Should a mere representation to MSME Facilitation Council for recovery of dues by an MSME, amount to “pre existing dispute”?
Author is an Advocate cum Company Secretary, currently practising as Advocate at MDP Partners, Mumbai
The case of Arpan Packaging Pvt. Ltd. vs. Regma Ceramics Pvt. Ltd. (2023) ibclaw.in 240 NCLAT, involved an operational creditor, Arpan Packaging, who was owed a sum of Rs. 1,91,55,230 by Regma Ceramics. Arpan Packaging had been supplying goods to Regma Ceramics for over 5 years, and despite raising 1,760 invoices for a total of Rs. 6,82,66,341, Regma Ceramics had only paid Rs. 4,91,11,111, leaving a balance of Rs. 1,91,55,230. In an attempt to recover the due amount, Arpan Packaging referred the matter to the Micro and Small Medium Enterprise (MSME) Facilitation Council under the provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act 2006), before filing a section 9 petition under the Insolvency and Bankruptcy Code (IBC) for initiating the Corporate Insolvency Resolution Process (CIRP) against Regma Ceramics.
The National Company Law Tribunal (NCLT) considered the application and deemed it a “pre-existing dispute” because Arpan Packaging had already approached the MSME Facilitation Council under Section 18 of the MSMED Act. As a result, the operational creditor was prohibited from filing a Section 9 Petition under the IBC. The NCLT interpreted the term “dispute” in Section 18(1) of the MSMED Act, stating that any party with a “dispute” regarding an amount under Section 17 can refer the matter to the MSME Facilitation Council. Therefore, the NCLT concluded that a pre-existing dispute existed between the parties, which led to Arpan Packaging’s petition to the Facilitation Council, and consequently, no application under Section 9 could be filed by Arpan Packaging as an operational creditor under the IBC.
Appeal to NCLAT
Arpan Packaging appealed to the National Company Law Appellate Tribunal (NCLAT), arguing that the mere invocation of Section 18 of the MSMED Act should not automatically imply that the amount involved was disputed. The MSMED Act provides a facilitation mechanism for small and medium-sized enterprises (MSMEs) to recover their rightful dues from buyers within the specified timeframe. However, the NCLAT also held that the Facilitation Council had the authority to arbitrate the “dispute” under the provisions of the Arbitration and Conciliation Act 1996. Therefore, the NCLAT concluded that a dispute existed, and the unpaid amount was now the subject of controversy pending resolution by the MSME Facilitation Council.
Background on the MSMED Act 2006
The Micro and Small Medium Enterprise Development (MSMED) Act 2006 provides a mechanism for micro and small enterprises to recover their dues from buyers who fail to make timely payments for goods and services. According to Section 15 of the act, the buyer is obligated to make payment within the agreed time limit, or 45 days from the acceptance of the goods/services if no specific timeline is agreed upon. In case of delay, Section 16 allows for the payment of interest at a rate three times the bank rate notified by the Reserve Bank of India. Section 17 enables the recovery of dues, along with interest as stated in Section 16, through a reference to the MSME Facilitation Council under Section 18. The council conducts inquiries, provides assistance to the MSME unit, and renders appropriate arbitration awards for the payment due to the MSME.
In the case at hand, it is evident from the judgments that there was no dispute between the parties regarding the quantity or quality of the goods supplied by Arpan Packaging. The respondent, Regma Ceramics, did not present any evidence to prove the existence of a pre-existing dispute, apart from the petition filed by Arpan Packaging before the Facilitation Council under the MSMED Act. Thus, the representation made by Arpan Packaging to the council can be considered as a grievance petition at most, with the only dispute being the non-payment of dues by Regma Ceramics, which was legally payable.
The Significance of Audited Financial Account Statements
Section 22 of the MSMED Act requires buyers who are required to get their annual accounts audited under any applicable law to furnish additional information in their annual statements of accounts. This information includes details of pending payments to MSME suppliers beyond the agreed timeframe, which, in the absence of a specific timeline, is 45 days from the acceptance of goods/services. In this case, Regma Ceramics is required to get its accounts audited under the Companies Act, and therefore, the company should have filed these details with the Ministry of Corporate Affairs (MCA) as part of its financial account statements. If this information had been presented, it could have served as conclusive evidence of whether a dispute existed between Arpan Packaging and Regma Ceramics, rather than relying solely on the representation filed under Section 18 of the MSMED Act.
Considering the facts and circumstances of the case, the Tribunal upheld the decision of the adjudicating authority. Citing the Hon’ble Supreme Court judgment in the case of Mobilox Innovations Pvt. Ltd. Vs. Kirusa Software Pvt. Ltd.  ibclaw.in 01 SC, the NCLAT dismissed Arpan Packaging’s appeal. Certain crucial facts were not presented in the judgments of both the NCLT and NCLAT, which could have potentially affected the outcome of the case. The MSMED Act provides a mechanism for MSMEs to recover dues from buyers, and an operational creditor can approach the MSME Facilitation Council for recovery, irrespective of the existence of a dispute between the parties regarding the outstanding payment.
If the audited financial account statements had been brought into ‘record,’ they could have provided conclusive evidence of any dispute between the appellant and the respondent, instead of relying only on representation filed under section 18 of the MSMED Act, 2006 by the Appellant .
Whether this case or the likes of it will settle here or travel to the Hon’ble Supreme Court, remains to be seen.
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