The Supreme Court's decision in M/s Silpi Industries v. Kerala State Road Transport Corporation (29 June 2021) is best known for applying the Limitation Act to Facilitation Council arbitrations — the subject of a companion article on this site. But the judgment decided two further questions that shape every Section 18 reference filed today: whether a supplier who registered under the Act only after entering into the contract can claim its benefits, and whether the buyer can bring a counterclaim into the Council's arbitration rather than being pushed to a separate suit. The Court answered the first against late registrants and the second in favour of counterclaims.
Holding one: registration must precede the contract
The MSMED Act's delayed-payment machinery — the forty-five-day ceiling in Section 15, compound interest at three times the bank rate under Section 16, and the Section 18 reference — is available to a "supplier", a status tied to the enterprise's registration under the Act. In Silpi Industries the Court held that the seller should have been registered as on the date of entering into the contract to claim these benefits; registration obtained after supplies had commenced could not be projected backwards.
The logic is contractual fairness. The Act imposes onerous, non-negotiable terms on buyers — an interest rate designed to sting and a compressed credit period — and a buyer is entitled to know, when it contracts, whether it is dealing with a protected supplier. Allowing retrospective registration would change the bargain after the fact.
- Register first, contract second: an enterprise intending to rely on the Act should complete Udyam registration before accepting purchase orders.
- For long-running relationships, benefits attach to contracts and supplies made after registration; the reference should be framed accordingly.
- Buyers facing references should verify the supplier's registration date against the contract date at the outset — it is a threshold defence.
Holding two: counterclaims are maintainable
The second question was procedural but consequential: when a supplier drags a buyer to the Facilitation Council, can the buyer assert its own cross-claims — for defective goods, delayed delivery, risk-purchase costs, or recovery of advances — in the same arbitration? The Court held that a counterclaim is maintainable before the statutory forum. Section 18(3) applies the Arbitration and Conciliation Act to the Council's arbitration as if it were consensual, and with it comes Section 23(2A), which expressly permits counterclaims and set-offs within the scope of the arbitration.
Without counterclaims
The Council decides the supplier's invoices; the buyer's cross-claims go to a separate suit or arbitration — two forums, two timelines, and the risk of inconsistent findings on one transaction.
After Silpi Industries
One tribunal decides the whole account: claim, set-off and counterclaim. The award nets the positions, and any challenge proceeds under the Arbitration Act with the Section 19 pre-deposit protecting the supplier.
How the two holdings interact in practice
A well-advised reference now anticipates both rules. The supplier pleads its registration date and annexes the certificate, frames the claim invoice-wise within limitation, and prepares for the buyer's counterclaim on the merits rather than objecting to its maintainability. The buyer, conversely, has every incentive to bring its genuine cross-claims into the Council proceeding — supported by contemporaneous rejection memos, inspection reports and correspondence — since a counterclaim raised for the first time as an afterthought in Section 34 proceedings will not be entertained.
For Delhi practice, references concerning supplies to buyers in the capital proceed before the Delhi Micro and Small Enterprises Facilitation Council, and awards are executable as decrees. The strategic centre of gravity has shifted to the Council stage itself: with limitation, registration and counterclaims all justiciable there, the arbitral record — not the later challenge — usually decides the dispute.
Note: This article completes the chamber's coverage of Silpi Industries; the limitation holding is discussed separately. General information only, not legal advice.
Frequently Asked Questions
What exactly did the Court hold about registration timing?
That to seek the benefit of the MSMED Act, the seller should have been registered under the Act as on the date of entering into the contract. Registration obtained after the supplies, or midway through the transaction, does not operate retrospectively to bring earlier supplies within the statutory delayed-payment regime.
Does the registration-timing rule apply to Udyam registration today?
The principle carries forward: entitlement is tested against the supplier's status when the contract was made. An enterprise that obtains Udyam registration today can invoke the Act for contracts made after registration; it cannot retrofit the Act onto contracts and supplies that predate its registration.
Why are counterclaims allowed before the Facilitation Council?
Because Section 18(3) makes the Arbitration and Conciliation Act, 1996 applicable to the Council's arbitration as if it arose from an arbitration agreement, and Section 23(2A) of the 1996 Act permits a respondent to submit a counterclaim within the scope of the arbitration. Forcing the buyer to a separate civil suit would fragment one commercial dispute across two forums and risk conflicting findings.
Does entertaining a counterclaim dilute the supplier's protections?
No. The supplier keeps the statutory interest under Sections 16 and 17 and the buyer's Section 19 obligation to pre-deposit 75% of any award before challenging it. The counterclaim simply ensures both sides of the account — defects, short supply, recoveries — are decided in the same proceeding.