Judicial Analysis Court Copy Headnote Facts Arguments Court observation

2010 Supreme(Mad) 3598

High Court of Judicature at Madras
K. CHANDRU
M/s.Eden Exports Company & Others
Versus
Union of India & Others
W.P.NOs.16908, 16909 and 25406 of 2009, 1202, 5062, 6015, 13308, 13407, 13430, 13431, 13613, 14431, 14432, 14650 and 14889 of 2010 and M.P.Nos.1,1 and 2 of 2009, 1,1,1, 1,1, 1,1,1,1,1,1,1,1,2,2, 2,2 and 3 of 2010
Decided On : 20-08-2010

Advocates Appeared:
For the Petitioners:P.S.Raman, Advocate General for M/s.Pushpa Menon Zaffarulla Khan, K.S.V. Prasad, Perumbulavil Radhakrishnan, Rahul Balaji, T. Mohan, Jayesh B.Dolia assisted by Aravindan for M/s.Aiyar and Dolia, R. Parthiban, D. Abdullah, Advocates.
For the Respondents:K. Mohanamurali, SCGSC, M. Dhandapani, Spl.G.P.(W), V. Balasubramanian, R. Saravanakumar, N. Viswanathan, B. Ravi, S. Veerabhagu, C. Saravanan, Advocates.

The provisions of Chapter V of the MSMED Act are a reasonable restriction on the right to enter into contracts under Article 19(1)(g) of the Constitution, as they are necessary to protect the rights of small enterprises. The interest rates imposed under the Act are not excessive and are justified in light of the mischief sought to be remedied by the Act. The Facilitation Council is not a court or a tribunal and its members are not required to have judicial qualifications.

Headnote:
The constitutional validity of Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) was challenged in a batch of writ petitions. The petitioners, who were buyers, contended that Sections 15 to 24 of the Act were unconstitutional and ultra vires of the Constitution of India, particularly Articles 14 and 19(1)(g). They argued that the provisions infringed their right to enter into contracts, imposed excessive interest rates, and empowered the Micro and Small Enterprises Facilitation Council (Facilitation Council) to conduct quasi-judicial proceedings without any judicial member.
Fact of the Case:

The Facilitation Council was established under the MSMED Act to facilitate the promotion and development of micro, small, and medium enterprises. It had the power to conduct conciliation and arbitration proceedings in disputes between suppliers and buyers. The petitioners challenged the vires of the Act on the grounds that it interfered with their right to enter into contracts, imposed excessive interest rates, and empowered the Facilitation Council to conduct quasi-judicial proceedings without any judicial member.
Finding of the Court:

The court upheld the constitutional validity of Chapter V of the MSMED Act. It held that the provisions did not infringe the petitioners' right to enter into contracts, as they were a reasonable restriction in the interest of protecting the rights of small enterprises. The court also held that the interest rates imposed were not excessive and were justified in light of the mischief sought to be remedied by the Act. Further, the court held that the Facilitation Council was not a court or a tribunal and that its members were not required to have judicial qualifications. The court also held that the requirement of pre-deposit under Section 19 of the Act was not unconstitutional and was a valid measure to prevent dilatory tactics by buyers.
Issues: 1. Whether the provisions of Chapter V of the MSMED Act infringed the petitioners' right to enter into contracts under Article 19(1)(g) of the Constitution? 2. Whether the interest rates imposed under the Act were excessive and violative of Article 14 of the Constitution? 3. Whether the Facilitation Council could conduct quasi-judicial proceedings without any judicial member, thereby violating the principles of natural justice?
Ratio Decidendi: 1. The court held that the provisions of Chapter V of the MSMED Act did not infringe the petitioners' right to enter into contracts under Article 19(1)(g) of the Constitution. It held that the provisions were a reasonable restriction in the interest of protecting the rights of small enterprises. The court noted that the Act provided for a maximum credit period of 45 days, which was a reasonable time for payment of dues. It also noted that the Act provided for a mechanism for resolving disputes through conciliation and arbitration, which was a fair and just process. 2. The court held that the interest rates imposed under the Act were not excessive and were justified in light of the mischief sought to be remedied by the Act. The court noted that the Act was enacted to protect small enterprises from the problem of delayed payments, which was a major impediment to their growth and development. The court held that the interest rates imposed were necessary to deter buyers from delaying payments and to compensate small enterprises for the losses they suffered as a result of such delays. 3. The court held that the Facilitation Council was not a court or a tribunal and that its members were not required to have judicial qualifications. The court noted that the Facilitation Council was a body of arbitrators and that its members were appointed from various backgrounds, including industry, finance, law, trade, and commerce. The court held that the Facilitation Council was not required to follow the same procedures as a court or a tribunal and that its decisions were subject to judicial review.
Final Decision: The court dismissed all the writ petitions challenging the constitutional validity of Chapter V of the MSMED Act.

