MSMED Act; Refex Energy Ltd. Vs. Union of India, [Madras High Court, 02-06-2016]

MSMED Act – This writ petition is filed under Article 226 of the constitution of India, to issue a Writ of Declaration, declaring section 18 of the Micro, Small and Medium Enterprises Development Act, 2006 as ultravires Article 14 of the constitution of India.


IN THE HIGH COURT OF JUDICATURE AT MADRAS

DATED: 02.06.2016

CORAM: THE HONOURABLE MR.SANJAY KISHAN KAUL, CHIEF JUSTICE AND THE HONOURABLE MR.JUSTICE R.MAHADEVAN

WP.No.17785 of 2016 WMP.No.15469 of 2016

M/s.Refex Energy Limited, by its Managing Director/ Authorised Signatory Anil Jain, Mumbai 400012 Petitioner

Versus

1. Union of India, by its Secretary (Legislative), Ministry of Law and Justice, Government of India, 4 th Floor, A-Wing, Shastri Bhavan, New Delhi 110001

2. M/s.Passive Infra Projects P Limited, by its Director, Sh.Varun Agrawal, Delhi 110088. Respondents

For petitioner : Mr.Srinath Sridevan For respondents : Mr.V.P.Sengottuvel-R1

ORDER

This writ petition is filed by the petitioner company to issue a Writ of Declaration, declaring

Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006

(herein after referred to as the MSMED Act), as ultravires Article 14 of the constitution of India.

2. The case of the petitioner, in a nutshell, is that the petitioner company placed three work orders, viz. (1) REL/COMET/PO-04/11-12, dated 03.06.2011, (2) REL/Vituza/PO-03/11-12, dated 16.06.2011 and (3) REL/Vituza/PO-09/11-12, dated 28.07.2011, with the 2nd respondent for the supply of Galvanized Steel Structures/Solar Module Mounting Structures. Subsequently, since the 2nd respondent made a further demand, without making any correlative supplies, certain disputes arose between them. After conciliation, by the settlement agreement dated 20.03.2012, the same was settled by themselves with a condition that the 2nd respondent shall not claim any further amount other than Rs.80,00,000/-. For the amount payable to the 2nd respondent under the said settlement agreement, the 2nd respondent has to execute certain rectificatory service and on its failure, the petitioner withheld the said payment. The further case of the petitioner is that after a lapse of 3 years from the date of the said settlement agreement, the 2nd respondent filed a claim petition under

Section 18 of the MSMED Act, 2006

before the MSME Facilitation Council, claiming a sum of Rs.1,86,00,000/- along with interest thereon under section 16 of the MSMED Act. It is the further case of the petitioner that the facilitation council, despite the objections from the petitioner, referred the matter to arbitration and appointed Justice Shri S.S.Dahiya as the arbitrator to decide the claim petition. During the pendency of the arbitration proceedings, questioning the validity of section 18 of the MSMED Act, 2006 and raising the issue of legislative competence, this writ petition has been filed, with the prayer as stated above.

3. The learned counsel for the petitioner, in support of his contention that section 18 of the MSMED Act is ultra vires, has submitted as follows:-

a. A party cannot be forced to participate in the arbitration proceedings at the instance of the other party making the reference under section 18 of the MSMED Act. Section 18 contemplates initiation of unilateral arbitration proceedings, which is contrary to the spirit of alternate dispute resolution system, as without the consent of both the parties, the dispute cannot be referred to arbitration. Only payment as per the invoices by Micro, Medium and Small Scale industries would attract the provisions of sections 16, 17 and 18 of the MSMED Act.

b. The parliament has no power to legislate in respect of Micro, Small and Medium Scale industries as it is a subject falling within the scope of Entry 24 of List II of Schedule VII of the constitution and only the states will have the power to enact.

c. Section 18 deprives the petitioner of its right to approach the courts for redressal of their grievances.

d. The dispute raised would not fall within the ambit of sections 16, 17 and 18 of the MSMED Act, 2006.

e. Since a conciliation under section 18(2) is a pre-requisite for the 4 MSME facilitation council, in the absence of such conciliation between the parties, within the meaning of section 18(2) of the Act, the MSME Facilitation Council has no jurisdiction to entertain the claim of the 2nd respondent and therefore, the reference of the dispute to arbitration is bad in law.

f. The 2nd respondent, having waived its right to invoke the arbitration clause in view of the settlement agreement and having consented to the courts within the territory of Chennai and contracted itself out of the statute, is not entitled to make any reference under section 18 of the MSMED Act and further, the 2nd respondent has also initiated proceedings under section 138 of the Negotiable Instruments Act against the petitioner.

