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Cold storage has no right to recover loan given to farmers storing potatoes under MSME Act:Allahabad High Court

The Allahabad High Court while dismissing the petition said that the petitioner company running cold storage does not have the right to recover the loan given to two farmers storing potatoes under the Micro, Small and Medium Enterprises Development Act.

The Division Bench of Justice Mahesh Chandra Tripathi and Justice Prashant Kumar passed this order while hearing a petition filed by M/S Neeraj Potato Preservation and Food Products Pvt Ltd.

M/s Neeraj Potato Preservation and Food Products Pvt Ltd (the petitioner company) is in the business of running cold storage at Shivrajpur. The farmers of that area grow crops and use the petitioner’s facility for storage of their potatoes and other crops and for this purpose the company charges rent/ fees (for the services provided) for keeping the crop in a cold storage facility. When the farmers come to take back their crop, they pay the charges according to the period of storage and area occupied in the petitioner’s cold storage.

The respondent nos 2 and 3 are the farmers, who had used the services of the petitioner’s cold storage. They had stored their potatoes to be sold in the market at a suitable time. While the produce of the farmers is kept in cold storage, the farmers sometimes need financial assistance towards the input cost needed for fresh sowing, which may be provided by the petitioner company.

Accordingly, the respondent nos 2 and 3, who needed financial assistance to sow their next crop took a loan from the petitioner company of Rs 4,09,022/-. It seems that the respondent nos 2 and 3 did not pay back the loan to the petitioner. The petitioner, claiming itself to be Micro, Small and Medium Enterprises (MSME) registered under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) had filed a claim petition before the ‘U.P Micro, Small and Medium Enterprises Facilitation Council, Kanpur Nagar’ (the Council) on 24.12.2020, which was registered as Claim Petition for the recovery of the principal amount of Rs 4,09,022/- along with interest at the rate of 18% per annum, as provided under the MSMED Act, which came out to be Rs 2,26,851/-, so the total claim was of Rs 6,35,873/-.

In the said proceeding, notices were issued to the respondents on 19.7.2021 calling them for settlement and to appear on 29.7.2021 for conciliation.

It is contended that on 29.7.2021, the petitioner had appeared but the respondents did not appear before the Council, hence the reference could not be decided and the proceeding of Section 76 of the Arbitration and Conciliation Act, 1996 was terminated and the matter was referred for arbitration asking the respondents to file reply within 15 days.

It is contended that once the aforesaid case/claim of the petitioner was not being decided, the petitioner approached the Court by preferring Writ (M/s Neeraj Potato Preservation and Food Products Pvt Ltd v U.P Micro and Medium Enterprises Facilitation Council and Anr), which was decided on 2.3.2022 directing the Council to decide the claim of the petitioner preferably within three months.

In Spite of aforesaid direction, once the claim of the petitioner was not decided, the petitioner preferred Contempt Application (Civil) (M/s Neeraj Potato Preservation and Food Products Pvt Ltd v Dr Raj Shekhar/Chairman of U.P Micro and Medium Enterprises Facilitation Council), which was decided on 25.11.2022 according three months further time to comply with the Writ Court order.

While deciding the first issue, the Council opined that it has jurisdiction to decide the matter only for delayed payments in lieu of cooling & preservation services provided to customers. As per the Udyog Aadhar Registration Certificate of the claimant, the activities being done by the claimant, are related to warehousing and support activities, warehousing and storage, warehousing of refrigerated (cold storage). The claimant failed to produce any such document, which inspires the confidence of the Council regarding the arrear of rent/ services of Cold Storage, provided to the respondents by the claimant (petitioner), which is still due on the respondents.

The Council has observed that the opinion/ report of Lead District Manager (L.D.M) regarding the issue of re-finance service makes it clear that if the claimant company has provided loan against the products stored in its cold storage and the list of such borrowers, along with the receipts of their products, has been made available to the bank, only then the Council may entertain the claim petition otherwise not. The claimant has failed to produce any such document as mentioned in the opinion/ report of L.D.M As such the Council opined that as per the provisions of MSMED Act, 2006, it has no jurisdiction to decide the matter for recovery of loan / financial services and other recovery matters and in such circumstances the Council cannot act beyond its jurisdiction.

