When is the interest rate payable under Section 16 of the MSMED Act, 2006 applicable?

Background

The Preamble of the Micro, Small and Medium Enterprises Development Act, 2006¹ (the MSMED Act) describes it as “An Act to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto.”

One of the aspects covered by the MSMED Act is payment of interest on delayed payments towards goods and services provided by suppliers defined under it. At the outset, it is important to note that a “supplier” as defined in Section 2(n)² includes only micro and small enterprises registered under Section 8³ and excludes medium enterprises.

Sections 15⁴, 16⁵ and 17⁶ of the MSMED Act govern payment of interest on delayed payments to suppliers registered under it. These provisions are carried over from a previous statute, being the Interest on Delayed Payments to Small Scale and Ancillary Undertakings Act, 1993⁷ (the Interest Act). One of the objects of enacting the MSMED Act was to make further improvements to the Interest Act and to repeal that act by incorporating its provisions in the MSMED Act.

The Interest Act provided that where there was no agreement between the supplier and the buyer as to the date of payment in respect of any supply of goods or services, the “appointed day” for this purpose was to be considered as the day following immediately after expiry of 30 days from the date of acceptance of the relevant goods or services. Sections 4⁸ and 5⁹ of the Interest Act provided that in case of failure to make payment within such period, compound interest (payable monthly) was to be paid at 5% higher than the highest lending rate charged by banks on credit limits. The Interest Act was later amended in 1998¹⁰ to further increase the rate of interest to one-and-a-half time of prime lending rate charged by State Bank of India. It is relevant to note that the 1998 amendment also added a proviso to Section 3¹¹ of the Interest Act which prohibited parties from agreeing to a payment period of more than 120 days from acceptance or deemed acceptance of the goods or services.

The MSMED Act incorporated the provisions of the Interest Act and modified them in favour of micro and small enterprise suppliers in three important ways:

(a) First, the appointed day is considered as the day following immediately after expiry of 15 days from the day of acceptance or deemed acceptance of the relevant goods or services provided by a supplier.

(b) Second, Section 16 provides that in case of failure to make the payment towards the goods or services provided by a supplier before the appointed day, the buyer is required to pay compound interest with monthly rests on the due amount at three times of the bank rate notified by Reserve Bank of India.

(c) Third, the proviso to Section 15 prohibits parties from agreeing to a payment period of more than 45 days from acceptance/deemed acceptance of the goods or services.

It is noteworthy that the interest rate has been increased, while the maximum periods of payment have been decreased for both statutory period for payment (from 45 days to 15 days) and the maximum period for payment by agreement (from 120 days to 45 days) in comparison to the Interest Act. It is evident that Parliament has been nudging all stakeholders towards ensuring timely payment for goods and services provided by micro and small enterprise suppliers.

Scope of Sections 15, 16 and 17

One issue of interpretation that arises in view of the contents of the above provisions is whether they would apply to proceedings which are not instituted before the MSME Facilitation Centre (MFC) in terms of Section 181¹² of the MSMED Act. That is, would they apply to all disputes referred for resolution by a micro or small enterprise, before all forums, regardless of any reference to the MFC for the same?

It is relevant to note that Section 6¹³ of the Interest Act specifically provided that the amounts due from the buyer along with interest may be recovered by the supplier by way of a suit or other proceedings under any law in force. This explicit provision now stands removed from the MSMED Act.

A possible argument is that since the MSMED Act is a special statute that provides for a holistic scheme of dispute resolution, provisions of Sections 15, 16 and 17 would apply only to cases where the dispute is referred to the MFC for resolution in terms of Section 18. It could be argued that the MSMED Act is a complete code and the rate of interest specified in Section 16 would not be applicable beyond the dispute resolution process provided in Section 18.

A textual analysis of the said provisions, however, would suggest otherwise. The plain text of Sections 15, 16 and 17 does not restrict such claims only to proceedings instituted under Section 18. Section 18(1) also provides that any party to a dispute “may” make a reference to the MFC with regard to any amount due under Section 17 – as opposed to “shall”. Further, there is no provision in the MSMED Act restricting the application of Sections 15, 16 and 17 only to references before the MFC.

The High Court of Delhi concurs with the latter view. In Indian Highways Management Co. Ltd. v. Sowil Ltd.¹⁴, a Single Judge of the High Court considered this controversy and by way of judgment dated 21-12-2021 concluded that Sections 15, 16 and 17 of the MSMED Act impose the liability on the buyer to pay the due amount to the supplier within the specified period and to pay interest if it fails to do so, independent of the provisions of Section 18 of the MSMED Act.

The Court further held that the provisions of Sections 15 and 16 confer substantive rights and impose obligations which are not contingent upon recourse to any dispute resolution mechanism. There is nothing stated in Section 15 or Section 16 which restricts the amount recoverable under the said provisions contingent to a reference under Section 18(1) of the MSMED Act.

The Court also repelled the argument that where arbitration proceedings are constituted under the Arbitration and Conciliation Act, 1996¹⁵ (the A&C Act) interest provisions of Section 31(7)¹⁶ of the A&C Act would apply. The Court relied on the judgment of Silpi Industries v. Kerala SRTC¹⁷, where in the Supreme Court of India had clarified that the MSMED Act has an overriding effect vis-à-vis the A&C Act which is a general Act. It was further held that the MSMED Act was a special legislation regarding payment of interest and the provisions of the MSMED Act would override the provisions of the A&C Act to the extent of any repugnancy.

The above judgment of the learned Single Judge was challenged before a Division Bench of the High Court of Delhi.¹⁸ The Division Bench affirmed the judgment of the learned Single Judge by way of judgment dated 14-2-2022 while reasoning that since the MSMED Act is beneficial legislation, an interpretation which advances its purpose must be preferred.

The matter is now pending before the Supreme Court of India in SLP (C) No. 14233 of 2022.¹⁹ It remains to be seen what view the Supreme Court will take in this matter.

Conclusion

Pending a final decision by the Supreme Court, the law as it currently stands favours a wide application of Sections 15, 16 and 17 of the MSMED Act, including in disputes which are referred for resolution through modes other than through the MFC. The authors agree with this interpretation as it promotes the clear policy directives behind enactment of the MSMED Act. We hope that the Supreme Court will affirm this expansive view of the provisions of Sections 15, 16 and 17 and further strengthen the mechanism for payment of interest on delayed payments in favour of micro and small enterprise suppliers.