MSMED Act | Facilitation Council Must Adjudicate On Interest Component Itself- Cannot Delegate To Chartered Accountant: Calcutta High Court

Calcutta High Court in holding that the MSME Council could not ‘desert the task of decision making’ to a Chartered Accountant, who was not on the Council/arbitral tribunal under the MSMED Act, a single-bench of Justice Moushumi Bhattacharya observed:

Section 31(3) of the 1996 Act requires the arbitral tribunal to give reasons upon which the award is based subject to the parties agreeing otherwise. The reasons given by the Chartered Accountant in the present case for fixing the quantum of interest cannot be accepted to be the reasons of the Facilitation Council / arbitral tribunal in satisfaction of the mandate of section 31(3) of the 1996 Act. [By not completing the arbitral award] the Council would be undermining the very object of the MSMED Act and the legislative intent in enacting it.

Brief facts of the Case

The applicant/award-holder was registered as a ”small enterprise” under the MSMED Act. The MSME council had passed an award in 2019 on a claim made by the award-holder on account of outstanding dues against supply of medicines by the respondent award-holder to the petitioner award-debtor.

The aforesaid reference was made under Section 18(1) of the MSMED Act, and the Council made the award under Section 18(3) of the Act.

By the impugned award, the petitioner/award-debtor was directed to pay the outstanding principal amount of approx. Rs 35 lakhs, plus interest at 3 times the bank rate, compounded with monthly rests.

Petitioner had applied for setting aside of the award, and by an order dated 2023, was directed to comply with Section 19 of the MSMED Act, and put in 75% of the awarded sum as security.

Counsel for the petitioner was directed to deposit 75% of the awarded sum i.e. approx. Rs 26 lakhs in accordance with the calculation presented by the Counsel to Court.

Through the present application, Applicant/award-holder sought modification of the aforesaid order on the grounds that that the award-debtor was to pay approx. Rs 4.25 crore, which was 75% of the total awarded sum of approx. Rs 5.67 crore, including the interest component.

Counsel for the award-debtor argued that the quantum should be calculated at 75% of the principal amount. i.e. approx. Rs 35 lakhs, since the MSMED facilitation council had not calculated the interest component, but left it to a Chartered Accountant of the award-holders choice.

Counsel for the award-holder on the other hand argued that the 75% ought to be calculated on the entire awarded amount and not just the principal amount.

Findings of the Court

The issue before the Court was first, whether the adjudication of the MSMED Council was on the entire awarded amount and second, if it would impact the petitioner’s obligation to deposit 75% of the awarded amount if the first question was answered in the negative.

In answering these questions, the Court looked at Section 18 of the MSMED Act. It was found that Section 18, was a precursor to the 75% deposit under Section 19 and vested the MSME Council with the power to arbitrate on a reference and make an award under the provisions of the Arbitration Act. It held:

The Council becomes the arbitral tribunal for all intents and purposes of the 1996 Act. The provisions of the 1996 Act, in effect, are bodily-lifted to sit in for the procedure and the award of the Council. If this be the case, section 31 of the 1996 Act which deals with the form and content of an arbitral award would also apply to the decision of the Council in the present case.

Upon concluding that Section 18 of the MSMED Act conferred the powers of an arbitral tribunal on the MSMED Council, the Court looked at Section 31(7) of the Arbitration Act, and observed that the interest component is a part of the awarded amount and cannot be seen as the subject matter of a separate or severable decision-making process.

Court noted that awarding of interest was not a “mechanical process” and that the arbitral tribunal would have to apply its mind before arriving at a decision for award of interest, since in most awards, the interest component would translate to large sums of money.

In looking at Section 16 of the MSMED Act, it was observed that the same contained a detailed procedure for determining the rate at which a buyer would need to pay interest to the supplier on the amount which was due from the goods supplied to the buyer. Court held:

Calculation of the rate at which and the date from which the buyer is liable to pay interest under section 16 of the MSMED Act is no child’s play. This adjudication would form an inalienable part of the award and be treated as integral to the decision of the Council.

In taking exception to the fact that the MSMED Facilitation Council, in the present case had delegated the determination of interest to a chartered accountant of the award-holders choosing, the Court noted that the Council’s delegation of such an important part of the adjudication process would be impermissible under the Arbitration act.

It was held that the deeming fiction under Section 18(4) of the MSMED Act would put the MSMED Council on the same footing as an arbitral tribunal, and that the Council was under an obligation to adjudicate on the entire claim, and not shift the same on the chartered accountant.

The Council cannot desert the task of decision-making and leave it to a Chartered Accountant and depend on the arid landscape of the figures presented by the latter who is not the arbitral tribunal under the MSMED Act, it held.

Accordingly, in refusing to accept the reasoning of the chartered accountant for fixing quantum of interest as the reasoning of the MSMED Facilitation council, the Court concluded that since the MSMED Council had not adjudicated on the entire amount i.e. the principal + interest, 75% of the awarded sum would construe only the component which the Council had adjudicated upon, i.e the principal amount.

Application was disposed of by directing the award-debtor to deposit an amount of approx. Rs 26 lakhs, which was 75% of the awarded sum of approx. Rs 35 lakhs, since the Council had not specified a rate for applicable interest.

Citation: 2023 LiveLaw (Cal) 319

Case: Government of Maharashtra v Shrivin Pharma Pvt. Ltd.

Case No: AP 90 of 2023

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