MSME Act Overrides Arbitration Clause: Telangana High Court Denies Arbitrator Appointment, Upholds Exclusive Jurisdiction of MSME Council

In a significant ruling that strengthens the statutory framework protecting Micro and Small Enterprises, the Telangana High Court dismissed a petition seeking appointment of an arbitrator under the Arbitration and Conciliation Act, 1996, in light of an earlier and ongoing proceeding before the Micro and Small Enterprises Facilitation Council (MSEFC), Jammu.

“The MSMED Act, being a special beneficial legislation, overrides the Arbitration and Conciliation Act where a registered MSME has invoked its jurisdiction,” held Chief Justice Apresh Kumar Singh.

The Court ruled that once a registered MSME supplier invokes Section 18 of the MSMED Act, 2006, the jurisdiction of the Facilitation Council supersedes contractual arbitration clauses. Consequently, the Arbitration Application under Section 11(5) and (6) of the 1996 Act was found not maintainable.

“Beneficial Statute Cannot Be Defeated by Private Arbitration Agreement”: Special Law Prevails Over General Arbitration Law

Rejecting the petitioner’s contention that the existence of an arbitration clause (Clause 49) in the Sub-Contractor Agreement dated 04.06.2022 necessitated appointment of an independent arbitrator, the Court affirmed that Section 24 of the MSMED Act—a non-obstante clause—gives the statute overriding effect over other laws, including the Arbitration Act.

Quoting from the Supreme Court’s ruling in Silpi Industries v. KSRTC, (2021) 18 SCC 789, the Court noted:

“The Arbitration and Conciliation Act, 1996 is a general law, whereas the MSMED Act is a special beneficial legislation... When beneficial provisions are enacted, they cannot be defeated by technical pleas like counterclaims or contractual arbitration clauses.”

Thus, when Aeon Infratel, a registered MSME, had already approached the MSEFC, Jammu on February 1, 2025, the petitioner’s subsequent arbitration notice dated February 17, 2025, and arbitration application filed on March 13, 2025, were deemed premature and without jurisdiction.

“Forum Shopping and Suppression of Facts Are Abuses of Process”: Arbitration Petition Dismissed for Concealing MSEFC Proceedings

The Court sharply criticised the petitioner for concealing material facts, including the existence of the MSEFC proceedings when filing the arbitration application. Despite receiving a formal notice from MSEFC dated March 4, 2025, the petitioner did not disclose this ongoing process in its March 13 application.

“Approaching the Court without disclosure of prior statutory proceedings amounts to abuse of the judicial process. Such concealment undermines judicial integrity and invites dismissal in limine,” the Chief Justice observed.

The application also failed to satisfy the mandatory 30-day notice period under Section 11(5) of the Arbitration Act, as the notice sent via post was returned due to an “insufficient address” and only an email notice followed on February 25, 2025—less than 20 days before the petition was filed.

“Works Contract Is No Bar to MSME Jurisdiction”: High Court Rejects Tax Law Interpretation for Beneficial MSMED Scheme

Vishwa Samudra Engineering had argued that the Sub-Contractor Agreement was a “works contract” involving composite activities such as utility shifting, and thus outside the scope of the MSMED Act, relying on CCE v. L&T and Kone Elevators v. State of Tamil Nadu. However, the Court rejected this argument, citing the Calcutta High Court’s reasoning in HPCL v. West Bengal MSEFC:

“The MSMED Act makes no distinction between supply contracts and works contracts. Its scope depends on the nature of the enterprise, not the classification of the contract.”

Chief Justice Singh reaffirmed:

“Revenue law principles drawn from Article 366(29-A) of the Constitution are inapplicable to the MSMED Act, which is a beneficial legislation and must be interpreted liberally in favour of MSMEs.”

Thus, the fact that the contract involved composite work did not exclude it from MSMED protection. As long as Aeon Infratel was a registered supplier under Section 8(1) of the MSMED Act (registered since April 27, 2020, and renewed on July 15, 2022), its recourse to the MSEFC was held to be valid and binding.

“Parallel Proceedings Defeat the Purpose of MSME Law”: High Court Warns Against Conflicting Jurisdictions

Another critical point considered was the risk of parallel proceedings—before the MSEFC and under the Arbitration Act—leading to conflicting awards and delayed justice.

“Allowing such concurrent litigation undermines the purpose of expeditious, affordable remedies under the MSMED Act. The principle of Kompetenz-Kompetenz permits the MSEFC to decide its own jurisdiction.”

Relying on Gujarat Civil Supplies v. Mahakali Foods and NBCC v. State of West Bengal, the Court held that statutory arbitration under the MSMED Act takes precedence over contractual arbitration processes.

The Supreme Court in NBCC had held that:

“When the statute itself provides for arbitration, rooted in a policy of public benefit, a private arbitration agreement cannot override the same. Access to justice must be effective, not merely symbolic.”

MSEFC Has Sole Jurisdiction—Section 11 Petition Dismissed Without Costs

Summing up the legal reasoning, the Telangana High Court held:

• The MSMED Act is a special, overriding law.

• Registered MSMEs can seek redress through MSEFC, even where the contract includes an arbitration clause.

• The Sub-Contractor Agreement, though alleged to be a works contract, falls within MSMED coverage due to the nature of the enterprise.

• The petitioner's suppression of MSEFC proceedings and premature filing renders the application not maintainable.

“This Court is satisfied that the MSEFC, Jammu, is the proper forum under the MSMED Act for settlement through conciliation or arbitration. No arbitrator need be appointed under Section 11(6) of the Arbitration Act.”

Accordingly, the arbitration application was dismissed, though no costs were imposed.

Date of Decision: 31 October 2025