Author: Thamizhselvi Karunanidhi

Abstract

Micro, Small & Medium Enterprises (MSMEs) are crucial to the Indian economy,
contributing over 30% to the India’s GDP and generating significant employment
opportunities. They are regarded as key players in developing countries. Despite MSMEs
being the spine of the economy, are often hunched amidst the procedural bottlenecks. To
address these challenges, Section 18 of the Micro, Small and Medium Enterprises
Development (MSMED) Act, 2006 provides a fast-track dispute resolution mechanism via the
Micro and Small Enterprises Facilitation Council (MSEFC). However, the culmination of the
Insolvency and Bankruptcy Code (IBC), 2016 complicates this process. When Corporate
Insolvency Resolution Process (CIRP) commences, a moratorium under Section 14 of the IBC
is kicked in which halts initiation or continuation of all other proceedings, including those
under the MSMED Act, rendering MSMEs powerless. The conflict between the MSMED Act
and the Arbitration and Conciliation Act raises further concerns. The author intends to
disseminate these and provide with valuable critics and suggestions.

INTRODUCTION

Micro, Small & Medium Enterprises (MSMEs), substratum of the Indian economy, keenly
contributing over 30% to the Indian Gross Domestic Product (GDP) and consequentially
engendering employment for millions. Having a bird view on a global perspective, it could be
regarded that MSMEs are the majority players in terms of developing countries. Beyond
their modest size, MSMEs fuel the financial bloodstream of the Indian economy
efficaciously. MSMEs, despite being the spine of the economy, are often hunched amidst the
procedural bottlenecks. To alleviate the ingrained delays in terms of procedural facets, the
legislation purported Section 18 of the Micro, Small and Medium Enterprises Development
(MSMED) Act, 2006, which bids a fast-track dispute resolution to MSMEs, through
conciliation and arbitration before the Micro and Small Enterprises Facilitation Council
(MSEFC). This two-tiered dispute resolution mechanism has been tailored with a rear end
legislative intent to ensure time bound recovery of dues of MSMEs.

What was once a promising, wide – open, fast track route for MSMEs to recover their dues
now disappears like a mirage the moment insolvency proceedings under the Insolvency and
Bankruptcy Code, 2016 comes into play. The moment when IBC reflexes the moratorium
under Section 14, it casts a legal freeze on all recovery proceedings including those initiated
under the MSMED Act. This provision derails the eclectic avenue that was open under
Section 18 of the MSMED Act. As the moratorium grips the scene, MSMEs are benched as
powerless players. Not just that but then the existence of mutually exclusive two provisions
which are incongruous to each other is another element to be pondered upon, i.e., the MSEFC
resolution under Section 18 of the MSMED Act and the Arbitration and Conciliation Act.
Many a times it has been examined crucially and the judiciary has evolved with various
dimensions in terms of it. The overlapping effect of Section 18 of MSMED Act over the
arbitration agreement almost leaves MSMEs like clipped birds in a storm which are
altogether examined and discussed below.

RESEARCH AND DISCUSSIONS

CROSSROADS OF INDEPENDENT ARBITRATION CLAUSES AND STATUTORY
REMEDY UNDER MSMED ACT: A STUDY OF COMPETING FORUMS FOR
MSME DISPUTE

A pressing dissonance crop up when encompassing an arbitration clause conflicting with that
of the statutory remedy bequeathed under Section 18 of the MSMED Act, 2006. Whilst party
autonomy being earmark of arbitration, the aforementioned provision stands out to be the
juncture of dispute conflicting this principle by mandating dispute resolution through the
Micro and Small Enterprises Facilitation Council (MSEFC). The precedential analysis of
M/s. Steel Authority of India Ltd. v. MSEFC gives a clear picture that MSMED Act
culminates a statutory right and has an overriding effect over the arbitration agreement
between the parties. The judicial avowal of statutory supremacy of Section 18 of the
MSMED Act over the pertinent provisions of Arbitration and Conciliation Act, 1996 has set a
distinct jurisprudential trend, not merely confined to early rulings as cited above, but
reinvigorated and echoed in recent precedents as well, one such example to be cited is that of
Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Private Ltd case.

The need for harmonizing these provisions seems to be the need of the hour. Moreover, it has
always been a recurring blind spot in a legal array, often dragged back to the discussion table
as to whether the culmination of the MSMED Act was really protective or seem to be
encroaching the boundaries set by the legislation. This is because, issues such as overlapping
jurisdictional claims, procedural time constraints, viable violations of due process, and
limited avenues for challenging arbitral awards appears to represent the legal trajectory
toward which the framework naturally inclines 5 . This overpowering effect is more likely to
defeat the purpose of the Arbitration agreement which tilts the balance of party autonomy.
That area of divergence leads to disparate procedural treatment among the subjects under
comparable legal footing, i.e., for instance, one MSME entity acquired registration under the
ambit of it may access the statutory remedy under MSMED Act, whereas another MSME
who has not acquired the recognition of MSME has no other way but to invoke independent
arbitration clause to resolve the dispute. The aforementioned scenario details the violation of Article 14 of the Indian Constitution which ensures “equality before law and equal treatment
before law”.

