Analysis of Counterclaims in Arbitration under MSMED Act

Explore the insightful legal analysis on the permissibility of counterclaims in arbitration under the MSMED Act. The court’s interpretation and application of relevant provisions shed light on the intricacies of dispute resolution in cases involving micro and small enterprises. Stay informed on the nuances of this important legal issue.


  • The respondent filed O.P.No.617 of 2017 before the High Court of Judicature at Madras.
  • Appellant claims complete execution of the contract and project commissioning on 27.06.2015.
  • Respondent argued Facilitation Council deals with supplier disputes, not counterclaims.
  • Appellants filed appeal on Limitation Act and counterclaim issues.
  • Appellants and respondent had a contract for hydro-mechanical equipment supply and installation.
  • Respondent filed a claim petition before the Facilitation Council on 20.03.2017.
  • High Court allowed Arbitration Appeals filed by the respondent.
  • Appellants approached Industrial Facilitation Council for balance payment.
  • Application under Section 11(6) of the 1996 Act filed for appointment of a second arbitrator.
  • Appellant opposed the application stating it had already moved the Facilitation Council.
  • Conciliation failed, claims referred to arbitration under the 1996 Act.
  • Civil Appeal Nos.1620-1622 of 2021 filed against the High Court order in O.P.No.617 of 2017.
  • Appellants and KSRTC signed an agreement on 27.03.2011.
  • Common issues considered in the appeals which were heard together.
  • Civil Appeal Nos.1570-1578 of 2021 filed against a common judgment in Arbitration Appeal Nos.69, 70, 72, 73, 77, 78, 79, 80, and 81 of 2014.
  • The High Court remanded the matters to the arbitrator for disposal de novo in light of the observations made in the judgment.
  • The High Court appointed Mr. Justice K. Gnanaprakasam, former Judge of Madras High Court as 2nd arbitrator.
  • The order challenging the appointment of the arbitrator was tagged with another case by the Supreme Court.
  • The Supreme Court issued notice limited to the issue of whether the counter claim of the respondent could be entertained by the Arbitral Tribunal.
  • The High Court considered various provisions of the Arbitration and Conciliation Act, 1996, and the Limitation Act, 1963, in its judgment.

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  • Two main issues before the Court: applicability of Indian Limitation Act, 1963 to arbitration proceedings under Section 18(3) of MSMED Act, 2006, and maintainability of counterclaim in such arbitration proceedings.
  • Background of MSMED Act, 2006 and the repealed Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 is discussed.

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  • Sri V. Giri argues that the 2006 Act aims to protect micro and small enterprises and should not allow counter claims to expand its scope.
  • The Act is considered beneficial legislation for micro and small enterprises, so the scope should not be broadened by permitting counter claims from buyers.
  • Ms. Aishwarya Bhati and Sri P.B. Suresh argue that the MSMED Act, designed for unpaid sellers, should not be made ineffective and authorities under the Act should have jurisdiction even if buyers raise counter claims.
  • Sri V. Giri emphasizes that the conciliation and arbitration provisions in Chapter V of the 2006 Act are specific to claims of the supplier.
  • The respondent argues that no claim or counter claim under Section 18 is allowed.
  • They interpret the expression ‘any party’ in Section 18 to refer only to the supplier.
  • Therefore, in the absence of jurisdiction, they contend that no counter claim is permissible.

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  • The 2006 Act, being comprehensive, covers micro, small, and medium enterprises, unlike the earlier legislation of 1993 which was limited to small scale and ancillary industrial undertakings.
  • Disputes under the 2006 Act can be taken up for arbitration if not settled through conciliation by the Micro and Small Enterprises Facilitation Council.
  • The Act provides for buyer obligations, interest rates, recovery mechanisms, and remedies for the parties aggrieved by the awards.
  • Challenges to awards in favor of the seller require a pre-deposit of 75% of the awarded amount as per the 2006 Act.
  • The 2006 Act allows for preference policies in procurement for goods and services from micro and small enterprises by government entities.
  • The Act allows for appointment of arbitrator even without an agreement for resolution of disputes by arbitration.
  • In cases where the buyer cannot make a counter-claim, proceedings cannot be continued before the Council under the 2006 Act.
  • The Act aims to promote and enhance the competitiveness of micro, small, and medium enterprises through various measures and guidelines.
  • Registration under the MSMED Act is essential to claim benefits retrospectively for supply of goods and services.
  • Provisions of the MSMED Act prevail over the Arbitration and Conciliation Act, 1996, due to its special and overriding nature.
  • Central Government may credit grants to the Fund under section 13.
  • Cost of pollution control, research, and development, industrial safety devices to be excluded in calculating investment in plant and machinery.
  • Interest payable by buyer in case of delayed payment to supplier.
  • Recovery of amount due under section 16 for goods supplied or services rendered.
  • Reference to Micro and Small Enterprises Facilitation Council for disputes.
  • Application for setting aside decree, award, or order requires deposit of 75% of the amount.
  • Functions and powers of the Board in promoting micro, small, and medium enterprises.
  • Establishment of micro, small, and medium enterprises requires filing of memorandum.
  • Composition of the Advisory Committee and its role in providing recommendations.
  • Classification of enterprises based on investment in plant and machinery or equipment.
  • Special statutes are preferred over general ones if beneficial
  • Limitation Act, 1963 is applicable to arbitrations covered by Section 18(3) of the 2006 Act
  • Date of supply of goods/services can be considered the relevant date for applicability of the Limitation Act
  • The appellant is not entitled to invoke the provisions of Chapter V and seek reference to arbitration under Section 18 of the MSMED Act, 2006.
  • There is an agreement for arbitration between the parties for resolution of disputes pursuant to their contract.
  • The appellant has abandoned the incomplete work and made deficient and defective supplies in February/March 2015.
  • The High Court rightly allowed the application filed by the respondent under Section 11(6) of the 1996 Act.


  • The Civil Appeals are dismissed.
  • No order has been made regarding costs.


Case Number: C.A. No.-001570-001578 / 2021

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