Union Territory of J&K Vs Aibak Electric Industries Barzulla (Jammu & Kashmir and Ladakh High Court)
Summary: The Jammu & Kashmir and Ladakh High Court, in Union Territory of J&K and Another Vs Aibak Electric Industries Barzulla, examined the legality of an award passed by the Micro and Small Enterprises Facilitation Council (MSEFC) without complying with the mandatory conciliation and arbitration procedure prescribed under Sections 15 to 18 of the Micro, Small and Medium Enterprises Development Act, 2006. The petitioners, comprising the Union Territory of Jammu and Kashmir through the Chief Engineer, M&RE Wing, Srinagar, and the Executive Engineer, Electric Division, Budgam, challenged the award dated 20 April 2021 and the execution order dated 13 June 2023. The principal controversy concerned whether the Facilitation Council could issue an enforceable monetary award without conducting the statutory proceedings required under Section 18, particularly when the liability for the principal amount was admitted but the interest component remained disputed.
The respondent had approached the MSEFC on 16 June 2020 regarding delayed payment for goods supplied to the petitioner department. The Council sought details of the supplies, payments already made and outstanding dues through its communication dated 14 July 2020. Subsequently, on 17 August 2020, the Council directed payment of Rs.7,65,952 within fifteen days. After further proceedings, the Secretary of the Council passed an award on 20 April 2021 directing payment of Rs.7,65,952 together with compound interest at 12.75% per annum from 31 January 2018. When the petitioners failed to comply, the respondent initiated execution proceedings, whereupon the executing court ordered attachment of the department’s bank accounts, except the salary account, and its official vehicles.
The petitioners argued that the award was a nullity because the Council had neither completed a valid conciliation process under Section 18(2) nor conducted arbitration under Section 18(3) of the MSMED Act. They submitted that no valid settlement agreement or arbitral award existed which could be executed. The Chief Engineer personally acknowledged before the High Court that the principal amount payable to the respondent was not disputed and ought to be paid. However, the petitioners disputed the Council’s award of compound interest at 12.75% per annum. The respondent, on the other hand, contended that since the supply of goods and payment liability were admitted, a further arbitration proceeding was unnecessary and the Council was justified in issuing its monetary directions.
The High Court examined the statutory scheme of Chapter V of the MSMED Act, especially Sections 15, 16, 17 and 18. Section 15 requires buyers to pay suppliers within the agreed period, subject to a maximum statutory period of forty-five days. Section 16 creates an overriding statutory liability for delayed payments, prescribing compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. Section 17 makes the buyer liable for both the amount due and the statutory interest. The Court held that these provisions create binding payment obligations independently of any contrary contractual stipulation. Consequently, even where the principal amount is admitted, the buyer cannot avoid the statutory interest merely because the Facilitation Council failed to follow the prescribed procedural requirements.
With regard to Section 18, the High Court observed that the statutory mechanism concerns disputes relating to amounts due under Section 17. According to the Court, where the supplies and outstanding principal payment were admitted, there was no justification for the Council to embark upon the particular proceedings undertaken in the case. The Court found that no proper conciliation had been conducted, no settlement agreement signed by the parties had been drawn up and no failure of conciliation had been formally recorded followed by arbitration. Accordingly, the Council’s proceedings were procedurally defective and had not resulted in a valid arbitral award enforceable under the Arbitration and Conciliation Act, 1996. The Court nevertheless distinguished the invalidity of the purported award from the independently existing statutory liability of the purchaser.
The High Court emphasised that the petitioner department could not rely on technical defects in the Facilitation Council’s procedure to escape the payment obligations which it had admittedly incurred. In the Court’s assessment, the principal amount remained payable and the statutory interest under Section 16 was also attracted by the admitted delay. The failure of the Council to follow Section 18 did not extinguish the respondent supplier’s entitlement to payment or transform an admitted obligation into a disputed liability. The Court therefore declined to grant relief that would enable the petitioners to avoid their substantive liability, even while holding that the impugned award and execution proceedings could not be sustained in their existing form.
