The Delhi High Court has held that a small enterprise cannot be denied recourse to the dispute resolution mechanism under Section 18 of the Micro, Small and Medium Enterprises Development Act, 2006, merely because it obtained registration after the execution of the contract.

The bench of Justice Amit Mahajan clarified that its decision addressed only the objection concerning subsequent MSME registration. It did not determine the merits of the payment claim, and both parties remained free to raise their respective contentions in arbitration. 

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The central question was whether an enterprise that obtained MSME registration after entering into a contract could invoke Section 18 of the MSME Act for resolution of a dispute arising from that contract.

The joint venture argued that registration operated prospectively and could not extend statutory benefits to contracts executed before registration. It also contended that the Facilitation Council should have decided its preliminary objections concerning jurisdiction and eligibility before referring the dispute to arbitration.

The High Court rejected the challenge, relying on the Supreme Court’s reasoning in NBCC (India) Ltd. v. State of West Bengal & Others, 2025 INSC 54.

The dispute originated from the engagement of KRA Infrastructure Developers Pvt. Ltd. as a subcontractor for the construction of a sewerage system in Karnal, including ancillary works, an intermediate pumping station and operation and maintenance of the entire system for six years.

A letter of intent was issued on November 27, 2017, followed by a work order dated January 19, 2018.

On September 7, 2021, the joint venture issued a notice proposing to invoke bank guarantees amounting to ₹3,34,18,428 against the mobilisation advance. The subcontractor subsequently requested that the guarantees not be invoked and offered to transfer an equivalent amount. According to the factual account recorded in the judgment, the guarantees were returned after the transfer.

The subcontractor later sought payment of alleged outstanding dues of approximately ₹3.30 crore on November 27, 2021. On May 13, 2022, it approached the Facilitation Council with a claim of ₹3,59,94,768, excluding interest.

The Facilitation Council conducted conciliation proceedings through meetings held on January 11, 2023, May 3, 2023, and July 10, 2024.

After concluding that settlement was not possible, it terminated conciliation and referred the dispute to DIAC under Section 18(3) of the MSME Act. The joint venture challenged the Council’s orders dated July 10 and July 29, 2024.

Its principal objection was that the subcontractor had obtained MSME registration on November 7, 2020, whereas the letter of intent and work order had been executed in 2017 and 2018.

The joint venture maintained that the Council could not proceed without first deciding whether the subcontractor was entitled to invoke the Act.

Opposing the petition, the subcontractor submitted that it had been functioning as an MSME since 2007. It claimed that the registration obtained in November 2020 reflected a change in the registration format.

It also argued that registration before execution of the contract was not a prerequisite for approaching the Facilitation Council under Section 18.

Separately, the subcontractor questioned the maintainability of the writ petition, submitting that the joint venture could raise jurisdictional objections before the arbitral tribunal under Section 16 of the Arbitration and Conciliation Act, 1996.

The High Court examined the Supreme Court’s discussion in NBCC, which concerned contracts executed both before and after the enterprise’s registration.

As recorded in the High Court’s judgment, the Supreme Court had considered whether the absence of registration before execution of a contract prevented an MSME from making a reference under Section 18. The High Court also noted that the matter had been referred to a larger Bench.

The reasoning reproduced in the judgment placed particular emphasis on the expression “any party to a dispute” in Section 18. It explained that this wording could not simply be substituted with the narrower expression “supplier” through a chain of references to other statutory provisions.

The High Court relied on the view that Section 18 provides a statutory remedy for dispute resolution and should be interpreted in a manner that facilitates access to justice.

It also referred to the reasoning that Section 8 gives micro and small enterprises discretion to file a memorandum with the designated authority.

Applying that reasoning, Justice Mahajan noted that the subcontractor had obtained registration in 2020 and that its certificate classified it as a small enterprise.

The Court further recorded that the final bill had been raised in 2021, after registration. The joint venture’s objection nevertheless remained that the claims related to an earlier period and arose from the pre-registration letter of intent and work order.

The Court concluded that the reasoning in NBCC covered the objection. It held that recourse to Section 18 was available even where registration had been obtained after execution of the contract.

Consequently, the subsequent date of registration did not provide a ground to interfere with the Council’s reference to arbitration.

The High Court also emphasised the procedural stage of the dispute. The Council had referred the matter to arbitration after conciliation failed; it had not adjudicated the competing claims or determined liability.

On that basis, the Court found that the joint venture had failed to establish prejudice arising from the challenged orders.

The distinction is significant: allowing the arbitration reference to proceed did not amount to accepting the subcontractor’s claim or directing payment of ₹3.60 crore.

Dismissing the writ petition and pending applications, the High Court expressly confined its findings to the objection based on registration having been obtained after execution of the contract.

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