4. The learned counsel for the petitioner has, in support of his contentions, relied upon the following judgements:- (a) 1970 (3) SCC 323 (Shri Ramtanu Co-operative Housing Society Ltd Vs State of Maharashtra). (b) AIR 1971 Madras 245 (T.P Sundaram Lingam Vs State of Madras). (c) 2008 (7) SCC 454 (United India Insurance Co. Ltd Vs Ajay Sinha & another).

5. The learned counsel for the petitioner also submitted that the other provisions of the MSMED Act, except section 18, were tested before this court and upheld by the division bench of this court, in a batch of writ petitions in WA.No.2461 of 2011 (Eden Exports Company Vs Union of India & Others), by order dated 20.11.2012. Under the circumstances and grounds, the learned 5 counsel for the petitioner prayed for the declaration against section 18 as sought for in this writ petition.

6. Per contra, the learned counsel appearing for the 1st respondent contended that the grounds mostly raised by the petitioner are factual in nature and have to be tested before the Arbitrator. The learned counsel also contended that the parliament has the power to legislate as the enactment was made in public interest to cover a class of industries exercising its power under the Entry 52 of List I of VII Schedule of the constitution.

7. This court heard the learned counsel on either side and perused the materials placed on record, including the relevant provisions of law.

8. The bone of contention of the learned counsel for the petitioner is that the union legislature is incompetent to enact laws with respect to any “industries”, as they fall, exclusively, within the domain of Entry 24 of List II of the Union List and not under Entry 52 of the List I of the VII Schedule of the constitution and only the states are competent.

9. Entry 52 of List I reads as follows:- “52. industries, the control of which by the Union is declared by parliament by law to be expedient in the public interest.”

10. Entry 24 of List II reads as follows:- 6 “24. industries, subject to the provisions of entries 7 and 52 of List I.”

11. It is clear that Entry 24 is subject to the provisions of Entries in 7 and 52 of List I, which enable the Union of India to cover industries, which the parliament by law in public interest feels necessary to do so. In the present case, the Union has, after considerate opinion to pave way for development and smooth functioning of the industries in the Small Scale Sector, has enacted the MSMED Act, by repealing the existing “The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act,1993”. The statement of objects and reasons for enacting the act clearly spells out the public interest to bring in a unified legal frame work for the small scale industries, so that the obstacles in the path to growth may be minimised and to facilitate the growth of such industries into medium and so on.

12. Section 2(e) of the MSMED Act defines “Enterprise” as “an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the industries (Development and Regulation) Act, 1951 (65 of 1951) or engaged in providing or rendering of any service or services”. The definition is wide enough to cover not only the industries in the manufacturing or production sector, but also the industries engaged in the service providing sector. section 7 provides for classification of enterprises. First Schedule of the act provides for the types 7 of industries covered under the act.

13. In the decision relied upon by the learned counsel for the petitioner reported in AIR 1971 Madras 245 (T.P Sundaram Lingam Vs State of Madras), the Division Bench has held as follows:-

“7. Entry 24 of List II is “industries” subject to the provisions of Entries 7 and 52. Entry 52 of List I covers industries, the control of which by the Union is declared by parliament by law to be expedient in the public interest, trade and commerce within the State subject to the provisions of Entry 33 of List III is in Entry 26 of List II. Entry 33 of List III relates to trade and commerce, in, and the production, supply and distribution ofa. The products of any industry, where the control of such industry by the Union is declared by parliament by law to be expedient in the public interest, and imported goods of the same kind as such products; b. Foodstuffs, including edible oil-seeds and oils; and certain other articles. The interrelation to these articles in obvious. All industries fall within Entry 24 of List II. The State Legislature is exclusively competent to make laws in respect of industries. But, inasmuch as the entry in subject to Entry 52 of List I, where parliament by law declares that it is expedient in the public interest for the Union to control any specified industry, the parliament will have the entire power to make any law in respect of such control led industry, and correspondingly the State Legislature under Entry 24 will cease to have competence to make laws in respect of the controlled industry”.

14. In this context, it is also relevant to quote Entry 33 of List III of the VII Schedule, as under:-