Calcutta High Court: Defaulting Buyer Not Liable to Pay Interest at Three Times Bank Rate if Supplier is a Medium Enterprise Under MSMED Act

Calcutta High Court: Defaulting Buyer Not Liable to Pay Interest at Three Times Bank Rate if Supplier is a Medium Enterprise Under MSMED Act

The Calcutta High Court has ruled that where a ‘supplier’ is a ‘medium enterprise’ under Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) then the rate of interest levied on the arbitral award would be at the bank rate notified by the Reserve Bank of India (RBI), and not three-times of such rate, as would have if it were a Micro, or Small enterprise under Section 16 of the MSMED Act.

The single Judge Justice Moushumi Bhattacharya was adjudicating a petition filed by the New India Assurance Co. Ltd for a stay of the arbitral award of Rs. 24,11,07,449.15 imposed on them by a sole-Arbitrator.

In the instant case, the petitioner was aggrieved by the addition of two components of interest calculated at 24.6 per cent per annum for two periods amounting approximately to Rs.4.77 crores and Rs.13.16 crores.

According to learned counsel appearing for the petitioner, the interest calculated at 24.6 per cent was based on the respondent/claimant/ award-holder - Winsome International Ltd., being a ‘medium’ enterprise.

The Counsel submitted that the calculation of interest at 24.6 per cent was based on the basis of Section 16 mandate under The MSMED Act, 2006. Counsel sought to make a distinction between a medium, micro and small enterprise as defined under the said Act.

On the other hand, the Learned counsel appearing for the respondent submitted that these points could only be taken in the application for setting aside of the Award filed under Section 34 of the Arbitration and Conciliation Act, 1996 and not in an application for stay.

The Court noted that Micro, small and medium enterprises are defined in Section 2 of The Micro, Small and Medium Enterprises Development Act, 2006.

The Court observed that the very fact that the three kinds of enterprises are defined in three distinct and specific sub-sections of Section 2 intends that they cannot be viewed as a common set of similar enterprises coming within the fold of the MSMED Act

The Court discerned, “The distinction becomes further important with reference to the definition of ‘supplier’ under Section 2(n) which has been defined to mean a ‘micro’ or ‘small’ enterprise which has filed a memorandum with the authority referred to under Section 8(1) and further explained under the Clauses in Section 2(n). The definition of ‘supplier’ specifically excludes a ‘medium enterprise’ as defined under Section 2(g) of the Act.”

The Court emphasized that the conscious exclusion of a ‘medium enterprise’ from the definition of ‘supplier’ becomes significant in the interpretation of Section 16 of the Act which deals with the rate of interest payable by a defaulting buyer to a ‘supplier’, as required under Section 15 which in turn deals with the liability of a buyer to make payment to a supplier. Section 16 uses the term ‘supplier’ which traces back to Section 2(n).

The Judge remarked that Section 16 of The MSMED Act is an intervention by way of the liability to be fixed on an errant buyer for non-payment to a supplier at three times of the bank rate notified by the Reserve Bank of India with monthly rests on that amount from the appointed date; ‘appointed day’ has been defined in Section 2(b) of the Act.

According to the Judge, the result of the exclusion of a ‘medium enterprise’ from the definition of a supplier and the liability fixed on a buyer to make payment to a supplier under Section 16 of the Act at three times the bank rate, therefore, establishes that interest components could not have been awarded to the respondent/supplier/claimant in the arbitration in accordance with the mandate of Section 16 of the Act.

While noting that the respondent/supplier before the Court was admittedly ‘medium enterprise,’ the Court observed, “The interference is not on account of any law as contemplated under Section 34 of the 1996 Act but on a plain interpretation of Section 2(g), (h), (m) and (n) of The MSMED Act.”

Accordingly, the Court ordered a stay of the impugned award upon payment of the principal amount, along with interest at a rate of 8 per cent instead of 24.6 per cent and directed the award-debtor/petitioner to make the payment on the principal amount.