The Stringency Of Interest Provisions Under MSMED Act: Implementation And Judicial Interpretation

The Statutory Architecture Of The MSME Act: Sections 15 – 17 Read With Sections 22 - 24

The MSMED Act devotes Chapter V (Sections 15 - 25) to the notorious problem of delayed payments.

Payment obligation and trigger (Sections 15 – 17): Section 15 mandates that buyers pay within the agreed period, and in any event within 45 days from acceptance/deemed acceptance of the goods or services. Upon default, Section 16 imposes, notwithstanding anything contained in any agreement, compound interest with monthly rests from the “appointed day” (or the agreed date, if later) at three times the RBI bank rate; Section 17 declares that the buyer would be liable for the principal with such interest.

Such language is significant: “notwithstanding anything contained in any agreement” subordinates private contracts to the legislative scheme and renders any clause diluting the interest provision void to that extent.

Transparency and override: (Sections 22 – 24): Section 22 requires specified buyers to disclose MSME dues and interest in their annual statements, while Section 23 disallows deductions of such statutory interest for income-tax purposes. Section 24 gives overriding effect to Chapter V over inconsistent laws, including, where inconsistent.

Interface with Arbitration: A Special Law Prevailing over the A&C Act

A recurring judicial debate is whether these MSMED interest provisions override party agreements (including arbitration clauses) and the Arbitration and Conciliation Act, 1996 (A&C Act).

The Supreme Court has framed a clear approach. In Silpi Industries v. Kerala SRTC (LL 2021 SC 276): 2021 SCC OnLine SC 439, para 36), the Court underscored that the MSMED Act is a special, beneficial legislation; to the extent of inconsistency, its mandate prevails over the A&C Act. Later, in Gujarat State Civil Supplies Corp. Ltd. v. Mahakali Foods (Unit 2) (Civil Appeal Arising out of SLP (C) No. 12884/2020), the Court reaffirmed that disputes routed through the Facilitation Council under Section 18 must be governed by the MSMED framework, and party agreements cannot dilute statutory protections.

Making a Challenge Difficult: The Pre-Deposit Lock and the Bar on Writ Detours

A core anti-dilatory feature is Section 19, which requires a buyer to deposit 75% of the award amount before a Section 34 challenge is even entertained. In Tirupati Steels v. Shubh Industrial Component (Civil Appeal 2941 of 2022,), the Supreme Court held the pre-deposit to be mandatory, permitting only staggered compliance where warranted.

The Court has also shut the door on attempts to bypass Section 19 through writ jurisdiction. In India Glycols Ltd. v. MSEFC (Medchal–Malkajgiri) (Civil Appeal 7491 of 2023, 6^th Nov 2023), a three-judge bench affirmed that writ petitions aimed at avoiding the statutory route and its deposit discipline are impermissible; challenges must proceed under Section 34, subject to Section 19.

These directions are being applied in execution practice. In recent execution proceedings arising from an MSME award against the Jharkhand Education Project Council, courts reiterated that validity challenges to an award cannot be raised in execution and that writ detours will not lie when a recourse under Section 34 of the A&C Act (with the required pre-deposit) was available but not pursued.

The Parliamentary intent behind such stringency is singular: MSMEs typically lack bargaining power and a cash flow buffer to absorb payment delays imposed by larger buyers, including State entities. Delayed payment can be fatal to their operations. The compound, high-rate interest is a deliberate tool to alter incentives and foster contractual discipline. As the Supreme Court and several High Courts have observed, by overriding all forms of agreements, the Act curtails the scope for the buyer's escape routes

Interest Computation

Section 16 mandates compound interest with monthly rests at three times the RBI bank rate. In practice, this has required month-wise statements applying the RBI bank rate (as notified from time to time) ×3, compounded monthly from the statutory start date, with contractual terms yielding to the legislative command.

Appropriation of part-payments: On execution, partial payments are first appropriated to interest and costs, and only thereafter to principal, unless a contrary direction exists. In DSL Enterprises Pvt. Ltd. v. MSEDCL 2018(3)BomC R4, the Bombay High Court held that payments shall be adjusted towards the satisfaction of the interest first, then the principal amount. A similar view has been taken by Jharkhand High Court in Rungta Projects Limited vs. SAIL (2012 SCC OnLine Jhar 918).

No contractual derogation: It is clarified that because of the “notwithstanding” text in section 16 and the overriding effect of Chapter V offered by Section 24, clauses purporting to cap or waive interest cannot validly reduce the statutory impost in MSME disputes.

Practical Suggestions:

For suppliers (micro/small):

1. It is suggested that all claims for payment, from the outset, be framed to demand statutory interest in the event of non-payment. Another good practice could be presenting a month-wise chart reflecting the interest amount (compounded monthly at 3x the RBI rate) in pleadings and award-computation statements.
2. In execution proceedings, one may specifically press the interest-first appropriation principle and seek directions for updated running statements until complete satisfaction of the claim.
3. Where the award is challenged without a Section 19 deposit, insist that execution of the award must proceed or that the challenge be not entertained.

For buyers (especially public bodies/PSUs):

1. Budget for the 75% pre-deposit; Courts would not be able to entertain a challenge to the award under Section 34 of the A&C Act, in the absence thereof. As is evident, seeking recourse by filing writs would have no effect.
2. Avoid reliance on “no-interest” or capped-interest clauses, even if your contracts allow for the same; Chapter V of the Act overrides any inconsistent contract terms regarding interest provisions. It is also suggested to re-examine all contracts to ensure that contractual terms do not contravene the MSMED Act provisions.
3. Recognise that any delay in payments inflates exposure exponentially due to monthly compounding and the interest-first appropriation of any part-payments; An early settlement typically reduces total outlay.

The MSMED Act's interest provisions are not gap fillers but instead are instruments of policy to guarantee liquidity for micro and small suppliers. A reading of the aforementioned and other judicial precedents clearly shows that Indian Courts have responded by:

(i) enforcing the triple bank-rate, monthly-compound formula;

(ii) insisting on the required pre-deposit for challenges;

(iii) rejecting collateral attacks in execution; and

(iv) awarding costs to deter abuse, including by public entities.

The cumulative message is unambiguous: in MSME disputes, statutory interest is both sword and shield, and Indian courts will ensure that it is given full effect.

Author: Mr. Jog Singh, Advocate, Supreme Court Of India | Former Judicial Member Of The Central Administrative Tribunal (CAT) And Securities Appellate Tribunal (SAT) Mumbai. Views are personal.