Judgment :-

The questions that arise for consideration in most of the writ petitions are whether Sections 15 to 24 of the Micro, Small and Medium Enterprises Development Act, 2006 (Central Act 27 of 2006) (for short MSMED Act) are unconstitutional and ultravires of the Constitution of India, more particularly whether they infringe Articles 14 and 19(1)(g) of the Constitution. In some cases, the cognizance taken by the Micro, Small and Medium Enterprises Facilitation Council constituted under the Act are sought to be prohibited from proceeding with the enquiry initiated at the instance of the contesting private respondents?

2. This batch of writ petitions came to be posted before this court on being specially ordered by the Honble the Chief Justice vide order, dated 11.8.2010.

3. Heard the arguments of Mr.P.S.Raman, learned Advocate General appearing for M/s.Pushpa Menon, Mr.Zaffarulla Khan, Mr.Rahul Balaji, Mr.Perumbulavil Radhakrishnan, Mr.K.S.V.Prasad, Mr.T.Mohan, Mr.Jayesh B.Dolia for M/s.Aiyar and Dolia, Mr.R.Parthiban, Mr.D.Abdullah for petitioners and Mr.K.Mohanamurali, learned Senior Central Government Standing Counsel appearing for the Union of India and for Director of Ministry of Micro, Small and Medium Enterprises, Mr.M.Dhandapani, learned Special Government Pleader (W), Mr.V.Balasubramanian, Mr.R.Saravanakumar, Mr.N.Viswanathan, Mr.B.Ravi, Mr.S.Veerabhagu and Mr.C.Saravanan for respondents.

4. The Director, Ministry of Micro, Small and Medium Enterprises has filed a counter affidavit, dated 25.2.2010 in W.P.No.25406 of 2009 on his behalf and the Union of India. The fifth respondent in W.P.No.25406 of 2009 has filed vacate stay applications supported by an affidavit. The second respondent in W.P.No.16908 of 2009 has also filed a vacate stay application supported by an affidavit.

5. The MSMED Act came to be enacted by the Parliament with a view to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto, by the Central Act 27 of 2006. It receive the assent of the President on 16.6.2006 and was brought into effect from 2.10.2006 in terms of Section 1(2) of the Act.

6. The objects and reasons as appended to the Bill may be usefully reproduced below:

"Small scale industry is at present defined by notification under Section 11-B of the Industries (Development and Regulation) Act, 1951. Section 29-B of the Act provides for notifying reservation of items for exclusive manufacture in the small scale industry sector. Except for these two provisions, there exists no legal framework for this dynamic and vibrant sector of the country’s economy. Many Expert Groups or Companies appointed by the Government from time to time as well as the small scale industry sector itself have emphasised the need for a comprehensive Central enactment to provide an appropriate legal framework for the sector to facilitate its growth and development. Emergence of a large services sector assisting the small scale industry in the last two decades also warrants a composite view of the sector, encompassing both industrial units and related service entities. The world over, the emphasis has now been shifted from ‘industries’ to ‘enterprises’. Added to this, a growing need is being felt to extend policy support for the small enterprises so that they are enable to grow into medium ones, adopt better and higher levels of technology and achieve higher productivity to remain competitive in a fast globalisation area. Thus, as in most developed and many developing countries, it is necessary, that in India too, the concerns of the entire small and medium enterprises sector are addressed and the sector is provided with a single legal framework. As of now, the medium industry or enterprise is not even defined in any law."

7. The Act under Section 32(1) had repealed the Interest on Delayed Payments to Small Scale and Ancillary Indust

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