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Opinion: Strengthen MSE facilitation councils

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 Telangana Today

Published Date - 16 December 2021, 12:06 AM

Opinion: Strengthen MSE facilitation councils

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:

The Council is expected to deliver judgment within 90 days of lodging the claim. Frequently, this time lag expands at the Council itself due to administrative reasons as the Chairperson is obliged to perform other statutory functions as Director of Industries.
90 days’ delay, if unresolved in terms of actual realisation of the supply bill, turns the account into NPA. 90 days was fixed when the NPA norm was 120 days’ overdue position. Therefore, this 90 days’ timeline should be reduced to 60, mandatorily.

The Council that meets once a month should meet fortnightly to provide reasonable scope for hearing both sides. No more than two adjournments must be allowed. This should be provided in the statute itself instead of rules.
If the respondent does not honour the order, the firm must file an Execution Petition within the respective jurisdiction after waiting for three months from the date of the order and this is governed by the civil procedure court. Therefore, the intended settlement does not take place.

Jurisdiction: Section 18(4)

Several MSEs enter sale contracts and PPPs that specify the jurisdiction (restricting area for resolving disputes) of the dispute within the respective State. Unless the MSMED Act has a provision to overrule such authority, the claim order will go for a legal tangle involving huge expense and delays in realising the claim from the respondent.
Most such disputes are formidable when the respondent is either a government department or PSU.
It is incumbent on the payee to remit 75% of the claim amount in case the Council’s order is contested in High Court. But such remittance being made into the court and not into the account of the firm, the sword of NPA still hangs on the neck of the enterprise. It is a matter for consideration whether the related HC in such dispute could straight away inform the bank where the firm holds its accounts that the deposit is held by the court in its name so that the NPA proceedings and those under the SARFAESI Act can be halted and the unit is allowed to carry on its production activity with renewal of their credit limits.
Clause four of Section 18 has an overriding clause that is not honoured by several State governments and High Courts as well. Therefore, strengthening this provision is extremely important when alone the disputed claim gets remittance of 75% into the court upfront.
Hence it is important that the issue of the jurisdiction should have an overriding provision over any and all other such clauses in any agreement between the disputant parties. Small enterprises being captive suppliers do not have the muscle to alter the public-private partnership (PPP) clauses even when some of them contravene the law.
In 2019, the Telangana government, like Maharashtra, set up four regional councils of the Micro and Small Enterprise Facilitation Council with the General Manager, District Industrial Centre, to perform the role of Chairman of the Council. The Chairperson performs the quasi-judicial role in settling the disputes. Hyderabad was the only MSEFC covering the entire State with the Commissioner of Industries as Chairperson but it was dispensed with from 2019.

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.