MSME Facilitation Council Jurisdiction Limits: What It Cannot Rule On

In the world of micro, small, and medium enterprises (MSMEs), timely dispute resolution is critical for business survival. The MSME Facilitation Council, established under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, serves as a key forum for arbitration and conciliation. However, its powers are not unlimited. Businesses often wonder: On what issues the MSME Facilitation Council cannot rule upon? Can it set aside the termination of a contract? Can damages be claimed before the Council?

This blog post explores these questions, drawing from judicial precedents and statutory provisions. Understanding these limits can help MSMEs and buyers navigate disputes effectively, avoiding wasted time and resources. Note that this is general information; consult a legal expert for advice specific to your situation.

Overview of MSME Facilitation Council Powers

The MSME Facilitation Council typically handles disputes referred under Section 18 of the MSMED Act, 2006. It conducts conciliation first, and if that fails, proceeds to arbitration. Key functions include:

• Adjudicating payment disputes between MSME suppliers and buyers. 2024 0 Supreme(All) 144
• Determining MSME status based on registration and criteria. 2024 0 Supreme(All) 144
• Awarding compound interest at three times the RBI bank rate for delayed payments under Section 16. 2024 0 Supreme(All) 144

However, courts have repeatedly clarified jurisdictional boundaries. The Council cannot act beyond Section 17 disputes, which are strictly limited to recovery of amounts due from buyers to MSME suppliers. 2023 0 Supreme(Telangana) 22

Key Issues the MSME Facilitation Council Cannot Rule Upon

1. Disputes Arising from Works Contracts

One major limitation is jurisdiction over works contracts. Courts have held that the Council lacks authority to adjudicate disputes from such contracts. In a notable case, a petitioner challenged Council proceedings for a subcontract involving bridge construction. The court ruled: The Facilitation Council lacks jurisdiction over disputes arising from works contracts under the MSME Act. 2025 0 Supreme(AP) 391

The reasoning? Section 17 of the MSMED Act covers supplier-buyer disputes for goods supplied, but works contracts (involving labor and services like construction) fall outside this purview. The court ruled that the Facilitation Council cannot adjudicate disputes arising from works contracts, as defined under the MSME Act, and that consent cannot confer jurisdiction where none exists. 2025 0 Supreme(AP) 391

Principles of natural justice also played a role; the Council failed to adhere to them, leading to the minutes being set aside.

2. Counter-Claims by Buyers

Buyers cannot raise counter-claims before the Council. In a dispute involving a small-scale unit's claim against a buyer for HVAC supplies, the Single Judge set aside an award partly because the Council ignored the buyer's counter-claim. On appeal, the High Court clarified: the Council has the mandate only to decide a matter referred to it under Section 17 of MSME Act which does not include a counter claim of the buyer. 2023 0 Supreme(Telangana) 22

Thus, while the supplier's claim proceeds, buyer counter-claims must be pursued separately, often under the Arbitration and Conciliation Act, 1996.

3. Cases Where Supplier Was Not MSME at Contract Time

Jurisdiction hinges on the supplier's MSME status at the time of entering the contract. If the supplier registers later, the Council has no power. The Supreme Court upheld this in a case where the buyer was foreign-based: When contract was entered into appellant was not MSME and parties would not be governed by MSME Act... Council would have no jurisdiction to entertain dispute. 2022 4 Supreme 92

Larger issues, like foreign buyers availing services in India, remain open, but the core rule stands firm.

Can the MSME Facilitation Council Set Aside Termination of a Contract?

Generally, no. The Council's role is narrow—recovering dues from suppliers to buyers, not reviewing contract validity or terminations. Termination disputes often involve broader contractual interpretations, which exceed Section 17's scope.

For instance, in works contract scenarios, challenging termination would compound the jurisdictional issue. Courts emphasize using appropriate forums like civil courts or arbitration clauses in the contract. The MSME Act does not empower the Council to 'set aside' terminations, as its awards focus on monetary recovery, not equitable relief like reinstatement. 2025 0 Supreme(AP) 391

In arbitration contexts, writ petitions against awards may not be maintainable if remedies exist under the Arbitration Act, reinforcing that terminations are outside the Council's purview. 2024 0 Supreme(All) 144

Can Damages Be Claimed Before the MSME Facilitation Council?

Damages claims are tricky. The Council can award the principal amount due plus compound interest under Section 16, but general damages (e.g., for breach, loss of profit beyond dues) typically fall outside its mandate.

• Claimable: Unpaid invoices, interest on delays. 2024 0 Supreme(All) 144
• Not Claimable: Counter-claims for damages by buyers, or supplier claims for consequential damages unrelated to payment recovery. 2023 0 Supreme(Telangana) 22

In NPA-related matters, classifications by banks are not justiciable before the Council; remedies lie under SARFAESI Act. 2024 0 Supreme(All) 144

If the dispute involves works contracts or non-MSME status at contract inception, even basic claims may be barred. 2022 4 Supreme 92 2025 0 Supreme(AP) 391

Additional Considerations from Case Law

• Natural Justice: Proceedings must follow fair procedures; failures lead to quashing. 2025 0 Supreme(AP) 391
• Writ Challenges: Prefer statutory remedies over writs where possible. 2024 0 Supreme(All) 144
• Joint Ventures: Authority revocations don't derail arbitration if properly conferred, but irrelevant to MSME Council. 2019 0 Supreme(Del) 1727

Conclusion and Key Takeaways

The MSME Facilitation Council is a swift remedy for payment disputes but cannot rule on works contracts, counter-claims, or issues where MSME status was absent at contract formation. It typically cannot set aside terminations or award broad damages, focusing instead on statutory recoveries.

Key Takeaways:- Verify MSME status at contract signing.- Use Council only for pure supplier payment claims.- Pursue terminations/damages in civil courts or arbitration.- Ensure conciliation precedes arbitration. 2023 0 Supreme(Telangana) 22

For MSMEs: Register early and document compliance. For buyers: Raise counter-claims separately. Always seek professional advice, as outcomes depend on facts.

This post references cases like 2024 0 Supreme(All) 144, 2025 0 Supreme(AP) 391, 2023 0 Supreme(Telangana) 22, 2022 4 Supreme 92. It is for informational purposes only. 2019 0 Supreme(Del) 1727