Navigating Legislative Supremacy: Delhi High Court’s Clarification on the Applicability of the MSMED Act over the Arbitration Act

Introduction

The recent judgment dated 24.02.2025 passed by the Delhi High Court in “Idemia Syscom India Private Limited v. M/s Conjoinix Total Solutions Private Limited (Arb. P. No. 1284/ 2024)” has provided clarity on the interplay between the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) and the Arbitration and Conciliation Act, 1996 (“Arbitration Act”). The Court held that the provisions of the MSMED Act, being a special and beneficial legislation, would override the provisions of the Arbitration Act, which is a general law. This article examines the Judgment, its legal context, and its implications for dispute resolution involving MSMEs in India.

Facts of the Case

The dispute arose out of a Service Framework Agreement dated 09.02.2022 between the Petitioner, M/s Idemia Syscom India Private Limited, and the Respondent, M/s Conjoinix Total Solutions Private Limited. The Petitioner sought the appointment of a Sole Arbitrator under Section 11 of the Arbitration Act, alleging breach and non-performance by the Respondent. However, the Respondent, being a registered MSME, had initiated proceedings under Section 18 of the MSMED Act before the MSME Facilitation Council, Chandigarh prior to appointment of the Arbitral Tribunal by the Delhi High Court.

Notably, even though the Section 18 MSMED Act proceedings were invoked after filing of the Section 11 Arbitration Act Petition, yet, the High Court dismissed the Section 11 Petition, emphasizing that the MSMED Act would prevail irrespective.

The Petitioner argued that the Arbitration Act should apply since no MSMED Act proceedings were pending at the time of filing the Section 11 Petition. Conversely, the Respondent contended that MSMED Act, being a special and beneficial legislation, would override the Arbitration Act. The High Court sided with the Respondent, highlighting the non-obstante clauses contained in the MSMED Act. It was observed:

“12.  While the A&C Act is the general law governing the field of arbitration, MSMED Act governs a very specific nature of disputes concerning MSME’s and it sets out a statutory mechanism for the payment of interest on delayed payments. MSMED Act being the specific law, and A&C Act being the general law, the specific law would prevail over the general law. Even otherwise. MSMED Act has been enacted subsequent to the A&C Act and the legislature is presumed to have been aware about the existence of A&C Act when the act was enacted. Sub-sections (1) and (4) of Section 18 contain non obstante clauses which have the effect of overriding any other law for the time being in force. Section 24 of the Act states that the provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. Thus, the legislative intent is clear that MSMED Act would have an overriding effect on the provisions of A&C Act. The provisions of MSMED Act would become ineffective if, by way of an independent arbitration agreement between the parties, the process mandated in Section 18 of the MSMED Act is sidestepped. Moreover, the fact that the petitioner has approached the Court under Section 11 of the A&C Act first would be of no help to him as the MSMED Act does not does not carve out any such exception to the non-obstante clause.”

Objects and Reasons of the Acts

1. Arbitration and Conciliation Act, 1996

The Arbitration Act was enacted to consolidate and amend the law relating to Domestic Arbitration, International Commercial Arbitration, and enforcement of Foreign Arbitral Awards. It is based on the UNCITRAL Model Law, aiming to provide a fair, efficient, and binding mechanism for dispute resolution with minimal Court intervention. Section 11 of the Arbitration Act empowers parties to seek court intervention in appointing an arbitral tribunal if the process contemplated under the Agreement fails.

1. Micro, Small and Medium Enterprises Development Act, 2006

The MSMED Act was introduced to facilitate the promotion, development, and competitiveness of MSMEs in India. A key feature of the MSMED Act is the protection offered to MSMEs in cases of delayed payments (Sections 15-23). Section 18 of the Act establishes the Micro and Small Enterprises Facilitation Council (MSEFC) as the statutory forum for conciliation and arbitration in disputes involving registered MSMEs. Importantly, Sections 18(1) and 18(4) of the MSMED Act contain non-obstante clauses, emphasizing the overriding effect of the Act on other laws:

“18.  Reference to Micro and Small Enterprises Facilitation Council.—

• Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council.
• Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.”