While deciding the second issue, the Council observed that the claimant is not entitled to receive any interest from the respondent as there is no principal amount of delayed payment due on the respondents. Accordingly, the claim/ reference of the petitioner was dismissed by the order impugned.

The Court observed that,

In the matter, three issues are to be adjudicated, which are as follows:- (i) whether the loan/ financial services will be covered under the Cold Storage Services; and (ii) whether the petitioner has been registered for any financial services under the MSMED Act. (iii) Whether the writ petition is maintainable or not.

The term ‘cold storage’ has been defined under Section 2 (c) of the Act, 1976, which provides:- (c) “cold storage” means an enclosed chamber insulated and mechanically cooled by refrigeration machinery to provide refrigerated condition to agricultural produce stored therein, but does not include refrigerated cabinets and chilling plants having a capacity of less than 100 cubic meters.

For the purposes of providing cold storage services a license is to be issued as much as cold storage services are regulated within the State of U.P, which is evident from perusal of Section 5 of the Act, 1976, as under:- “5. On and after such a date as the State Government may, by notification appointed on that behalf, no person shall carry on the business of storing any agricultural produce in a cold storage under and in accordance with the terms and conditions of a licence granted under this Act.”

The admitted facts of the case are that the loan advanced to the hirer/ farmer by the licensee was not in terms of Section 22 of the Act, 1976 as nowhere it has been stated in the writ petition that the loan so advanced was lower than one half of one percent per annum simple interest over the current rate of interest charged by the State Bank of India. Infact the loan was advanced @ 18% per annum, which is much higher than the rate of interest charged by the State Bank of India.

Moreover, the loan advance was not against the goods pledged in favour of the petitioner company but with a bond that if the payment is not done, the farmer undertakes to deposit his goods in the next agricultural year also in the cold storage of the petitioner. Hence, Section 22 of the Act, 1976 does not come into play.

As per Section 45 of the Act, 1976, the Government was authorised to make Rules. In pursuance of this power granted under the Act, 1976, the ‘U.P Regulation of Cold Storage (Licensing) Rules, 1976’ was framed. Rule 3 of the Rules, 1976 provides for the terms and conditions of the license and Rule 6 of the Rules, 1976 provides for specification of a cold storage. The term ‘condition and the specification of the cold storage’ together with the definition clauses constitute the cold storage services and, therefore, cold storage services have been properly structured under the U.P Enactment read with modified subordinate legislation of Uttar Pradesh. Grant of loan is not incidental to a cold storage services, which is explicit from bare perusal of the definition clauses, the licence, terms and conditions and specification of cold storage. Therefore, cold storage service and credit facilities by pledging the produce stored in the cold storage are two different services, which are not directly linked with each other. Therefore, the grant of loan will not be covered under cold storage services.

Once the services provided by the petitioner is not registered under the MSMED Act, Facilitation Council established under the Act, will be divested of jurisdiction to entertain any such dispute arising out of any service not registered under MSMED Act. In such a situation, the MSMED Act will not be applicable as per Section 18 of the Act.

Even as per the claim petition filed by the petitioner, the date of loan is shown to be 9.3.2018, wherein an amount of Rs 4,09,022/- was loaned to the respondent nos 2 and 3. However, the petitioner had made an application on 24.9.2018 for modification of NIC Code in Udyog Aadhar Card issued by MSME. Hence it is clear that on the date of the loan given by the petitioner, it was not having the registration under required Code as per NIC Data 2008.

Considering the rival submissions qua the third issue, the Court found that the order impugned, whereby the Facilitation Council had refused to entertain the matter under MSMED Act, as the same was not an award, therefore, the same is amenable under Article 226 of the Constitution of India. Accordingly, against the order impugned, the writ petition is maintainable.

“In view of the foregoing discussion, once the alleged financial services rendered by the petitioner was not registered at the time of disbursement of the loan under the MSMED Act, then certainly the Facilitation Council, which is established under the MSMED Act, will not be having jurisdiction to entertain any such dispute arising out of any service not registered under the MSMED Act. Therefore, there is no infirmity or illegality in the order impugned so as to warrant interference under Art.226 of the Constitution of India”, the Court observed while dismissing the petition.

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