In a significant ruling on the interplay between the MSMED Act and the Arbitration and Conciliation Act, the Madras High Court has appointed a former Judge as Sole Arbitrator and held that the MSMED framework cannot be invoked to defeat an independent arbitration agreement covering defective supply disputes.
The Court observed that MSMED Act, 2006 is a special enactment whose non-obstante clause under Section 18 operates only within the confined sphere of Section 17, namely, recovery of unpaid amounts owed by a buyer to a supplier for goods supplied or services rendered. The Act does not contemplate disputes relating to defective supply, replacement costs, or damages for breach of contractual obligations by the supplier, and such disputes must be adjudicated under the independent arbitration agreement between the parties.
A Single Judge Bench of Justice K. Kumaresh Babu noted that the second respondent (Prudential Sugar Corporation, the Garnishee) had chosen to remain ex parte and did not enter appearance. The Court observed that the core objection raised by Senatla was the primacy of the MSMED Act, 2006, and its overriding effect over the Arbitration and Conciliation Act, 1996. The Court relied upon the Larger Bench judgment of the Supreme Court in Gujarat State Civil Supplies Corporation Ltd. vs. Mahakali Foods Private Limited [(2023) 6 SCC 401], which had considered the scope of Section 18 of the MSMED Act.
The Court undertook a detailed reading of Sections 15, 16, 17, and 18 of the MSMED Act and observed that Section 18 opens with a non-obstante clause, but its scope is restricted to references relating to amounts due under Section 17, which deals with recovery of unpaid dues for goods supplied or services rendered. The Court further observed that Section 15 casts the liability to pay on the buyer, while Section 16 provides for levy of interest, and that the entire framework of the MSMED Act is geared towards ensuring timely payment to micro and small enterprises.
Critically, the Court noted that the MSMED Act restricts itself to recovery of unpaid amounts under Section 15 read with interest under Section 16, and does not extend to disputes concerning defective supply or failure to supply goods. The Court further observed that any dispute falling outside the realm of Section 17 read with Section 18 cannot be the subject matter of conciliation and arbitration under sub-sections (2) and (3) of Section 18, and that an independent arbitration agreement dealing with other rights and liabilities of the parties cannot be overridden by the MSMED Act.
Applying these observations to the facts, the Court noted that TI Clean’s claim of Rs. 5.08 crores was essentially for the cost of replacement of defective chargers, which falls outside the scope of Section 17 of the MSMED Act, whereas Senatla’s claim before the MSME Council was for Rs. 2.16 crores as unpaid invoices, which admittedly included Rs. 2 crores acknowledged by TI Clean as payable.
Briefly, TI Clean Mobility Private Limited, a Chennai-based company, entered into a Basic Purchase Agreement dated 5 July 2024 with M/s. Senatla Innovative EV Components Private Limited, a Hyderabad-based supplier, for the supply of chargers. Disputes arose between the parties after Senatla supplied defective chargers, which allegedly caused serious damage to TI Clean’s brand reputation. On 30 October 2025, TI Clean issued a debit note of Rs. 7.08 crores towards the cost of replacement of the defective chargers. After adjusting Rs. 2 crores, the net claim crystallised at Rs. 5.08 crores.
Senatla expressed financial distress and sought a waiver of the debit notes. Meanwhile, Prudential Sugar Corporation Limited entered into a Memorandum of Understanding with Senatla to acquire 76% of its stake, prompting TI Clean to file an application under Section 9 of the Arbitration and Conciliation Act, 1996 seeking interim protection. Later, an order was passed by the Madras High Court directing Senatla to furnish security. Subsequently, Senatla filed an application under Section 18 of the MSMED Act before the MSEFC, attempting to push the dispute into the micro and small enterprise conciliation framework.
TI Clean then filed a petition under Section 11(6) of the Arbitration Act for appointment of a Sole Arbitrator, along with two Section 9 applications, one seeking security of Rs. 5.08 crores and another seeking a prohibitory order against the Garnishee (Prudential Sugar Corporation) restraining it from paying any amount to Senatla.