Dispute Resolution Mechanism Under Both Acts

1. Arbitration and Conciliation Act, 1996
2. Allows parties to agree on a procedure for appointing arbitrators (Section 11).
3. Provides for the competence of arbitral tribunals to rule on their own jurisdiction (Section 16).
4. Ensures limited judicial intervention, promoting party autonomy.
5. Micro, Small and Medium Enterprises Development Act, 2006
6. Establishes a statutory mechanism under Section 18, where a dispute involving an MSME can be referred to the concerned MSEFC.
7. The Council can first initiate conciliation and, upon failure, proceed to arbitration, either by itself or through an institution.
8. The MSEFC also possesses the power to decide its own jurisdiction, akin to an arbitral tribunal under the Arbitration Act. (This aspect is already settled by the Supreme Court and was reaffirmed by the Delhi High Court to counter the Petitioner’s contention that the MSEFC lacks jurisdiction.)

Analysis of Relevant Supreme Court Judgments

The Delhi High Court extensively analysed two pivotal Supreme Court decisions that clarify the interplay between the MSMED Act and the Arbitration Act.

1. Silpi Industries & Ors. v. Kerala State Road Transport Corporation & Anr. [(2021) 18 SCC 790]:

In this case, the Supreme Court held that the MSMED Act, being a special statute with an overriding provision under Section 24, would prevail over the Arbitration Act, a general law. The judgment noted:

“39.   Thus, it is clear that out of the two legislations, the provisions of the MSMED Act will prevail, especially when it has overriding provision under Section 24 thereof. Thus, we hold that the MSMED Act, being a special statute, will have an overriding effect vis-à-vis the Arbitration and Conciliation Act, 1996, which is a general Act. Even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act. …”

.

1. Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods (P) Ltd. [(2023) 6 SCC 401]:

This judgment reaffirmed the supremacy of the MSMED Act over the Arbitration Act, and the Supreme Court held:

“52.1. Chapter V of the MSMED Act, 2006 would override the provisions of the Arbitration Act, 1996.

52.2.  No party to a dispute with regard to any amount due under Section 17 of the MSMED Act, 2006 would be precluded from making a reference to the Micro and Small Enterprises Facilitation Council, though an independent arbitration agreement exists between the parties.

52.3   The Facilitation Council, which had initiated the conciliation proceedings under Section 18(2) of the MSMED Act, 2006 would be entitled to act as an arbitrator despite the bar contained in Section 80 of the Arbitration Act.

52.4.  The proceedings before the Facilitation Council/ institute/ centre acting as an arbitrator/Arbitral Tribunal under Section 18(3) of the MSMED Act, 2006 would be governed by the Arbitration Act, 1996.

52.5. The Facilitation Council/institute/centre acting as an Arbitral Tribunal by virtue of Section 18(3) of the MSMED Act, 2006 would be competent to rule on its own jurisdiction as also the other issues in view of Section 16 of the Arbitration Act, 1996.”

It was also clarified that the MSMED Act governs specific types of disputes and follows a unique statutory process. Even if the Arbitration Act is treated as a special law, the MSMED Act, enacted later in time, would prevail due to its overriding clauses.

Conclusion: Key Takeaways from the Judgment

The Delhi High Court’s judgment underscores the following:

• The MSMED Act, as a special and beneficial legislation, overrides the Arbitration Act, a general law, when disputes involve a registered MSME.
• The Judgment affirmed that the statutory mandate of the MSMED Act cannot be circumvented by private agreements or by initiating proceedings under the Arbitration Act.
• Invocation of Section 18 MSMED Act bars the applicability of Section 11 Arbitration Act for appointing an arbitral tribunal, even if Section 11 was invoked earlier.
• The MSEFC (or the Arbitral Tribunal originating from the MSEFC) holds powers similar to an Arbitral Tribunal, and all the trappings of the Arbitration Act would apply to such arbitration. This would include the power of the Tribunal to rule on its own jurisdiction; as affirmed by the Supreme Court and reiterated by the Delhi High Court.
• This judgment emphasizes the legislative intent to support MSMEs through a statutorily protected dispute resolution mechanism, making the MSMED Act the preferred forum for disputes involving MSMEs.

Delhi High Court’s Judgment reinforces the legislative supremacy of the MSMED Act and the statutory protection it provides to MSMEs in India. By upholding the dedicated dispute resolution mechanism under the MSMED Act, the Court has underscored the importance of catering to the unique needs and challenges faced by MSMEs.