Orissa High Court

(Through Hybrid Mode) vs Micro And Small Enterprise on 7 April, 2022

                 IN THE HIGH COURT OF ORISSA AT CUTTACK

                              W.P.(C) No.21943 Of 2016
                               (Through hybrid mode)
            M/S. JSW Steel Ltd                       ....                Petitioner

                                                      Mr. Y. Das Senior Advocate
                                                       with Mr. R.Roy, Advocate

                                          -versus-

            Micro And Small Enterprise               ....         Opposite parties.
            Facilitation Council and others
                                               Mr. S.P.Mishra, Senior Advocate
                                                                      For O.P.2


                      CORAM: JUSTICE ARINDAM SINHA

                                     ORDER

07.04.2022 Order No.

28. 1. Petitioner has moved Court praying that proceedings initiated

by opposite party no.1 under section 18 in Micro, Small and Medium

Enterprises Development Act, 2006 (MSEFC Case no.17 of 2014) and

award dated 28th June, 2016, be quashed and set aside. The writ

petition was heard by this Bench on a few occasions.

2. Mr. Das, learned senior advocate appears on behalf of

petitioner and had earlier submitted, challenge in the writ petition is

directed against the proceeding, concluded by award dated 28th June,

2016 in arbitration reference under the Act. Short point is that award

holder cannot be said to be a supplier within meaning of clause (n) in

// 2 //

definitions section (2). Sub-clause (ii) under clause (a) in sub-section

(1) of section 7 limits enterprises, such as award holder, in being

called a small enterprise, to those whose investment on plant and

machinery is more than Rs.25 lakhs but does not exceed Rs.5 crores.

He referred to pages 110 and 111 of the writ petition to show from

schedule of fixed assets of opposite party no.2 (supplier), it had plant

and machinery as on 1st April, 2010 at Rs.6.54 crores and the same as

on 1st April, 2011 at Rs.5.47 crores. This is relevant information in

relation to the claim for payment made and forwarded as a demand

under the Act by said opposite party.

3. Mr. Mishra, learned senior advocate appears on behalf of

opposite party no.2 and was heard on 7th December, 2021, when he had

submitted that his client has three units. The unit situated at Khurda has

been assessed to be a Small Manufacturing Enterprise by the

committee formed as per decision of the government in Micro, Small

and Medium Enterprises (MSME) Department. The committee, on 30th

March, 2015 certified the status of his client's said unit. The document

is annexure A/2 in the preliminary counter filed by his client, appearing

at running page 266. His client had filed additional affidavit reply on

behalf of his client to bring on record fact of his client having three

separate units, as aforesaid, one in Khurda.

// 3 //

4. He submitted further, all supplies were made to petitioner from

the unit at Khurda. The supplies were made by his client in years

2009 to 2013. His client had certification as on 6th May, 2008 for the

Khurda Unit, being disclosure in the writ petition at page 75. The

order for supply is dated 30th June, 2009 and the supplies were made

pursuant thereto, as completed in year 2013.

5. On 4th March, 2022 hearing of the writ petition was on circulars

dated 29th September, 2015 and 3rd March, 2016. Relevant text from

order dated 4th March, 2022 is reproduced below.

"2. Mr. Das, learned senior advocate appears on behalf of petitioner and draws attention to two documents disclosed under memo dated 11th January, 2022, filed by opposite party no.2. The first is circular dated 29th September, 2015, issued by Additional Development Commissioner (Micro, Small and Medium Enterprises). Text of the circular is reproduced below.

"The matter regarding clubbing of various enterprises (whether located in the same district or in various districts of the state/country) under the same ownership have been examined by this office.

2. The competent Authority, after examining the issue in depth, has decided that the investments in Plant & Machinery/Equipments of all enterprises under same ownership shall be clubbed together while assessing the status of MSMEs as per provisions under the MSMED Act, 2006.

3. This supersedes all earlier orders/letters/ clarifications issued in this

// 4 //

regard.

