When a bus body builder withheld 10% payment, the supplier sued. But the buyer hit back with a counter-claim. Can a state transport corporation play defence under a law meant for small businesses?

Kerala's road transport corporation paid 90% of the bill. Then it stopped. The supplier went to the special council for small businesses. The buyer's response? A counter-claim.

Thread rubber — the material that keeps bus tyres gripping Kerala's winding roads — became the unlikely centre of a legal battle that reached the Supreme Court. Silpi Industries and other suppliers had delivered the goods to the Kerala State Road Transport Corporation (KSRTC). The corporation paid nine out of every ten rupees. But it held back the remaining 10%, waiting for performance reports. The suppliers wanted their money. KSRTC wanted something else entirely: it wanted to claim damages from the suppliers for alleged defects.

When the buyer becomes the claimant

The Micro, Small and Medium Enterprises Development Act, 2006 — the MSMED Act — was designed as a shield for small businesses. It creates a special council, the MSMED Facilitation Council, where a small supplier can go when a buyer refuses to pay. The council first tries conciliation (a mediated settlement). If that fails, the dispute goes to arbitration (a private tribunal that makes a binding decision). The entire machinery is tilted in favour of the supplier — that was Parliament's intention.

But what happens when the buyer, the large corporation, wants to turn around and say: "You owe me money too"? Can a state transport corporation, with its vast resources, file a counter-claim in a forum designed to protect the little guy?

That was the first question the Supreme Court had to answer. The second was about time. How long does a supplier have to bring a claim before the council? Does the Limitation Act, 1963 (the law that sets time limits for filing cases) apply to MSMED arbitrations at all?

The two batches, one principle

The court was hearing two sets of appeals together. In the first batch, Silpi Industries and others had supplied thread rubber to KSRTC. The corporation withheld 10% of the payment. The suppliers went to the MSMED Facilitation Council. Conciliation failed. Arbitration happened. The arbitral awards (the tribunal's decisions) favoured the suppliers. KSRTC challenged these awards in court. The Kerala High Court allowed KSRTC's appeals and sent the cases back to the arbitrator for a fresh look. The suppliers appealed to the Supreme Court.

In the second batch, Khyaati Engineering had supplied hydro equipment to a company called Prodigy. But Khyaati had registered under the MSMED Act only after the contract was signed and after the goods were supplied. Prodigy argued that Khyaati could not claim the benefits of the Act because it was not a registered MSME at the time of supply. Prodigy also wanted a separate arbitrator appointed under Section 11(6) of the Arbitration and Conciliation Act, 1996 (the provision that allows a party to ask the court to appoint an arbitrator when the other side refuses).

The Supreme Court bench, led by Justice R. Subhash Reddy, delivered its judgment on June 29, 2021.

Does the limitation clock tick for MSME claims?

The Limitation Act, 1963 says you must file a case within a certain period — typically three years for contractual claims — from the date the cause of action arises (the date when you first had the right to sue). If you miss that window, your claim dies.

The question was whether this clock applies to arbitration proceedings under the MSMED Act. The suppliers argued that the MSMED Act is a special, beneficial statute. Its purpose is to ensure small businesses get paid quickly. Applying limitation periods would defeat that purpose.

The court disagreed. It pointed to Section 43 of the Arbitration and Conciliation Act, 1996, which expressly states that the Limitation Act applies to arbitrations. And Section 18(3) of the MSMED Act says that when conciliation fails, the dispute is referred to arbitration under the provisions of the 1996 Act. If the 1996 Act applies, and the 1996 Act says limitation applies, then limitation applies to MSMED arbitrations too.

The court held that the Limitation Act, 1963 applies to arbitration proceedings under Section 18(3) of the MSMED Act. A supplier cannot come to the Facilitation Council years after the payment was due and expect the clock to have stopped.

The counter-claim puzzle

This was the more interesting question. The MSMED Act, read literally, seems to create a one-way street. Section 18 says a supplier can refer a dispute about "any amount due" to the Facilitation Council. It does not explicitly say a buyer can file a claim there. The Act's overriding effect under Section 24 (the provision that says the MSMED Act prevails over other laws) suggests that the special forum is meant only for suppliers.

But the court took a different view. It read Section 18(3) of the MSMED Act together with Section 7(1) and Section 23(2A) of the Arbitration and Conciliation Act, 1996. Section 7(1) defines an arbitration agreement broadly. Section 23(2A) explicitly allows a party to file a counter-claim or set-off (a claim that reduces the amount owed) in arbitration proceedings.

The court reasoned that when the MSMED Act incorporates the 1996 Act for arbitration, it incorporates the entire procedural framework — including the right to file counter-claims. To hold otherwise would create an absurd situation: a supplier could claim Rs. 10 lakh, but the buyer could not say "You actually owe me Rs. 5 lakh for defective goods." The arbitrator would have to ignore the buyer's claim and award the full Rs. 10 lakh, only for the buyer to file a separate lawsuit. That would defeat the purpose of arbitration — a single, efficient resolution of all disputes between the same parties.

The court held that counter-claims and set-off by buyers are maintainable in arbitration proceedings under the MSMED Act. The special forum does not become a one-way street.

When registration comes too late

The second batch of appeals turned on a different point. Khyaati Engineering had registered under the MSMED Act after the contract was signed and after the goods were supplied. The court held that to claim the benefits of the Act — the special council, the fast-track arbitration, the favourable interest rates — a supplier must be registered under Section 8 of the MSMED Act at the time of supply. Registration obtained later operates only prospectively (from the date of registration forward, not backward).

Since Khyaati was not a registered MSME when it supplied the hydro equipment, it could not approach the Facilitation Council. The Madras High Court's order appointing a separate arbitrator under Section 11(6) of the 1996 Act was upheld, but on a different ground — the general arbitration law, not the MSMED Act.

What this means for your next contract

For small suppliers, the message is clear: register under the MSMED Act before you sign the contract and before you deliver the goods. A post-supply registration will not give you access to the special council. And even if you are registered, do not delay. The limitation clock is ticking from the day payment was due.

For buyers — including government corporations — the judgment opens a door. If a supplier drags you to the Facilitation Council, you can file your counter-claim in the same arbitration. You do not need to file a separate lawsuit. But remember: the MSMED Act still tilts in favour of the supplier. The council's procedures, the interest rates under Section 16 (which can be as high as three times the bank rate), and the overriding effect of the Act all work against you.

THE PLAY: If you are a supplier, register under the MSMED Act before you deliver the first invoice — and file your claim within three years of the due date. If you are a buyer facing an MSMED claim, file your counter-claim in the same arbitration rather than starting a separate proceeding.

The court ended where it began: with a bus body builder, a withheld payment, and a counter-claim that reshaped how the MSMED Act works in practice.