MSMED Act | Defaulting Buyer Not Liable To Pay Interest At 3 Times Bank Rate If Supplier Is A Medium Enterprise: Calcutta High Court

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

Justice Moushumi Bhattacharya was hearing a petition by 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, on the grounds that the Arbitrator had set the rate of interest at 24.6%, which was three-times the bank rate notified by the RBI, in spite of the respondents being a “medium enterprise.”

The court said three kinds of enterprises are defined in three distinct ways under MSMED Act and cannot be viewed as a common set of similar enterprises.

“Medium enterprise’’ is defined under Section 2(g) as an enterprise classified under Section 7 and the sub-clauses thereunder. A “micro enterprise” is defined under Section 2(h) while a “small enterprise” is defined under Section 2(m) of the Act," said the court.

It further observed that 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). The definition of “supplier” specifically excludes a “medium enterprise” as defined under Section 2(g) of the Act, said the court.

"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)," said the court.

The petitioners, directed to pay Rs 24,11,07,449.15, were aggrieved by the award of the Arbitrator to the extent that the rate of interest being imposed on them by the Arbitrator was at 24.6% over two periods, which would amount to Rs 4.77 crores and Rs 13.16 crores, respectively.

It was the case of the petitioners that the rate of interest was calculated on the assumption that the respondent was a “medium enterprise” under Section 16 of the MSMED Act, while “medium enterprises” are specifically excluded from the mandate of Section 16, unlike Micro and Small enterprises. 

On the other hand, the respondents argued that the points raised by the petitioners may only be taken up in an application for setting aside of the award under Section 34 of the Arbitration & Conciliation Act, 1996 and not in an application for stay.

The court said 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 it 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.

"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. The respondent/supplier before the Court is admittedly a “medium enterprise” and the impugned Award records the same." said the court.

Accordingly, the court ordered a stay of the impugned award upon payment of the principal amount, along with interest at a rate of 8% instead of 24.6%. 

“The award-debtor/petitioner will make payment of the interest component at 8% on the principal amount of Rs.5,17,09,732.78 for the two time periods indicated in the tabulated statement. The time periods computed will remain the same but the interest will be at 8% per annum instead of 24.6% for the reason stated above,” said the court.

Case: The New India Assurance Co. Ltd. v Winsome International Ltd.

Citation: 2023 LiveLaw (Cal) 180

Appearances: Mr. Ratnanko Banerji, Sr. Adv., Mr. Srinjoy Bhattacharya, Adv., Ms. Nikita Rathi, Adv. …for the petitioner

Mr. Samit Talukdar, Sr. Adv., Ms. Nandini Mitra, Adv., Mr. Pradip Sarawagi, Adv., Ms. Debolina Dey, Adv.…for the respondent

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