4. This issues with the approval of Special Secretary & Development Commissioner (MSME)."

The second document is circular dated 3rd March, 2016. The text of the circular is reproduced below.

"Reference is invited to circular no. 5(2)/4/2015-MSME Pol. Dated 29.09.2015 issued from this office.

2. It is to inform that the above referred to circular has been withdrawn with immediate effect.

3. This issues with the approval of Hon'ble Minister for Micro, Small and Medium Enterprises."

3. He, then draws attention to his client's affidavit in response to the circulars. He submits with reference to paragraph 5 in the affidavit, on information obtained, there was no clubbing as a result of withdrawal circular dated 3rd March, 2016. On query from Court he relies on sections 22 and 27 in Micro, Small and Medium Enterprises Development Act, 2006 to submit, not only is opposite party no.2 ineligible to be a small enterprise, since all its units clubbed together will take the working capital above the prescribed limit, said opposite party did not disclose its claimed status and thereby exposed his client to penalty under section 27.

4. What emerges is that there is no notification regarding clubbing of enterprises or units that make the aggregate working capital ineligible for certification as a micro or small or medium enterprise, as the case may be. Internal correspondence between

// 5 //

departments/offices will not be relied upon by Court. There has been demonstration that Khurda unit of opposite party no.2 had received certification. On query from Court Mr. Mishra clarified that there was disclosure of the two circulars to demonstrate that there was no notification for clubbing and the dispute regarding nonpayment arose in year, 2013-14, at a time before the circulars came into existence."

6. On 16th March, 2012 Mr. Das reiterated his submissions, earlier

made. He referred to additional reply on behalf of opposite party no.2,

affirmed on 2nd December, 2021, page 17 to show that on addition in

plant and machinery totalling Rs.9.32 crore, Kashipur (Uttarakhand)

unit of opposite party no.2 could not continue to remain a small

enterprise. He drew attention to sub-clauses (i) to (iii) under clause (a)

in section 7(1), Micro, Small and Medium Enterprise Development

Act, 2006 to submit, added value of plant and machinery in said unit

exceeded categorization as small enterprise and came within category

of medium enterprise. Turning to definition of supplier under clause

(n) in definitions section 2, he submitted, meaning given does not

include a medium enterprise. On query from Court he submitted, claim

was made by said opposite party, before the council, on supplies made

from the Kashipur unit, but later withdrawn.

7. Today Mr. Das relies on several judgments.

(i) Judgment dated 15th December, 2021 of the Supreme Court

// 6 //

in Civil Appeal no.2899 of 2021 ( Jharkhand Urja Vikas Nigam

Limited Vs. State of Rajasthan and others), paragraphs 10 to 13. He

submits, in that case prescribed procedure was not followed by the

council. The Supreme Court intervened. It is applicable to facts in this

case, where the award is a result of breach of the procedure and as

such, it should be set aside and quashed.

(ii) Order dated 23rd September, 2021 of the Supreme Court in

Civil Appeal no.5934 (Vijeta Construction Vs. Indus Smelters Ltd.

and others), paragraphs 9.2 to 10. He submits, here too the Supreme

Court found that prescribed procedure had not been followed by the

council and there was interference.

(iii) Vidya Drolia Vs. Durga Trading Corporation reported in

(2021) 2SCC 1, paragraph 48. Mr. Das submits, the Supreme Court

said that judgment in rem determines the status of a person or thing

and such a judgment is conclusive evidence against all persons

whether parties, privies or strangers of the matter actually decided.

The certification received by opposite party no.2 is akin to judgment in

rem in as much as it tends to bind his client, who was not party nor

privy to the making of it. As such, the validity of the certificate is

excluded from arbitration as it is an action in rem. The validity be

examined by Court, to quash the same.

// 7 //

(iv) Order dated 27th August, 2010 passed by a Division Bench of

the High Court of Bombay at Nagpur, available at 2010 SCC On Line

Bom 2208 (Steel Authority of India Limited vs. MSEFC, Nagpur),

paragraph 11.

