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Overriding effect of arbitration and conciliation act, 1996 and MSMED Act,2006 Part 1



The micro, small and medium enterprises development act, 2006, (Herein referred as “the Act”) was in acted with the aim of felicitating the promotion and development and enhancement of competitiveness of micro, small and medium enterprise. Every micro, small and medium enterprise have to file a memorandum of understanding with the District industries Centre under this act.

With a view to protecting the micro and small enterprise, the act provides for a procedure to follow in case of delayed payment. One needs to remember that these provisions are limited to micro and small enterprises and does not cover medium enterprises as per the interpretation of the act. That implies the enterprise is engaged in manufacturing and production where the investment in plant and machinery is less than five crores and the enterprises engaged in providing or rendering services where the investment in equipment is less than two crores, only for those enterprises, dispute resolution mechanism is given under chapter V of the act.



Nowadays, small and micro enterprises have started playing a major role in the Indian economy both by supplying goods and by providing employment. There has been a plethora of cases where buyers do not end up paying the amount of the goods supplied by the small and micro enterprises on time which can create hardships for those enterprises. To protect them from such hardships, the MSMED friendly act was enacted also providing for a mechanism to make sure that these enterprises are getting paid. They act imposes an obligation on medium, large and government undertakings to pay for the goods within 45 days of the purchase otherwise the compound interest or three times bank rate as specified by the RBI will be levied on the defaulters. Even after that, no payment is made, small and micro enterprises can approach to micro and small enterprises facilitation Council (herein referred to as facilitation Council.)



A specific dispute resolution under section 18 is provided which can be explained as below:

  1. First, there should be an amount due between the supplier and the buyer;
  2. Any party can make a reference to the micro and small enterprises facilitation council.
  3. The facilitation council will first step up a conciliation (either by itself or can refer it to a conciliation Centre);
  4. If the conciliation is successful, the matter will be completed there as per the settlement between the parties;
  5. If the conciliation is not successful, then the facilitation council will initiate arbitration proceedings either by itself or it can refer the matter to an arbitration centre;
  6. The reference under this section has to be resolved within 90 days.

This section also highlights the jurisdiction of facilitation council. As per the section, the facilitation Council can act only on those references by suppliers is from its jurisdiction whereas buyer need not be.



Section 18 ousts the jurisdiction of civil courts and provides for a specific dispute resolution mechanism. In case of M/S Refex energy Ltd versus Union of India[1], the petitioner challenged the validity of section 18 on the grounds that it is violative of Article 14 as it does not permit a person to approach a court of his choice. However, the Madras High Court observed that under section 19 of the act, a person aggrieved by the award or decree can approach the court.[2]


This Article Does Not Intend To Hurt The Sentiments Of Any Individual Community, Sect, Or Religion Etcetera. This Article Is Based Purely On The Authors Personal Views And Opinions In The Exercise Of The Fundamental Right Guaranteed Under Article 19(1)(A) And Other Related Laws Being Force In India, For The Time Being. 

  • Why this mechanism is required?
  • Mechanism under section 18 of the MSMED act, 2006
  • Validity of section 18

BY : Mr. Kartikeya Awasthi

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