A Single Bench of the Calcutta High Court in the case of Bharat Heavy Electricals Limited v. Optimal Power Synergy India Private Limited, [I.A. No. G.A. 1 of 2020 in A.P. 175 of 2020, decided on September 1, 2021], interpreted the law enumerated in section 19 (application for setting aside decree, award or order) of the Micro, Small and Medium Enterprises Development Act, 2006 (“the Act”) in the backdrop of the object and reasons of the Act. 

Issue:

The issue which arose for consideration before the Court was, while securing 75% (seventy-five percent) of the principal sum awarded by the West Bengal State Micro Small Enterprises Facilitation Council (“Facilitation Council”) under section 19 of the Micro, Small and Medium Enterprises Development Act, 2006 (“the Act”), whether the award-debtor should be directed to secure such 75% (seventy-five percent) of the principal sum, inclusive of interest or exclusive of the interest component?

Decision by the Court:

The Court noted that the object of the Act finds specific articulation in sections 15 (liability of buyer to make payment), 16 (date from which and rate at which interest is payable) and 17 (recovery of amount due) of the Act which casts an obligation on the buyer to make payment within an outer limit of 45 (forty-five) days from the date of acceptance and for payment of compound interest with monthly rests to the supplier at 3 (three) times the bank rate notified by the Reserve Bank of India. The Court further noted that, the obligation on the buyer with regard to payment of interest is reinforced under section 17 of the Act where the supplier has supplied goods or rendered services to the buyer.

On a perusal of section 19 of the Act, the Calcutta High Court opined that, no application for setting aside of an award passed by the Facilitation Council shall be entertained by any court unless 75% (seventy-five percent) of the amount in terms of the award is deposited.

Moreover, while expressing its view on section 16 of the Act prescribing imposition of compound interest with monthly rests to the supplier at 3 (three) times the bank rate notified by the Reserve Bank of India, the Calcutta High Court observed that, although section 16 of the Act is a ‘draconian provision’, it articulates what the framers of the Act deemed necessary for dealing with errant buyers.

Thus, while referring to the facts of the present case, the Court noted that, the Facilitation Council had found the petitioner/ award-debtor liable for unpaid amounts of a total principal amount of Rs. 61,08,654/- (Rupees sixty-one lacs eight thousand six hundred and fifty-four only) plus interest under section 16 of the Act and hence, as per the Court, it was quite evident that, the Facilitation Council had awarded the principal amount plus interest thereon at three times of the RBI bank rate compounded with monthly rests under section 16 of the Act.

Therefore, in light of the above, the Calcutta High Court, held that:

1. the person seeking to set aside an award must deposit 75% (seventy-five percent) of the award under section 19 of the Act;
2. the meaning of the expression ‘award’ must be gleaned from the plain language of section 19 read with the overall object of the Act which seeks to ensure the survival of micro, small and medium scale enterprises by formulating means for realising the dues of such enterprises from buyers;
3. section 19 of the Act should be construed in a manner which is in consonance with the surrounding provisions, including section 16, which prescribes a special rate of interest and is also aimed at ensuring the economic viability of micro, small and medium enterprises;
4. reading the expression ‘award’ in section 19 of the Act as confined only to the principal sum and not the interest accrued thereon would amount to a construction which would defeat the very purpose of the Act.

Please find attached a copy of the judgment.

This update has been contributed by Arka Majumdar (Partner) and Kunal Dey (Associate).

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