Ultimately, the High Court held the impugned orders legally unsustainable and liable to be quashed, but directed the petitioners to pay the entire outstanding amount, comprising principal and compound interest under Section 16 of the MSMED Act, within two months from the judgment dated 14 December 2023. It further directed that the proceedings before the executing court would terminate. The petition was disposed of accordingly. The judgment illustrates the distinction between the procedural validity of an MSEFC award and the substantive statutory obligation to pay delayed MSME dues with interest. Importantly, the Court’s direction was to pay compound interest in accordance with Section 16, rather than to uphold the Council’s procedurally defective award merely because the principal amount was admitted.
Cases Discussed
1. Aibak Electric Industries (Jammu & Kashmir and Ladakh High Court); CM(M) No. 287/2023; Decision Date: 14.12.2023. The High Court referred to its decision in this matter, delivered on the same date, in which the scope of Chapter V of the MSMED Act, particularly Sections 15 to 19, had been discussed. The detailed analysis was not repeated in the present judgment.
FULL TEXT OF THE JUDGMENT OF JAMMU & KASHMIR AND LADAKH HIGH COURT
1. Union Territory of Jammu and Kashmir through Chief Engineer, M&RE Wing, Srinagar, alongwith Executive Engineer, Electric Division, Budgam, have filed this petition under Article 227 of the Constitution of India for seeking quashment of an award dated 20-04-2021 passed by the Secretary, Micro and Small Enterprises Facilitation Council, Kashmir Division, Srinagar, in case titled Northern Transformers v. Chief Engineer, M&RE Wing, Srinagar, as also an order dated 13-06-2023 passed by the court of learned Additional District Judge (Bank Cases) Srinagar [„the executing Court‟].
2. Briefly stated the facts projected by the petitioners in this petition are that on 16-06-2020 the respondent filed an application under the Micro Small and Medium Enterprises Development Act, 2006 [„MSMED Act, 2006‟] regarding delayed payments before the Secretary, Micro and Small Enterprises Facilitation Council, Kashmir Division, Srinagar [„the Council‟]. On receipt of reference the Secretary of the Council vide its communication dated 14-07-2020 called upon the petitioner No.2 to furnish the details in respect of the reference received, within a period of seven days with regard to; (i) date of completion of supply order; (ii) payment made, if any; and (iii) pending payments as on date. This was followed by another communication of the Secretary of the Council dated 17-08-2020 calling upon the petitioner No.2 to pay an amount of Rs. 7,65,952/- to the respondent within 15 days from receipt of notice, intimating further to the petitioner No.2 that, in case of failure, the case shall be registered by the Council. It seems that the aforesaid notices issued by the Secretary to the Council were not responded to by the petitioners and the requisite payment demanded by the respondent was not released. The Secretary of the Council invoked the provisions of Section 18(2) of the MSMED Act, 2006 and called upon both the parties to appear before it for mutual settlement. It is, however, not clear from the pleadings as to whether the parties attended the settlement meeting fixed by the Council. It is, however, the grievance of the petitioners that they suddenly received an award dated 20-04-2021 passed by the Secretary of the Council, holding the respondent entitled to a payment of Rs, 7,65,952/- alongwith compound interest at the rate of 12.75 % Per annum with effect from 31-01-2018 till the payment was made to the respondent through J&K SICOP.
3. When the award dated 20-04-2021 was not complied with by the petitioners, the respondent filed an execution petition before the executing Court in which the executing Court, vide order impugned dated 13-06-2023, attached all accounts operated by the petitioner No.2, excluding the salary account, as also all the official vehicles belonging to the petitioner-department. The award, as well as the order passed by the executing Court referred to above, are subject matter of challenge in this petition.
4. The award has been challenged by the petitioners inter alia on the ground that the Council has not followed the mandate of Section 18 of the Act of 2006 in its right perspective. It is submitted that no conciliation proceedings in terms of sub-Section 2 of Section 18 were ever conducted nor was the dispute between the parties amicably settled in such proceedings. It is thus argued that in the absence of failure of conciliation proceedings, it was not available to the Council to initiate the arbitral proceedings. To put it more clearly, the learned counsel for the petitioners argued that the award, which has been put to execution before the executing Court, is neither on account of any amicable settlement made during the conciliation proceedings conducted under sub Section (2) of Section 18 nor the same can be termed as an award passed by the Arbitral Tribunal under Section 18(3) of the Act of 2006. It is thus argued that the impugned award, which has been put to execution by the respondent, is nullity in the eye of law, and, therefore, cannot be enforced.