(v) Order dated 1st March, 2021 of a Single Judge in the High

Court of Bombay in Arbitration Appeal (St) no.30508 of 2019 (P.L.

Adke Vs. Wardha Municipal Corporation ), paragraph 29 and 38

in Manupatra print. Mr. Das submits, where there is arbitration

agreement, there cannot be a reference under the 2006 Act, was view

expressed by the learned Single Judge. He submits further, the view is

pending adjudication in the Supreme Court. Hearing has been

concluded and judgment reserved.

(vi) Order dated 5th January, 2022 passed by this Bench in

W.P.(C) no.27216 of 2020 (Bajaj Electricals Limited Vs. Micro

and Small Enterprise Facilitation Council), paragraphs 12 and 13.

Mr. Das submits, this Bench has held on maintainability of writ

petitions in matters of arbitration and interfered on finding that

petitioner in that case had not been heard. His client too had not been

heard on its contention that opposite party no.2 cannot call itself a

small enterprise and therefore, invoke mechanism of the 2006 Act to

obtain purported award. Without prejudice to the contention he

// 8 //

reiterates, the prescribed procedure was also not followed.

8. Mr. Mishra submits, none of the judgments relied upon are

applicable to the case at hand. On approach to the council, there was

conciliation proceeding. Several sittings were held by the council in

attempting conciliation and on failure thereof, there was adjudication

and award.

9. On the question of maintainability of the writ petition in

matters of arbitration, submission was made on behalf of opposite

party no.2 that it is not maintainable. Award has been passed and

remedy of petitioner, in event petitioner seeks to challenge it, is under

section 34 in Arbitration and Conciliation Act, 1996. Contra

submission was that there has been demonstration of it being a rare

case where there should be judicial review on wrongful invocation of

the 2006 Act and in any event violation of prescribed procedure

resulting in impugned award.

10. The facts will appear from record of submissions above.

Opposite party no.2 had certification as on 6th May, 2008 for its

Khurda unit, from where admittedly all supplies were made to

petitioner. The supplies were made under purchase order dated 13th

June, 2009 and supplies were completed in year 2013. Opposite party

no.2 alleged non-payment and ultimately approached the council

// 9 //

under the 2006 Act. Impugned award dated 28th June, 2016 says total

supply value was in excess of Rs.36 crores. Upon adjustment of part

payments, balance outstanding was Rs.1,93,81,657.88/-. Claim of

Rs.4,98,60,326.33 was filed before the council by opposite party no.2.

The council held 45 sittings.

11. First, Court must deal with challenge mounted on contention

that opposite party no.2 cannot claim itself to be a small enterprise, for

invoking mechanism under the 2006 Act. The certificate is dated 6th

May, 2008 and is of date prior to the purchase order. The dispute arose

on part of the payment for the supplies remaining outstanding. Prayers

in the writ petition are for interference with the award. Scope of the

prayers do not include a challenge to the certificate itself and the

issuing authority was accordingly not impleaded as opposite party.

12. In Vidya Drolia (supra) the Supreme Court had declared on

interpretation of judgments in rem. The certificate cannot be equated

with a judgment in rem. The authority issued the certificate on being

satisfied that opposite party no.2, at its unit at Khurda, was eligible to

have certification as a small enterprise. There is no question of

petitioner being privy or party to the proceeding for issuance of the

certificate simply because petitioner had not applied to the authority as

a supplier connected to opposite party no.2. Vidya Drolia (supra) is of

// 10 //

no aid to petitioner.

13. Petitioner had also contended on clubbing. Nothing further in

addition to what was already said in order dated 4th March, 2022,

extracted and quoted above, is required to be said.

14. Regarding procedure followed culminating in impugned award,

on perusal of it Court finds that the council had submission made to it

on behalf of petitioner that there would be amicable settlement. Few

paragraphs from the award are extracted and reproduced below.

