Sections 15 And 16 Of The MSMED Act Are Mandatory Provisions, Arbitrator Must Assign Reasons For Not Awarding Compound Interest: Delhi High Court

The bench of Justice Vibhu Bakhru and Justice Amit Mahajan held that once the arbitrator has held that MSMED Act applies to the dispute between the parties, it must assign reasons for not awarding interest in terms of Sections 15 and 16 of the Act.

Facts

The Petitioner had placed three Purchase Orders on the Respondent for the supply of certain items. Accordingly, the respondent supplied the items and raised the invoices for payment.

A dispute arose between the parties when the appellant withheld a certain amount against the said invoices. Accordingly, the respondent filed a reference before the MSE Facilitation Council under Section 18 of the MSMED Act.

On failure of the conciliation, the parties were referred to arbitration under the aegis of DIAC. Before the arbitral tribunal, the respondent claimed the balance amount along with interest at 27% p.a. compounded annually.

The arbitrator partly allowed the claim of the respondent for the balance amount along with 12% interest but rejected the claim for 27% interest without assigning any reason.

Aggrieved by the decision of the arbitrator in rejecting its claim for 27% compound interest, the respondent challenged the award under Section 34 of the A&C Act to that extent. The Commercial Court allowed the petition of the respondent and set aside the award.

Aggrieved by the decision of the Commercial Court, the appellant preferred an appeal under Section 37 of the A&C Act.

The Grounds Of Appeal

The appellant challenged the impugned order on the following grounds:

• The Commercial Court erred in not appreciating the fact that the respondent was not registered as an MSME at the time when the parties entered into the agreement, therefore, it cannot claim benefits of the MSMED Act.
• The appellant relied on the judgment of the SC in Silpi Industries v. KSRTC, 2021 SCC OnLine SC 439 to canvass the abovementioned challenge.
• The Commercial Court also erred in setting aside the arbitral award instead of remanding back the matter to arbitrator.

Analysis By The Court

The Court rejected the contentions of the appellant. It held that the objection of the appellant that the MSMED Act does not apply to the dispute between the parties was not accepted by the arbitrator and the appellant has not challenged the finding of the arbitrator.

The Court held that judgment in SIlip Industries (supra) would not help the appellant as the SC only held that to claim the benefits of the MSMED Act, a party must be registered as an MSME at the time of performance of the Contract and the respondent in the present case was duly registered as an MSME when the contract was performed, therefore, the contention of the appellant that registration as an MSME must be prior to the contract is without any merit.

The Court observed and held that after holding that the MSMED Act applies to the dispute between the parties, it was incumbent upon the arbitrator to assign reasons for not awarding compound interest in terms of Sections 15 and 16 of the Act.

The Court held that Sections 15 and 16 are mandatory provisions of the MSMED Act, therefore, there is no infirmity in the order of the Commercial Court in setting aside an award in derogation of mandatory provisions of the Act.

The Court further reiterated that the Court exercising powers under Section 34 of the A&C Act cannot remand the matter to the arbitral tribunal except in terms of Section 34(4) of the Act and an order under Section 34(4) cannot be passed except on an application of any party.

The Court held that the appellant not having moved an application under Section 34(4) at the relevant time cannot contend that the matter should have been remitted back to the arbitrator.

Accordingly, the Court dismissed the appeal.

Case Title: Bharat Heavy Electrical Ltd. v. Bhatia Engineering Company

Citation: 2022 LiveLaw (Del) 711

Date: 18^th July 2022

Counsel for the Applicant: Mr Ashim Vachher and Mr Vaibhav Dabas, Advocates.

Counsel for the Respondent: Dr Amit George, Mr Swaroop George, Mr P. Harold, Mr Amol Acharya, Mr Rayadurgam Bharat and Mr Arkaneil Bhaumik, Advocates.

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