Payment of Compound Interest Under MSMED Act Supersedes All Agreements And Laws: J&K High Court

A bench of Justice Sanjeev Kumar observed,

“This condition of payment of compound interest on failure of the buyer to make the payment on the date it becomes due, is statutory in character and overrides any stipulation in the agreement made between the buyer and the supplier. It also overrides any such stipulation with regard to interest made in any law for the time being in force”.

Section 16 of the MSME Act prescribes that in case the buyer fails to make the payment to the supplier, the buyer shall become liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.

The case involved a dispute between the respondent Northern Transformers, an MSME supplier, and the Union Territory of J&K and its Chief Engineer, M&RE Wing. The respondent, having not received timely payments for its supplies, approached the Micro and Small Enterprises Facilitation Council (MSEFC) under the Act. However, the Council, bypassing the conciliation and arbitration procedures outlined in Section 18, directly issued an award in favour of the respondent.

The petitioners contended that the Council had not followed the mandate of Section 18 of the MSMED Act, alleging that conciliation proceedings were never conducted. They argued that, in the absence of conciliation failure, arbitral proceedings should not have been initiated. The key point of contention was the validity of an award dated April 20, 2021, which directed payment of Rs. 13,39,209/- along with compound interest.

Justice Kumar, while acknowledging the failure of the Council to adhere to the mandated procedure, emphasized that the liability of the petitioners to make the payment was statutorily incurred. The Court held that the initiation of proceedings by the Council under Section 18 was unnecessary, as the payment due to the respondent was not disputed, and the statutory liability had already been incurred.

“..for the reason that the amount due to the respondent (supplier) is not disputed nor it is in dispute that payment to the supplier (respondent) has not been made so far, this Court is of the firm view that the petitioners cannot be permitted to hide behind technicalities and avoid its contractual as well as statutory liability”, the bench recorded.

Furthermore, the bench underscored the statutory nature of compound interest under Section 16 of the MSMED Act, overriding any contrary stipulation in agreements or existing laws.

While acknowledging the petitioners' liability to pay the respondent, the Court found the MSEFC's award flawed due to the Council's failure to follow the proper procedures mandated by the Act. Notably, the Council neither conducted the required conciliation proceedings nor referred the matter for arbitration as stipulated in Section 18 and these procedural lapses rendered the award legally untenable, the bench underscored.

Based on these considerations the Court quashed an award passed by the Council due to procedural lapses while upholding the petitioners' liability to pay the respondent MSME the principal amount and statutory interest.

Case Title: Union Territory of J&K V/s Northern Transformers

Citation: 2023 LiveLaw (JKL) 325

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