5. The Chief Engineer, who appeared in person before this Court, fairly submitted that the payment due to the respondent is not in dispute and is required to be paid. He, however, disputes the award insofar as it grants the compound interest at the rate of 12.75% per annum in favour of the respondent. As a matter of fact, before the executing Court also, the petitioners have taken this fair stand.
6. Per contra, the case of the respondent is that, pursuant to reference filed by the respondent under Section 18 of the Act, the petitioners were served and were directed to make the payment. The direction to make the payment was made by the Council for the reason that the petitioners had fairly admitted the supply of goods made by the respondent. It is thus argued on behalf of the respondent that, once the supplies made by the respondent to the petitioners are admitted and the payment due to the respondent is not disputed by the petitioners, there was hardly any need for the Council to refer the matter to arbitration for passing an arbitral award under Section 18(3). Learned counsel for the respondent would submit that the case of the respondent falls within the purview of Sub Section 2 of Section 18 and, therefore, an award in terms of Section 31 of the Arbitration and Conciliation Act, 1996, which has been rightly put to execution by the respondent before the executing Court.
7. Having heard learned counsel for the parties and perused the material on record, it is seen that the Parliament in the year 2006 enacted the Micro, Small and Medium Enterprises Development Act, 2006, with a view to providing and facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto. Apart from other objectives and reasons for enactment, the Act seeks to make provisions for ensuring timely and smooth flow of credit to Small and Medium Enterprises to minimise the incidence of sickness among and enhancing the competitiveness of such enterprises in accordance with the guidelines and instructions of the Reserve Bank of India and to make further improvements in the interest on delayed payments to small and ancillary industries under the Small Scale and Ancillary Industrial Undertakings Act, 1993 and making that enactment a part of proposed legislation and to repeal that enactment. Chapter V of the 2006 Act deals with delayed payments to Micro and Small Enterprises. Section 15 deals with liability of the buyer to make payment and the same for facility of reference is reproduced hereunder:-
“15. Liability of buyer to make payment:- Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”
8. Similarly Sections 16 and 17 provides the rate at which the interest is payable and the date from which it becomes payable on the delayed payment. Sections 16 and 17 read thus:-
“16. Date from which and rate at which interest is payable:- Where any buyer fails to make payment of the amount to the supplier, as required under Section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed date, or as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
17. Recovery of amount due:- For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under Section 16.”
9. Section 18 is at the heart of controversy raised in this petition and, therefore, is set out below:-
“18. Reference to Micro and Small Enterprises Facilitation Council:- (1) Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to anyamount due under Section 17, make a reference to the Micro and Small Enterprises Facilitation Council.
(2) On receipt of a reference under sub-section (1), the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of Section 65 to 81 of the Arbitration and Conciliation Act, 1996 ( 26 of 1996) shall apply to such a dispute as if the conciliation was initiated under Part III of that Act.
(3) Where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council hall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 ( 26 of 1996) shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section (1) of Section 7 of that Act.
(4) Notwithstanding anything contained in any other law for the time being in force, the Micro and Small Enterprises Facilitation Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.
(5) Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.”
10. From reading of scheme of Section 15 to 18, it clearly transpires that where supplies are made by any micro and small enterprise to any buyer, the payment thereof shall be made by the buyer on or before the date agreed upon between him and the supplier in writing. However, where there is no such agreement entered into between the buyer and the supplier, the payment shall be made by the buyer before the appointed day. The term „appointed day‟ is defined in Clause (b) of Section 2 of the MSMED Act, 2006. The proviso appended to Section 15 further lays down that the period agreed upon between the buyer and supplier in writing shall not, in any case, exceed 45 days from the date of acceptance or the date of deemed acceptance. From reading of Section 16 it becomes abundantly clear that in case the buyer fails to make the payment to the supplier, as required under Section 15, the buyer shall become liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank. This condition of payment of compound interest on failure of the buyer to make the payment on the date it becomes due, is statutory in character and overrides any stipulation in the agreement made between the buyer and the supplier. It also overrides any such stipulation with regard to interest made in any law for the time being in force. To put it succinctly, the payment of compound interest under Section 16 is statutory in nature and in supersession of any contrary stipulation contained in any agreement between the buyer and the supplier or any contrary stipulation contained in any law for the time being in force. So far as Section 18 is concerned, it would come into play only when there is dispute with regard to the payment between the buyer and the supplier.