"The O.P. filed time petition to file counter to the rejoinder before the Council in it is 38th sitting. The Council allowed 15 days time and directed both the parties to have an amicable settlement within one month as agreed upon & report the same to the Council.

Both the parties were present before the Council in its 42nd sitting of MSEFC on 20.01.2016.

The petitioner submitted before the Council that the case is pending since 24.04.2014 and the unit is facing financial hardship for pending of his claim on O.P.

Initiating the discussion, the advocate on behalf of the O.P. submitted before the Council that the management of Gupta Power Infrastructure Ltd. is in touch with the management of JSW Steel Ltd., Karnataka to have amicable settlement & prayed 7 days time to intimate its outcome to the Council. In response to it the representative of the petitioner declined to have such

// 11 //

information to the Council. As a result, the Council may go ahead towards disposal of the case. The Council went through the deliberation made by both the parties and directed the O.P. to have amicable settlement with the petitioner and inform its outcome to the Council in writing within 7 days from to-day i.e. 20.01.2016. If no communication is received from the O.P. within the stipulated period, award shall be given for payment of the outstanding dues with interest as per MSMED Act, 2006. xx xx xx"

It does appear the council acted as conciliator in allowing parties to

arrive at amicable settlement.

15. Further submission was made on behalf of petitioner, by

reliance on sub-section (2) in section 18 of the 2006 Act and section

80 in Arbitration and Conciliation Act, 1996. Mr. Das had submitted

that conciliator cannot be arbitrator. In this case, he submitted, if the

council is held as having caused conciliation then it could not

thereafter itself have adjudicated on the disputes as arbitrator.

16. Though section 80 in the 1996 Act says that unless otherwise

agreed by the parties, inter alia, conciliator shall not act as arbitrator

but section 18 in the 2006 Act says, inter alia, the council shall either

itself conduct conciliation or seek assistance in the matter and where

the conciliation initiated is not successful, the council shall either itself

take up the disputes for arbitration or refer it to any institution. The

// 12 //

2006 Act came after the 1996 Act and section 24 in it gives overriding

effect to section 15 to 23 in the Act. As such, the council has

legislative mandate to be both conciliator as well as arbitrator, under

section 18 in the 2006 Act overriding section 80 in the 1996 Act.

17. In Jharkhand Urja Vikas Nigam Limited (supra) the facts

were that appellant before the Supreme Court had not appeared in the

proceeding for conciliation and on the very first date of its appearance,

it was directed by the council to pay towards principal and interest.

The Supreme Court set aside the award and left it open to the council

to either take up the dispute of its own or to refer the same in terms of

section 18. Here, 45 sittings were held by the council. It does appear

that petitioner participated, if not in all of them, in most.

18. In Vijeta Construction (supra) the Supreme Court interfered

on finding that the facilitation council did not follow the procedure as

required to be followed under section 18 of the 2006 Act. It is on facts

found in the case. The facts were as would appear from paragraph 3 in

the order.

"3. By order dated 10.01.2012 the Facilitation Council closed the said proceedings by observing that Facilitation Council has been constituted with limited object and jurisdiction and the Facilitation Council has no jurisdiction to make through enquiry and take evidence and decide truth about the challenged

// 13 //

document. The Facilitation Council also observed that parties are at liberty to move before the competent court."

Clearly Vijeta Construction (supra) is not applicable.

19. In Steel Authority of India Limited (supra) there was

arbitration agreement between the buyer and supplier. The arbitration

agreement stood invoked. After the supplier had submitted to the

reference, it thereafter went to the council and invoked the mechanism

under the 2006 Act. It is on those facts that the Division Bench of

High Court of Bombay at Nagpur said that the council is not entitled

to proceed under the provisions of section 18 (3) in view of

independent arbitration agreement dated 23rd September, 2005

between the parties. The Division Bench, thereafter, gave direction for

participation in the conciliation, which shall be conducted by the

council. This decision too is inapplicable to the case at hand as the