By B Yerram Raju In the context of the stress faced by the justice dispensing system for several reasons, chief of them being the huge pendency of cases, the Government of India thought it expedient to provide a new forum and procedure for resolving international and domestic commercial disputes quickly culminating in setting up of […]
By B Yerram Raju
In the context of the stress faced by the justice dispensing system for several reasons, chief of them being the huge pendency of cases, the Government of India thought it expedient to provide a new forum and procedure for resolving international and domestic commercial disputes quickly culminating in setting up of the International Arbitration and Dispute Resolution Centre (IADRC) in Hyderabad in November.
“This is not a centre that would exclusively decide on international arbitration. It will also decide domestic arbitration, differences, or disputes between local investors. …We all know that in Indian culture, we sort out our disputes through mediation, negotiation and conciliation,” the CJI said.
Minister KT Rama Rao emphasised the need for the MSMEs to make the best use of the arbitration mechanism in settling their disputes. This article examines the legal position and further facilitation required to make the IADRC effective.
In line with the long-standing demand of the small-scale sector to alleviate the problem of delayed payments, the Delayed Payments Act came into being in 1993. The hope that the small-scale industries would be relieved of the stress in working capital was short-lived due to ineffective implementation.
The Act was amended in September 1998 providing for payment of penal interest at 150% of the prime lending rate of SBI, defining default period as 120 days. It also provided for an alternative mechanism of arbitration and conciliation and redefined the term supplier to include any institution, agency or undertaking notified as such by the Union government.
Industrial Facilitation Councils empowered to function as arbitrators/conciliators were to be notified by the State/UT governments. The amendments were aimed at strengthening the Act and providing relief to the small suppliers from the cumbersome legal redressal.
In 2006, when the MSME Development Act was brought in, the Delayed Payments Act was subsumed in Sections 15 to 18 of the Act whereby the MSE Facilitation Councils replaced the Industrial Facilitation Councils. The GoI directed the States to frame rules for running the Councils, as part of the arbitration and mediation mechanism. The well-intentioned provisions, however, are still not delivering the intended reliefs for the following reasons and need reforms:
Jurisdiction: Section 18(4)
Chairperson Role Crucial
The Chairman being a quasi-judiciary function must have full knowledge of the functioning of inter-relationship between the buyer and seller as a contractual arrangement; functioning of industry from the date of registration to its demonstrated ability to reach production capacity and standards of supply of goods and services; and of the transactional milieu of the industries with banks and FIs. Several State governments, notwithstanding the existence of such Councils in their States, refuse to honour the verdict of the Council.
Training
The Chairman and the Council members must be given training in the essential laws that govern contracts, sale of goods Act, taxation laws and the jurisdictional issues, Arbitration and Conciliation Act 1996 through case laws in the State Judicial Academy or the National Law University/school. This will enable them to come to quicker decisions on the disputes.
The arguments of both sides should be carefully recorded and interpreted. Such speaking orders of the Chairperson should stand the test of the judiciary as any reference to a higher court could damage the interest of the MSE that raised the dispute before the arbitration council. Role-plays can be an effective training tool.
The MSMED Act, 2006, established such councils only for the benefit of micro and small enterprises and not for medium enterprises. Medium enterprises are entitled to bankruptcy code provisions under the Insolvency and Bankruptcy Code. While efforts have been made to include MSEs and private individuals also to file bankruptcy petitions before the Insolvency and Bankruptcy Board of India, it did not add to the facilitation as the resolution mechanism is protracted to 250 days. In all the other corporate disputes, MSMEs stand as residual creditors, last in the queue for realising their dues.
Whenever courts receive petitions relating to the debts due to the MSMEs from the government departments or PSUs, it is a matter of introspection as to the reasons for the Judiciary at different tiers not asking them to specify what according to them meets with the contractual arrangement and pass the orders in just one or two hearings. This single step could settle many grievances.
Further, courts should insist on the disputed party to mandatorily remit 75% of the amount and interest of the judgemental debt a priori. This amount can be kept as a deposit on hold with the related bank so that the status of NPA of the account can undergo a change, qualifying for either full enjoyment of the sanctioned limits or even sanctioning additional working capital. Now that the IADRC has been set up in Hyderabad, its regional outfit, MSEFC, can be strengthened with its support both structurally and spatially.
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