A case for mandatory registration of MSMEs to avail benefits under the MSME Act

The Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act) was enacted by the Parliament for facilitating the promotion and development of such enterprises.

Amongst other benefits, entities registered under the MSME Act can avail the dispute resolution mechanism (for recovery of unpaid dues) before the ‘MSME Facilitation Councils’ as envisaged under Section 18 of the Act. These MSME Councils first attempt conciliation between such MSME entity (supplier) and the opposing party which has availed such services (buyer). In the event the conciliation fails, the reference gets converted into a regular arbitration in terms of Section 18(3) of the Act.

The obvious benefits of such a reference, and the reason for a significant increase in MSME arbitration, is the entitlement of the MSME to get enhanced rates of interest in terms of Section 16 of the MSME Act for such unpaid dues.

However, the MSME Act itself does not clearly specify whether dues relating to, or arising out of contracts/purchase orders/invoices issued by an MSME prior to date of registration, are also amenable to be referred before the MSME Facilitation Councils.

NBCC (India) Ltd v. State of West Bengal and Ors

The aforesaid questions relating to mandatory registration and entitlement of MSMEs to seek redressal under the MSME Act for dues relating to period prior to registration were initially answered by the Supreme Court in Silpi Industries v Kerala State Road Transport Corporation and Gujarat State Civil Supplies Corporation Ltd. v Mahakali Foods Pvt. Ltd. In both these judgments, the Supreme Court held that only claims post registration are amenable to MSME jurisdiction.

However, the Court in NBCC (India) Ltd. v The State of West Bengal and Ors recently doubted the precedential value of the Silpi and Mahakali judgments. The Court has opined that the core issue of whether claims prior to registration (under the MSME Act) are amenable to be referred before the MSME Facilitation Councils was never an issue raised in the said two judgments. As such, while holding that the said two judgments cannot be a precedent for such proposition, the matter has been referred to a three-judge bench for an authoritative pronouncement.

Need for mandatory registration of MSMEs

MSMEs should be directed to mandatorily register themselves, and only prospective claims should be allowed to be filed before the MSME Facilitation Councils. In fact, a system of verification of entities purporting to register as MSMEs should be introduced. Each and every entity ought not to be registered as an MSME in the garb of ‘single window clearance’. This is due to the following practical considerations.

Firstly, it is relevant to note that presently, the classification of an enterprise as a ‘micro’, ‘small’ or ‘medium’ enterprise is contingent upon the twin threshold requirements of ‘investment in plant and machinery’ and ‘turnover’ of the respective MSME entity as per the notification dated June 26, 2020 issued by the Ministry of MSME. The documentary basis for such classification are the Income Tax Returns and the GST Returns of the concerned MSME. However, interestingly, the notification expressly provides that registration of an MSME shall be provided on a ‘self-declaration with no requirement to upload documents, papers, certificates or proof’ basis. The said notification does not provide any system of checks and balances and expressly dispenses with the requirement of proof prior to obtaining registration as an MSME. It is only upon a ‘complaint’ or a ‘discrepancy’ highlighted that the General Manager of the concerned District Industries Centre is empowered to undertake an enquiry. In such a case, it is evident that any entity can obtain such MSME registration overnight on a ‘self-declaration’ basis, which may or may not be meeting the twin threshold requirements of ‘investment in plant and machinery’ and ‘turnover’. Any such entity can, therefore, start claiming interest under the MSME Act merely by obtaining such registration even in pending litigation. Thus, this aspect of verification of purported entities claiming to be MSMEs first needs to be addressed (and appropriate amendments made) to ensure that no one claims MSME status prior to meeting the said twin requirements as per the 2020 notification.

Secondly, when such MSME Certification (admittedly based on mere ‘self-certification’) is produced to prima facie make a claim in MSME arbitration/other litigation, the same is deemed to be a valid certificate. In every proceeding where there could be a genuine doubt about the aforesaid twin requirements not being met by the purported MSME, the ‘buyer’ (the party against whom the claim for money is raised) has to then specifically challenge and seek cancellation of the MSME certification. The onus is then cast on the ‘buyer’ to challenge and establish in trial/evidence that the concerned MSME does not meet the twin requirements of ‘investment in plant and machinery’ – which the arbitrator/judge may not be in a capacity to decide. For this reason also, it should be the onus of the entity seeking MSME certification to establish such twin requirements with documentary evidence at the time of seeking registration under the MSME Act.

Thirdly, it is also relevant to note that a buyer (person who owes any debts to an MSME) is required to specify such principal amount and interest due thereon in its annual statement of accounts, in terms of Section 22 of the MSME Act. Non-compliance with provisions of Section 22 of the MSME Act is a criminal offence triable by a Metropolitan Magistrate under Section 28 of the MSME Act. Now, if registration under the MSME Act is made optional (and not mandatory), there is practically no way for a buyer to ascertain if the supplier it has contracted with is an MSME or not. The buyer in such cases will be left to face criminal prosecution at its own risk.

Fourthly, since it is evident that the MSME Act has drastic consequences on the buyers, it should be made mandatory for the MSME entity to forthwith disclose its claimed MSME status prior to all its commercial dealings. This will also be in line with the Office Memorandum dated December 27, 2012 issued by the Ministry of MSME. This is to ensure that the buyer (or whoever avails the services of an MSME), knows and is aware of the consequences of such commercial dealings with an MSME.

The Act was promulgated as a beneficial piece of legislation for MSMEs, which form the backbone of the economy. However, in view of all of the aforesaid issues, the Act has the potential of being abused at the instance of those entities which never meet the twin threshold requirements in law, and which were never intended to be benefitted.

It is imminent for Parliament to take up all of these issues and amend the Act accordingly after consulting the stakeholders, rather than such issues being settled by way of judicial precedents.

Vipul Kumar is an Advocate-on-Record (AOR) at the Supreme Court.