11. In the instant case, I am surprised to find that when the supplies made by the respondent to the petitioners were not disputed and the payment due to the respondent was also not in dispute, where was the occasion for the respondent to seek a reference before the Council under Section 18 of the Act of 2006. From plain reading of Sub Section (2) of Section 18 it clearly transpires that reference can be made by the aggrieved party to the Council only where there is a dispute with regard to any amount due under Section 17 of the Act. Ordinarily, in the present case the petitioners should have acted fairly and in the true spirit of the MSMED Act, 2006 and made payment to the respondent along with statutory interest envisaged under Section 16. However, the failure on the part of the petitioners to carry out the mandate of Section 15 and 16 did provide a cause of action to the respondent to directly approach this Court by invoking its extraordinary writ jurisdiction under Article 226 of the Constitution of India.
12. I reiterate that Section 18 of the MSMED Act, 2006 is invokable only when there is dispute with regard to any payment due under Section 17. In the instant case the payment due to the respondent is not disputed. It is also not disputed that the payment has not been made to the respondent by the petitioners within the period stipulated under Section 15. That being the admitted position, Section 16 was to operate automatically and the amount would become payable with compound interest as envisaged under Section 16.
13. In the instant case, the Council has miserably failed to carry out the mandate of Sections 15 to 18 of the MSMED Act, 2006, and, therefore, all proceedings taken by the Council are vitiated. However, for the reason that amount due to the respondent (supplier) is not disputed nor it is in dispute that payment to the supplier (respondent) has not been made so far, this Court is of the firm view that the petitioners cannot be permitted to hide behind technicalities and avoid its contractual as well as statutory liability. It is reiterated that in the instant case, invocation of Section 18 was totally uncalled for and the liability to make payment was statutorily incurred. Therefore, the initiation of proceeding by Council under Section 18 erroneously should not impact the outcome. Despite not being satisfied with the manner in which the Council has acted, the Court is inclined to uphold the liability which the petitioners have incurred and are under a statutory obligation to discharge. It is for this reason only the petition filed by the petitioners is liable to be dismissed and the petitioners are required to be directed to make payment to the respondent alongwith interest envisaged under Section 16 without any further delay.
14. The scope of Chapter V of the MSMED Act, 2006, in particular Sections 15 to 19, has already been elaborately discussed in the case of Aibak Electric Industries (CM(M) No. 287/2023 decided today) and, therefore, is not reiterated here.
15. In the instant case, the entire procedure laid down in these Sections has been thrown to wind. There is neither proper conciliation conducted by the Council nor any settlement agreement duly signed by the parties has been drawn so as to give it a status of award, enforceable under Section 36 of the Act of 1996. The Council has not recorded failure of conciliation nor has it referred the matter for arbitration. Probably, the Council did not think it proper to adhere to the procedure being influenced by the fact that at no point of time the petitioners had denied the payment due to the respondent. Resultantly, there is no valid arbitral award which could be put to execution before civil court or could be challenged by the petitioners under Section 19 of MSMED Act of 2006 read with Section 34 of the Act of 1996. However, for the reasons given above, I uphold the liability of the petitioners to make payment to the respondent.
16. In the premises, this Court, while holding the impugned orders bad in law and liable to be quashed, direct the petitioners to make the payment of entire amount i.e., principal as well as compound interest to the respondent within a period of two months from today. Resultantly, the proceedings before the executing court shall terminate.
17. Petition is, accordingly, disposed of in the terms as above.
