MSMED Act | Imposition Of Three Times Bank Interest By MSME Facilitation Council Is Violation Of Principles Of Reasonableness And Fairness: Madras High Court

Brief Facts:

The Petitioner had a dispute with M/s Unicon Engineers (“Second respondent”), which was referred to the Facilitation Council of the Micro Small and Medium Enterprises. An ex-parte arbitration award was passed by the Facilitation Council against the Petitioner. Feeling aggrieved, the Petitioner initially contested the award through a writ petition in the Madras High Court (“High Court”). This writ was disposed with instructions for the Facilitation Council to follow proper procedures under Section 18 of the MSMED Act, leading to fresh arbitration proceedings. Subsequently, a new arbitral award was passed. The Petitioner again approached the High Court and filed a writ petition against the new arbitral award.

The Petitioner argued that despite the award being issued on 27.03.2023, it only received a copy on 02.11.2023. The Petitioner's contention primarily revolved around the interest element in the award, particularly its calculation at three times the bank rate interest on certain invoices covering a period inclusive of the time during which the earlier writ petition was pending.

Under Section 19 of the MSMED Act, 2006, any application challenging the award mandates a deposit of 75% of the award amount. The Petitioner argued that due to the unreasonably high interest and failure to consider the period during the pendency of the writ petition, their right to file an application under Section 19 is effectively nullified.

On the other hand, the second respondent contended that the Petitioner's remedy lied solely under Section 34 of the Arbitration and Conciliation Act, 1996 (“Arbitration Act”), which necessitates depositing 75% of the decretal amount. It argued that this obligation cannot be bypassed by resorting to writ jurisdiction under Article 226 & 227 of the Constitution of India.

Observations by the High Court:

The High Court noted the Petitioner had a right to challenge the award under Section 19 of the MSMED Act, 2006 read with Section 34 of the Arbitration Act. However, the High Court noted that the award by the council was issued without considering the practical challenges faced by the Petitioner, particularly the financial burden of depositing 75% of the award amount, which includes interest accrued during the pendency of the writ petition. The High Court observed that despite the prolonged pendency of the writ petition for seven years, neither party nor the Court itself expedited its disposal.

The High Court emphasized the importance of ensuring that the right to challenge the award remains realistic and accessible. It criticized the imposition of excessive interest, which effectively closes the door to challenging the award, thereby indirectly depriving the petitioner of their appeal remedy. The High Court condemned such actions as contrary to the fundamental principles of justice.

While acknowledging that a writ petition cannot substitute the proper course of action under Section 19 of the MSMED Act, 2006 read with Section 34 of the Arbitration Act, the High Court held that avenues for challenging the award should not be arbitrarily closed off due to onerous pre-deposit conditions. Despite its limited authority to review arbitral awards, the High Court held it necessary to intervene in this case to rectify the injustice caused by the excessive imposition of interest.

In light the violation of fundamental principles of reasonableness and fairness, the High Court decided to remit the matter back to the council solely for reconsideration of the interest component of the award. It directed the council to review the rate of interest and issue fresh orders within four weeks, specifically excluding any other aspect of the award from reconsideration.

Case Title: M/s Bagalkot Cement & Industries Ltd vs The Chairperson, Micro Small and Medium Enterprises and Anr.

Citation: 2024 LiveLaw (Mad) 144

Case Number: W.P. No.2170 of 2024 and W.M.P.No.2349 of 2024

Advocate for the Petitioner: Mrs.N.Kavitha Rameshwar

Advocate for the Respondent: Mr.B.Manoharan for R2.

Click Here To Read/Download Order