What does MSMED Act 2006 have for existing contracts of new SMEs?

                                                                                           

The Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”)

As per the new definition/criteria for classification of MSMEs which will be effective shortly from 1^st July 2020, many new entities will become MSMEs.  

Therefore, a question arises as to -can these new MSMEs claim benefit under the MSMED Act under their existing contracts, as MSMEs? Is it legally possible to enable/stop them in this regard?

As to the retrospective/prospective application of the 1^st June notification laying down the new criteria, the following cases have very important bearing on the topic:

Purbanchal cable is the landmark judgement of the Supreme Court on this topic pronounced under the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (for short 'the 1993 Act') which was the governing Act before MSMED Act, 2006 came into force and repealed the 1993 Act.

In M/s. Purbanchal Cables & Conductors Pvt. Ltd. Vs. Assam State Electricity Board & another: The question relevant to our context was whether the 1993 Act applied to contracts that were entered into prior to its commencement.

It was held by the Apex court that – “in the absence of any express legislative intendment of the retrospective application of the Act, and by virtue of the fact that the Act creates a new liability of a high rate of interest against the buyer, the Act cannot be construed to have retrospective effect. Since the Act envisages that the supplier has an accrued right to claim a higher rate of interest in terms of the Act, the same can only said to accrue for sale agreements after the date of commencement of the Act, i.e., 23rd September 1992 and not any time prior.” (Para 40)

In Assam Small Scale Ind. Dev. Corp. Ltd. v. J.D. Pharmaceuticals and Anr.-  The Hon’ble Supreme Court had the opportunity to consider the question as to the applicability of the 1993 Act to transactions that were entered into prior to 23.09.1992. The Court held that the 1993 Act would not apply to transactions concluded prior to the coming into force of the 1993 Act.

In State Bank’s Staff Union V. Union of India: The Apex Court observed as follows in para 20 as under:-

20. Judicial Dictionary (13th Edn.) K.J. Aiyar, Butterworth, p. 857, state that the word “retrospective” when used with reference to an enactment may mean (i) affecting an existing contract; or (ii) reopening up of past, closed and completed transaction; or (iii) affecting accrued rights and remedies; or (iv) affecting procedure. Words and Phrases, Permanent Edn., Vol. 37-A, pp. 224-25, defines a “retrospective or retroactive law” as one which takes away or impairs vested or accrued rights acquired under existing laws. A retroactive law takes away or impairs vested rights acquired under existing laws, or create a new obligation, imposes a new duty, or attaches a new disability, in respect to transaction or considerations already past.

In M/s Shanti Conductors (P) Ltd. Vs. Assam State Electricity Board:

The question arose for consideration before the Hon’ble Apex Court as to whether the provisions of the Interest on Delayed Payment to Small Scale and Ancillary Industrial Undertakings Act, 1993 will not be applicable when the contract for supply was entered into between the parties prior to the enforcement of the aforesaid Act. The Hon’ble Apex Court laid down as under:-

Even if agreement of sale is entered prior to enforcement of the Act, liability to make payment under Section 3 and liability to make payment of interest under Section 4 shall arise if supplies are made subsequent to the enforcement of the Act.”

Form the above, it emerges that if the relevant supply under the contract has been made post July 1^st 2020 which is the date on which the notification laying down the new criteria for classification of MSME shall become effective, the benefit of the provisions under the MSMED Act 2006 will be available.

What is the new criteria: 

The Central Government, in exercise of the powers conferred under section 7 of the Act, vide notification dated 1^st June, 2020 notified the following criteria for classification of micro, small and medium enterprises (MSME), namely:-

(i) a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;

(iii) a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

This notification comes into effect from 01.07.2020.

New criteria of MSME classification can be summarized in a tabular form as follows:

New Classification applicable w.e.f 1st July 2020
Composite Criteria: Investment in Plant and Machinery/Equipment: Not more than ‘A’ and Annual Turnover ; not more than ‘B’.
Classification	Micro	Small	Medium
Manufacturing & Services rendering Enterprises	A = Rs.1 crore B= Rs.5 crore	A=   Rs.10 crore B=   Rs. 50 crore	A= Rs.50 crore B=   Rs.250 crore

Therefore, with effect from 01.07.2020, many new entities will be eligible for classification as MSME and, for that matter, new claims will be classified as MSME claims.

Which Provisions are likely to be invoked the most?

Chapter V (section 15 to 25) of the Act deals with Delayed Payments to Micro and Small

Enterprises (SMEs). Let us have a look at the provisions.

Section 15. Liability of buyer to make payment — As per section 15, where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment either as per agreement or, where there is no agreement in this behalf, before the appointed day.

As per proviso to section 15, in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.

Appointed day is a defined term under the Act. In terms of section 2(b) of the Act, appointed date shall imply as follows:

Case I: Where there is an agreement to the effect – Payment shall be made as per the timeline agreed upon under the Agreement, but such period cannot exceed 45 days from the date of acceptance or deemed acceptance;

Case II: Where there is no agreement to that effect – Payment shall be made before;

a. the 16th day from actual delivery or rendering of services; or

b. where within fifteen days from the day of the delivery of goods or the rendering of services any objection is made in writing by the buyer regarding acceptance of goods or services, the 16th day from the day on which such objection is removed by the supplier.

In any case, therefore, maximum within 45 days, the payment has to be made.

As per section 24 of the Act, the provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force. 

Section 24 of the Act is the most powerful provision to the rescue of SME supplier.

Therefore, we see that Chapter V of the Act contains very important provisions as regards dues of SME suppliers.

The constitutional validity of chapter V of the Act was challenged in Eden Exports Company v. Union of India, wherein the constitutional validity of Chapter V of the Act has been upheld by the Hon’ble Madras High Court. The question that arose for consideration in this case was whether Section 15 to 24 of the Act was unconstitutional.

Therefore, a lot of disputes will be created in the MSME space in the wake of the 1st June notification defining the new criteria.

CS (Ad) Brajesh Tiwary

M 8588828190

Actum Legal