FROM FAST-TRACK TO STANDSTILL: HOW IBC’S SECTION 14 UNDERMINES
MSME RECOVERY UNDER THE MSMED ACT, 2006

The Insolvency and Bankruptcy Code, 2016 emerged not just as a statute, but as an economic
CPR – recuperating failing corporate bodies while placing all other claims in a legal state of
suspended animation. The central foci of this paper pertaining to this Act orbits around
Section 14 of the IBC, 2016, a legislative linchpin that activates a sweeping moratorium,
freezing all legal actions once the Corporate Insolvency Resolution Process (CIRP) is
actuated. This counterbalancing mechanism seems to impart neutrality but when viewed in
conjunction with Section 18 of the MSMED Act, 2006 it becomes starkly problematic for
Micro, Small, and Medium Enterprises (MSMEs). The IBC, 2016 was enacted with an intent
to rewire the corporate debt landscape but then the moment when moratorium is kicked in all
the legal proceedings initiated or continued against a corporate debtor holds to be a statutory
standstill 6 , which includes all the alternative dispute resolution mechanisms as well within the
brackets of it. The MSMED Act channel a special statutory route to secure dues for MSMEs
through the MSEFC via conciliation and arbitration. But the moment IBCs moratorium
pitches in, the special route bridging as a fast lane to justice is barricaded, stalling recovery
which is likely to undermine the Act’s core objective.

What was meant to be a protective cocoon for fiscally distressed companies inadvertently
becomes a procedural trap for the very enterprises the MSMED Act, 2006 was designed to
empower. Judicial precedents such as Power Grid Corporation v. Jyoti Structures Ltd 7 .,
gravitates this position by affirming that the moratorium under IBC applies to all the
proceedings except those which are beneficial to the corporate debtor. This is a classic case
that could be relied upon to assess the judicial scrutiny as to whether the scales of justice are
truly balanced, i.e., it was brought in with an intent to circumscribe the over burden on the
corporate debtor but on the other hand it is likely to prejudice the judgment creditors, which
has to be carved with utmost responsibility to protect the interests of the creditors even.
While the moratorium under the IBC, 2016 was designed to shield corporate debtors from an
avalanche of claims, its veil application risks prejudicing the interests of judgment creditors, particularly MSMEs, who are left powerless aftermath. Striking this balance demands a
nuanced interpretation that protects the debtor’s interest without shelving the legitimate
entitlements of creditors.

RECALIBRATING RECOVERY: COMPARATIVE LEGAL MODELS FOR MSMEs
ACROSS JURISDICTIONS

In countries where there exists ample of MSME’s contribution forming majority in its
economy, the insolvency system should provide specific solutions for safeguarding their
interests 8 . Including the MSMEs in the brackets of regular insolvency proceedings is most
likely to be detrimental 9 . Most countries draw MSMEs too under the same framework of
insolvency proceedings that are generally applicable for large market players as well.
However, few countries are proactively culminating provisions to secure the pulse of the
economy, MSMEs .

A classic example to be quoted is that of the special insolvency regulations carved for micro
and small enterprises by Myanmar 10 . Such measure ensured to maintain an equilibrium
among the other market players subject to certain exceptions and relaxations provided therein
by recognising its vulnerabilities. It was a very known fact that the fiscal strength across the
globe went down after the reverberation of covid waves all over the world. It was during that
time Australia too came up with a groundbreaking strategy to cope up with the situation, i.e.,
the implementation of a new regime for micro and small companies in 2021 11 . Similarly,
Singapore came forward with such measure but however, it was provisional 12 . Another such
commendable move was that of the United States. In the year 2019, they inculcated an
insolvency framework for small enterprises via Small Business Reorganisation Act.
Equivocally United Nation Commission on International Trade Law (UNCITRAL) Working
Group V (Insolvency Law) had published a draft on a simplified and streamlined insolvency
regime for small enterprises.

The aforementioned list isn’t exhaustive; the countries are evolving one behind the other
slowly but at a steady rate. This consistency could empower MSMEs and enable them to
evolve as eloquent market players prospectively. India, as a developing economy with a vast
and growing MSME sector carries huge responsibility to culminate into practices such
distinct lane of proceedings exclusively applicable to MSMEs to extend them a protection
against huge market players and in return ensuring promising returns to the economy of the
country. However, India’s legislations seem to have lacunae in terms of distinct treatment of
MSMEs with regard to insolvency proceedings, which is indeed of great magnitude. India,
standing at the cross roads of economic envision and social equity, could not afford to look at
the structural vulnerabilities of its MSMEs. It is pertinent to note that India’s MSME
legislation and Insolvency legislation are inconsistent with each other due to lack of such
distinct treatment of MSMEs in purview of insolvency proceedings. Hence, India must refract
the ideology of such distinct treatment of MSMEs pertaining to insolvency proceedings in
order to ensure coherence with those legislations specially rooted for the benefits of MSMEs.

CONCLUSION

The relationship between the MSMED Act, 2006 and the Insolvency and Bankruptcy Code,
2016 imparts a deep structural discrepancy in India’s legislative landscape—one that pits the
statutory protection of MSMEs against the procedural command of insolvency resolution.
While Section 18 of the MSMED Act was enacted to provide a fast-track two-tiered
mechanism for the recovery of MSME dues through conciliation and arbitration, this remedy
is frequently rendered inert by the automatic moratorium imposed under Section 14 of the
IBC.

Judicial pronouncements have struggled to strike a consistent balance, leaving the field
marked by procedural uncertainty and constitutional concerns—particularly under Article 14,
where similarly placed creditors face unequal procedural treatment. Comparative insights
from countries like Myanmar, Australia, Singapore, and the United States reveal a growing
global consensus: MSMEs require a distinct insolvency mechanism, not mere inclusion
within broader frameworks meant for large corporate entities.

As a developing nation with a thriving MSME base, India must respond to this legislative
imbalance. It is time to recapitulate the insolvency framework either by carving out express
exceptions for MSMEs within the IBC or by legislating a dedicated MSME specific insolvency framework. Only then can the law fulfil its dual mandate: ensuring efficient debt
resolution while safeguarding the economic lifeline that MSMEs represent.

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