMED Act, 2006. In NBCC v. State of West Bengal [2025] GCtR 98 (SC) it was held that "a substantial portion of our jurisdiction under Article 136 is reflective of regular appellate disposition of decision making. Every judgment or order made by this Court in disposing of these appeals is not intended to be a binding precedent under Article 141 of Constitution of India." It was commented on Mahakali Foods [2022] that "there was neither an issue about the supply of goods nor a formulation of the question as to whether the filing of a memorandum is mandatory for invocation of reference under Section 18." The view stated at page no. 22 of NBCC v. State of West Bengal [2025] GCtR 98 (SC) is this : "The text of Section 18 of MSMED Act, 2006 is clear and categoric. The words employed herein are “any party to a dispute”. The text, “any party to a dispute”, cannot be read as a ‘supplier’ by adopting a process of interpretation, by first referring to Section 17, then to Sections 15 and 16 and thereafter, in search of the definition of supplier, to Section 2(n) and finally stopping at Section 8 to hold that ‘any party to a dispute’ will only be an Enterprise which is registered under Section 8 of the Act. This meaning-making process to metamorphosise the clear text ‘any party’ to ‘a supplier’ is not the legal method to understand true meaning of words employed by the legislature."

If we go back to the year 2021, Hon'ble Supreme Court explained provisions of MSMED Act, 2006 where 2 Judges' Bench explained the provisions of the Act and tried to answer the effect of registration ; Hon'ble J. R. Subhash Reddy wrote the opinion. It was noted at page number 40 of Silpi Industries v. Kerala SRTC [2021] GCtR 1282 (SC): "By taking recourse to filing memorandum under sub-section (1) of Section 8 of the MSMED Act, 2006 subsequent to entering into contract and supply of goods and services, one cannot assume the legal status of being classified under MSMED Act, 2006, as an enterprise, to claim the benefit retrospectively from the date on which appellant entered into contract with the respondent. The appellant cannot become micro or small enterprise or supplier, to claim the benefits within the meaning of MSMED Act 2006, by submitting a memorandum to obtain registration subsequent to entering into the contract and supply of goods and services." Discussions were made on findings in Silpi Industries [2021] in NBCC [2025]. 

Conclusion

The divergent views made in Mahakali Foods [2022] and later on in NBCC [2025] has stirred the controversy. What was stated by Delhi HC in its Judgment has drawn lot of criticism as it blocks the rights of MSMEs because it did not availed option of Facilitation Council. This needs more clarity.

MSMEs need to remain alert at the judicial pronouncements on MSMED Act, 2006 for an informed decision because of the economic impact it can have. 

It can be expected that once the maze around registration becomes clear, the issue of interest will automatically get resolved by an authoritative judicial pronouncement.