The fundamental purpose of the Micro Small and Medium Enterprises Development Act of 2006 is to “improve the competitiveness of micro, small, and medium enterprises by making their promotion and development easier.” The Act includes provisions for resolving disputes between suppliers as defined by the MSME Act, i.e. a micro or small firm that has submitted a memorandum of authorization as indicated in section 8(1) of the MSME Act. The MSMED Act of 2006 requires the state government to establish Micro and Small Enterprise Facilitation Councils. This is how the State Government must define the Council’s jurisdiction. The Council has the jurisdiction to settle disputes between suppliers and buyers from all over India within their territory (as determined by the State Government).

The Council can have a minimum of 3 and a maximum of 5 members, appointed from amongst the following categories:

Chairman- Director of Industries, or any other officer not below the rank of such Director, who is having administrative control of small-scale industries


1- One or more persons with expertise in the field of industry, commerce finance, trade or law

2- One or more office- bearers or representatives of associations of micro and small industries

3- One or more representatives from banks and financial institutions involved in lending to micro, small or medium enterprises

Dispute Resolution

Any party with a dispute over an amount due to a Supplier may refer the matter to the MSME Facilitation Council for resolution under Section 18 of the MSME Act. If conciliation fails, the Council may decide to arbitrate the dispute itself or refer the parties to an arbitral institution. Section 18(4) also states that the Council or centre providing alternative dispute resolution services has jurisdiction to act as an arbitrator or conciliator in a dispute between a Supplier located within its jurisdiction and a buyer, defined as anyone who buys goods or receives services from a Supplier located anywhere in India (“Buyer”). [i] 

If conciliation fails under the Act’s provisions, the Council may arbitrate the matter directly or refer it to any institution or centre that provides alternative dispute resolution services for such arbitration, according to section 18 sub-section 3.

The Council or the centre providing alternative dispute resolution services has jurisdiction to act as an Arbitrator or Conciliator in a dispute between a supplier located within its jurisdiction and a buyer located anywhere in India, according to Section 18 sub-section 4.[ii]

Procedure of Dispute Resolution

According to Section 18 (1) of the MSMED Act, in the event of a payment delinquency, either party may submit the problem to the Micro and Small Enterprise Facilitation Council. Section 18 (2) of the Act establishes a conciliation mechanism that the Council may use or refer to any institution that offers alternative dispute resolution.

The MSMED Act, on the other hand, makes no provision for a separate method of conciliation, and the Arbitration Act’s Sections 65 to 81 apply to the dispute “as if the conciliation were commenced under Part III of that Act,” according to Section 18(2).

The MSME Act’s statutory tier-wise dispute resolution procedure is the referral of disputes to a Facilitation Council. The issue is initially sought to be settled by the Facilitation Council through conciliation, either by itself or by making a referral to an institution/centre for conducting Conciliation under the Arbitration and Conciliation Act, 1996. If the issues cannot be resolved through conciliation, the Facilitation Council either takes up the case directly or refers it to an institution or centre for dispute resolution through arbitration under the Arbitration & Conciliation Act, which must be completed within ninety days of the referral.

Conciliation as a pre-arbitral procedure has been determined to be just directory and not necessary in a slew of rulings by the Supreme Court and High Courts across the country.

The appellant’s appeal for the setting aside of any award, decree, or order will not be considered unless the appellant deposits a substantial 75 percent of the award amount, with a portion of that sum distributed to the seller subject to necessary orders during the appeal.


Because the opposing parties almost always have an agreement with an arbitration clause, there is sometimes a conflict between the applicability of sections of the MSMED Act and the Arbitration Act. This could be a formal arbitration agreement or simply an arbitration clause in a non-MSME buyer’s Purchase Order. If one of the parties meets the MSME definitions, the MSME entity will find it more straightforward to begin actions under the MSMED Act in the event of a disagreement. Because both the MSME Act and the Arbitration & Conciliation Act, 1996 have different timetables for completing the processes, the parties in a dispute can only choose one option: whether they wish to be regulated by the MSME Act or the Arbitration & Conciliation Act, 1996. If a party decides to be regulated by the MSME Act, the Law of Estoppel will apply to the party, and it will be required to finish the processes within 90 days. In this case, the parties are unable to use the Arbitration and Conciliation Act of 1996 to obtain a time extension.

The petitioner in AVR Enterprises v. Union of India[iii] was a registered MSME company seeking arbitration under the Arbitration and Conciliation Act. Since no “reference” was lodged with the Facilitation Council that may have resulted in a formal reference to arbitration under the MSME Act, it was categorically held that seeking arbitration was not covered by the MSME Act. The provisions and requirements of Section 19 of the MSME Act were also decided to apply only when the arbitration was initiated by the Facilitation Council as a result of a statutory reference, rather than when the arbitration was initiated directly between the parties based on a contractual arbitration agreement.


Over the previous five decades, the Ministry of Micro, Small and Medium Enterprises (MSME) has made significant contributions to the country’s socioeconomic development. MSME accounts for a significant portion of jobs, development, and exports. They account for around 8% (per cent) of the country’s GDP, 45 percent (per cent) of manufacturing production, and 40% (per cent) of exports. The government’s initiatives have resulted in MSME growth and the ability to deal with late payments.[iv] The MSME Act’s statutory arbitration provisions were added to provide Suppliers with a number of benefits, including time-bound dispute resolution, a conciliation process before referring a dispute to arbitration, and a mandatory deposit of 75% of the award amount in court by the Buyer as a pre-condition for challenging an award passed by the Council. These restrictions were apparently enacted in recognition of the fact that micro and small businesses may lack the necessary bargaining power to engage in protracted and costly legal processes against other entities. Buyers have been given a method to get around these provisions by making section 18 of the MSME Act directory. These flaws should be rectified if the MSME Act’s statutory arbitration mechanism is to be given additional power, and if the objective is to defend Suppliers’ interests during the dispute resolution process.

[i] https://indiacorplaw.in/2020/08/the-msme-act-and-arbitration-agreements-first-mover-advantage.html

[ii] https://pib.gov.in/PressReleasePage.aspx?PRID=1741505

[iii] CM(M) 769/2018 with CM APPL. 27219/2018

[iv] https://www.lawyered.in/legal-disrupt/articles/dispute-resolution-through-msme-act/

Authored by: Aarsha Prem

Aarsha is a Fourth year law student, pursuing B.B.A. LL.B (Hons.) from Centre for Legal
Studies Gitarattan International Business School ( Affiliated to GGSIPU)

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