Title: Government of Maharashtra v Shrivin Pharma Pvt. Ltd.
Case no.: AP 90 of 2023
Decided on: 12.10.2023
Coram: Justice Moushumi Bhattacharya
Introduction
The Calcutta High Court held that the ‘Facilitation Council cannot desert the task of decision making and leave it to a Chartered Accountant and completely rely on the numbers presented by the Chartered Accountant who is not a part of the council or arbitral tribunal as envisaged under The Micro Small and Medium Enterprises Development Act, 2006 (MSMED Act). Further, the single judge bench consisting of Justice Moushumi Bhattacharya made the observation that the delegation of an important part of the adjudication process i.e., calculation of interest payable of the arbitral tribunal is not permissible under the provisions of the 1996 Act. Section 31 of the 1996 Act delineates the form and content of an arbitral award and makes award of interest an inseparable part thereof.
Facts of the case
The applicant award-holder is registered as a “small enterprise” under The Micro Small and Medium Enterprises Development Act, 2006 (MSMED Act). The State Micro Small Enterprises Facilitation Council (MSME Council) passed the impugned order on a claim made by the respondent award-holder in 2017 which is the subject matter of contention. The claim was with regards to the outstanding dues against supply of medicines by the respondent award-holder to the petitioner award-debtor. The applicant made reference to the council under section 18(1) of the MSMED Act. The impugned order directed the petitioner award-debtor to pay the outstanding principal amount of Rs. 35,83,588/- plus interest thereon at 3 times the bank rate compounded with monthly rate. The petitioner was further required to deposit 75% of the awarded amount as per section 19 of the MSMED Act and was accordingly directed to deposit Rs. 26,25,000/-
The respondent award-holder, filed an application for modification of the said order. The applicant award-holder wants the court to direct the petitioner award-debtor to deposit a sum of Rs. 4,25,35,173/- and not the amount which was directed to be deposited by the above order. The reasoning given by the applicant is that 75% of the amount of Rs. 5,67,13,564/- awarded by the MSME Council shall be taken into account.
Issue before the court
The issue before the court was whether adjudication of the Facilitation Council is on the entire awarded amount. Second, would the petitioner’s obligation under section 19 be impacted if the answer is in the negative.
Court’s observation and analysis
Section 19 of the MSMED Act contains provision for the deposit of 75% of the amount in case of decree, award or any other case. Hence, herein the court is statutorily prohibited from setting aside the award passed by the Council unless the buyer-applicant has deposited 75% of the amount in terms of the award. Reference was made to the cases of Tirupati Steels vs. Shubh Industrial Component; (2022) 7 SCC 429 and in Gujarat State Disaster Management Authority vs. Aska Equipments Ltd.; (2022) 1 SCC 61 in this regard.
The issue regarding whether 75% of the principal amount sans interest would satisfy the rigour of section 19 of the MSMED Act, would become more clear from section 18 of the MSMED Act which contains the hierarchy of a reference made by a party for recovery of an amount under section 17 of the MSMED Act. This vests the Facilitation Council with the power to arbitrate on the reference and make an award under the provisions of the Arbitration and Conciliation Act, 1996.
Regarding the interest rate, section 31(7) makes it clear 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. This would entail the arbitral tribunal to apply its mind to the facts and attending circumstances for coming to a decision on the award of interest. The award of interest is certainly not a mechanical process where the arbitral tribunal can randomly pick on a percentage on the principal sum or a time frame for which the interest is to be made payable.
The single bench Judge also discusses the significance of section 16 of the Act which provided for the date from which interest is payable by the buyer. The amount will then be multiplied 3 times in accordance with the prevalent bank rate. It makes the buyer liable for interest presuming their failure to make payment of the amount as agreed upon between the buyer and supplier. Therefore, it can be concluded that such calculation is not an easy task. The Facilitation Council, appointed as the arbitral tribunal for the purposes of the 1996 Act, must deal with the calculation of interest carefully which would also become an integral part of the adjudication of the Council.
Further, the concluding part of the award shows that the Facilitation Council delegated the determination of the interest to the Chartered Accountant of the applicant’s / award-holder’s choice. The Council has entirely relied upon the computation done by the Chartered Accountant while adjudicating the amount of interest payable by the petitioner to the respondent. This was also proved from the certificate of Chartered Accountant which contains the calculation of the interest payable.
The High Court was of the view that the delegation of an important part of the adjudication process of the arbitral tribunal is not permissible under the provisions of the 1996 Act. Section 31 of the 1996 Act delineates the form and content of an arbitral award and makes award of interest an inseparable part thereof. Reference was also made to the Supreme Court case of M/s. Hyder Consulting (UK) Ltd. v. Governer State of Orissa Tr. Chief; (2015) 2 SCC 189,wherein it was held that the interest component becomes part and parcel of the “sum” awarded, where the interest component had already been adjudicated.
It is the duty of the Council to adjudicate the specific rate of interest payable under section 16 of the Act, rather than to delegate this responsibility entirely to 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.
Hence, the court held that the calculation of 75% under section 19 of the MSMED Act would only be on the amount which has been adjudicated upon and awarded by the Facilitation Council i.e., Rs. 35,83,588/-. 75% of this amount would be Rs. 26,87,691/-. The Council has not specified a figure for the applicable interest as it was quantified by the Chartered Accountant. The award-debtor was directed deposit the amount of Rs. 26,87,691/-
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Written by- Amrita Rout
