No Benefit Under MSMED Act If Arbitration Conducted Outside Facilitation Council: Supreme Court Appoints Sole Arbitrator

"Hence, we are of the definite opinion that if arbitration is sought on the normal mode, the appellant cannot claim any benefits as provided under the Act of 2006." Supreme Court of India, in a significant order, held that parties opting for normal arbitration proceedings in lieu of the statutory mechanism provided under the Micro, Small and Medium Enterprises Development Act (MSMED Act), 2006, relinquish their right to claim the special benefits mandated by the Act.

A bench comprising Justices J.B. Pardiwala and K. Vinod Chandran emphasized that such a waiver is a necessary corollary to bypassing the Facilitation Council process. The court observed that the decision to opt for an independent arbitrator was made precisely to avoid the delay inherent in awaiting the outcome of a pending reference to a larger bench regarding the applicability of the Act.

The appellant, M/s Indo Engineering Works, had initially approached the Andhra Pradesh Micro and Small Enterprises Facilitation Council to initiate arbitration against the respondent, Rashtriya Ispat Nigam Limited. The High Court had earlier set aside the appellant's move on the grounds that the contract was a works contract and the appellant had failed to file a memorandum under Section 8 of the MSMED Act, as necessitated by the Supreme Court’s dictum in Silpi Industries v. Kerala State Road Transport Corporation. The matter reached the Supreme Court while a similar issue regarding the mandatory filing of a memorandum was pending before a larger bench of the Apex Court.

Court addresses the scope of MSMED Act benefits

The primary question before the court was whether an enterprise, upon consenting to regular arbitration to expedite dispute resolution, can still invoke the protections and benefits afforded by the MSMED Act. The court was further tasked with appointing an independent arbitrator to resolve the underlying commercial dispute between the parties while balancing the interests of a small-scale industry with the procedural requirements of the governing law.

Exit from statutory mechanism implies waiver of benefits

The bench clarified that the special protections of the MSMED Act, including expedited facilitation, are inextricably linked to the statutory process managed by the Facilitation Council. By choosing to move the dispute to a "normal mode" of arbitration outside the statutory framework, the appellant effectively opted out of the unique jurisdictional benefits of the Act. The court noted that this departure was facilitated solely to prevent the appellant from suffering further delays while awaiting the final verdict of a larger bench on the Silpi Industries ratio.

"We adopted such procedure only reckoning the fact that the disposal of the reference by a larger bench may further delay the claim as raised by the appellant, who, admittedly has not filed the memorandum under Section 8 of the Act of 2006."

Appointment of Sole Arbitrator

To resolve the impasse, the Court appointed Hon’ble Mr. Justice R. Raghunandan Rao, Former Judge of the Andhra Pradesh High Court, as the Sole Arbitrator. The order grants the learned Arbitrator the autonomy to determine his fees in consultation with the parties. The court explicitly refrained from commenting on the merits of the underlying dispute, leaving all contentions open for the parties to canvass during the arbitral proceedings.

The Supreme Court’s order underscores the principle of party autonomy in arbitration while affirming that statutory benefits under the MSMED Act are contingent upon strict adherence to the Act's procedural mechanisms. By clearly delineating the consequences of choosing regular arbitration, the Court has provided a pragmatic pathway for MSMEs to resolve disputes without being trapped in protracted litigation regarding jurisdictional technicalities.

Date of Decision: 13 August 2026