Court holds that Micro, Small and Medium Enterprises cannot claim benefits retrospectively for disputes arising before their registration under MSME Act, 2006; dismisses Shri Krishan Grit Co.'s appeal against arbitrator's jurisdiction ruling
In a significant judgment that clarifies the scope of protections available to micro and small enterprises, the Delhi High Court has upheld an arbitrator's decision rejecting claims filed by Shri Krishan Grit Co. against Continental Engineering Corporation for disputes arising before the company's formal registration under the Micro, Small and Medium Enterprises Development (MSME) Act, 2006.
Justice Tushar Rao Gedela, while dismissing the appeal filed under Section 37(2)(a) of the Arbitration and Conciliation Act, 1996, emphasized that registration under the MSME Act operates only prospectively and cannot confer benefits retrospectively for claims arising before the registration date.
Key Facts of the Case
Shri Krishan Grit Co., a sole proprietorship entity engaged in supplying aggregates and TMT steel bars, had supplied materials to Continental Engineering Corporation pursuant to a Memorandum of Understanding dated February 9, 2016. The parties had multiple contractual arrangements under which supplies were completed between May 2016 and June 2017. However, disputes arose regarding unpaid dues.
The critical issue was that Shri Krishan Grit Co. was registered under the MSME Act only on February 26, 2019—nearly three years after the supply contracts were executed and supplies were completed. The appellant attempted to claim that an earlier registration certificate dated October 20, 2016, in the State of Rajasthan for a different entity (for "manufacturing activity") should be considered, but this argument was rejected by both the arbitrator and the High Court.
The Court's Landmark Ruling
Justice Gedela relied heavily on the Supreme Court's authoritative judgment in Silpi Industries v. Kerala SRTC (2021) 18 SCC 790, which established that:
1. Registration is Mandatory: To seek benefits under the MSME Act, a seller must have been registered under the provisions of the Act as on the date of entering into the contract or, alternatively, on the date of supply of goods/services.
2. No Retrospective Application: Registration obtained after the contract is made and supplies are completed cannot operate retrospectively. Any registration obtained is prospective and applies only to supplies made subsequent to registration.
3. Policy Rationale: The Court noted that allowing retrospective application would lead to absurdity and confer unwarranted benefits contrary to legislative intent.
Territorial Jurisdiction Issue
The judgment also clarified an important jurisdictional principle. The Court held that under Section 18 of the MSME Act, 2006, only the Micro and Small Enterprises Facilitation (MSEF) Council where the supplier is located has exclusive jurisdiction to resolve disputes or refer them to arbitration. A supplier registered with a particular MSEF Council can only approach that specific Council for disputes arising after registration.
In this case, since Shri Krishan Grit Co. was registered only with the Delhi MSEF Council in 2019, it could invoke that Council's jurisdiction only for claims arising after February 2019. The disputes in question, arising between 2016 and 2017-2018, fell outside this jurisdictional scope.
The "Forum Shopping" Principle
Additionally, the Court upheld the arbitrator's observation that Shri Krishan Grit Co. had previously initiated arbitration proceedings with a former Chief Justice of Andhra Pradesh High Court as the sole arbitrator in 2018-2019. However, the appellant had abandoned those proceedings without filing a Statement of Claim, leading to termination with costs. The company then registered under the MSME Act and initiated the present proceedings through the MSEF Council.
Justice Gedela held that this conduct amounted to "forum hunting" and was impermissible. The Court observed that when arbitration proceedings are terminated, the aggrieved party has appropriate remedies under law to challenge such termination. A party cannot simply abandon proceedings and then resurrect the same claims by subsequently registering under a different statutory scheme.
Factual Inconsistency
The Court also noted that in its original Statement of Claim, Shri Krishan Grit Co. had relied exclusively on its Delhi registration dated February 26, 2019. It was only during the arbitration proceedings, when it appeared the company's case might fail, that the October 2016 Rajasthan registration certificate was produced. This delayed reliance on an alternative registration—for a "manufacturing activity" by a different entity at a different location—was found to be inconsistent with the company's own pleadings and contrary to its interests. The Court observed that the entity named on the 2016 certificate (M/s Shri Krishan Grit Company, Rajasthan) was different from the claimant entity (Shri Krishan Grit Co., Delhi), which had signed the MOU and supplied the materials.
Broader Implications
This judgment provides clarity on several aspects of MSME protection:
- - Strict Compliance: Entities must register under the MSME Act before entering into contracts or before making supplies to claim statutory benefits.
- - No Strategic Registration: Companies cannot use the MSME Act as a strategic tool by registering only after disputes arise.
- - Procedural Fairness: Courts will not permit parties to shop between forums or resurrect abandoned claims through alternative statutory mechanisms.
- - Definition of "Supplier": The definition of "supplier" under Section 2(n) of the MSME Act is tied directly to the filing of a memorandum with the designated authority under Section 8. Until such registration is formally completed, an entity does not qualify as a "supplier" for the purposes of the Act.
The Court's Reasoning
Justice Gedela emphasized that while the MSME Act, 2006, is welfare legislation designed to protect vulnerable small enterprises, this protective purpose cannot be stretched to encompass disputes that arose before the protective framework was invoked through registration. The legislature clearly intended the protections to apply prospectively from the date of registration, not retrospectively to pre-registration disputes.
The Court stated: "By taking recourse to filing memorandum under sub-section (1) of Section 8 of the Act, 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."
Conclusion
The Delhi High Court's judgment reinforces the principle that statutory protections operate within defined temporal parameters. While the MSME Act provides substantial benefits to micro and small enterprises—including interest on delayed payments and special arbitration mechanisms—these benefits are available only for disputes arising after an entity's formal registration under the Act. The judgment serves as a cautionary note to businesses seeking to leverage the MSME Act's protections to ensure timely registration before entering into significant commercial contracts.
The dismissal of this appeal effectively closes the litigation avenue for Shri Krishan Grit Co. regarding its pre-2019 supplies to Continental Engineering Corporation, unless the company pursues alternative legal remedies outside the MSME statutory framework.
Bottom Line:
Claims under the MSME Act, 2006, are maintainable only for the period after the entity's registration as a supplier. Registration under the Act cannot operate retrospectively, and claims arising before registration are not actionable.
Statutory Provisions
Section 2(n) of the Micro, Small and Medium Enterprises Development Act, 2006, Arbitration and Conciliation Act, 1996 Section 37(2)(a) Micro, Small and Medium Enterprises Development Act, 2006 Sections 2(n), 8, and 18.
Shri Krishan Grit Co. v. Continental Engineering Corporation, (Delhi) : Law Finder Doc Id # 2975332
