Read Time: 07 minutes

Synopsis

The Calcutta HC recently held 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 will be at the bank rate notified by the RBI, rather than three times that rate.

The single judge bench of Justice Moushumi Bhattacharya noted the provision of section 16 of the MSMED Act which states that a defaulting buyer will not be liable to pay interest at three times the bank rate under Section 16 of the Act if the supplier is a medium enterprise. The position entirely changes if the supplier is a micro or small enterprise.

The court was hearing a petition filed by New India Assurance Co Ltd for a stay of the arbitral award dated April 3, 2023, of Rs 24,11,07,449.15 imposed on them by a sole-Arbitrator, on the grounds that the Arbitrator set the rate of interest at 24.6%, which was three times the bank rate notified by the RBI, despite the respondents being a "medium enterprise."

The counsel appearing for the petitioner argued that the interest calculated at 24.6% was based on the respondent before this court being a “medium” enterprise.

Further, the counsel submitted that the calculation of interest at 24.6% is on the basis of the Section 16 mandate under The MSMED Act, 2006.

Furthermore, the counsel seeks to make a distinction between a medium, micro and small enterprise as defined under the said Act.

The counsel representing the respondent stated that the amount awarded was on the admitted fact of the respondent being an MSME under the Act of 2006.

After considering the submissions made, the court noted the definitions of Micro, Small and Medium Enterprises and said that each of the definitions refers to specific clauses / sub-clauses of section 7(1) of the Act. The very fact that the three kinds of enterprises are defined in three distinct and specific sub-sections of Section 2 means that they cannot be viewed as a common set of similar enterprises coming within the fold of the MSMED Act.

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

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.

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.

Hence, the respondent/supplier is admittedly a “medium enterprise” and the impugned Award records the same.

Accordingly, the court held that the petitioner should be directed to pay the principal amount of Rs.5,17,09,732.78 plus costs at Rs.1 crore as computed by Arbitrator for the stay of the Award.

"The 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. 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," the court added.

Further, the petitioner will secure 50% of the total amount of Rs.11,68,82,129.93.

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

Statute: Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act)