LI Network
Published on: October 16, 2023 at 16:51 IST
The Calcutta High Court has rendered a significant decision, emphasizing that the MSME (Micro, Small, and Medium Enterprises) Council cannot delegate its decision-making responsibility to a Chartered Accountant who is not a part of the Council or the arbitral tribunal, as per the MSMED Act.
Justice Moushumi Bhattacharya presided over this single-bench ruling, reiterating the need for the Council to fulfill its duty.
The Court based its decision on Section 31(3) of the 1996 Act, which mandates that the arbitral tribunal must provide reasons for its award unless the parties decide otherwise.
In this case, the Court found the reasons provided by the Chartered Accountant, who determined the interest amount, inadequate to meet the requirements of Section 31(3) of the 1996 Act.
The Court stressed that by not finalizing the arbitral award, the Council would undermine the very purpose of the MSMED Act and its legislative intent.
Case Background:
The petitioner, registered as a “small enterprise” under the MSMED Act, had an outstanding dues claim against the respondent due to the supply of medicines.
In 2019, the MSME Council passed an award under Section 18(3) of the Act, directing the respondent to pay the outstanding principal amount, plus interest at three times the bank rate compounded with monthly rests.
The petitioner sought to set aside the award and was instructed to comply with Section 19 of the MSMED Act, depositing 75% of the awarded sum as security. The dispute arose over whether this 75% should be calculated based on the entire awarded amount or just the principal amount, as the interest component was not explicitly determined by the Council but was left to a Chartered Accountant’s discretion.
Court Findings:
The Court examined Section 18 of the MSMED Act, which bestows the MSMED Council with the authority to arbitrate and make awards under the provisions of the Arbitration Act.
It concluded that the Council, in effect, acts as an arbitral tribunal, making Section 31 of the 1996 Act, which governs the content and form of an arbitral award, applicable to the Council’s decisions.
The Court further noted that the interest component is an integral part of the awarded amount and cannot be treated as a separate decision.
The arbitral tribunal must thoughtfully assess and decide the interest, as it often involves substantial sums of money.
The Court referred to Section 16 of the MSMED Act, which outlines the procedure for determining the interest rate a buyer must pay to the supplier. It emphasized that this adjudication forms an essential part of the award and is a fundamental aspect of the Council’s decision.
The Court criticized the Council for delegating the determination of interest to a Chartered Accountant, as such a significant part of the adjudication process cannot be delegated under the Arbitration Act.
The Court emphasized that the Council, under Section 18(4) of the MSMED Act, is equivalent to an arbitral tribunal and must adjudicate the entire claim, refraining from shifting this responsibility to a Chartered Accountant.
The Court asserted that the Council cannot evade its decision-making responsibilities and rely on a Chartered Accountant who is not part of the arbitral tribunal under the MSMED Act.
As a result, the Court refused to accept the Chartered Accountant’s reasoning for fixing the interest amount as the Council’s reasoning. Since the Council had not adjudicated on the entire amount (principal + interest), the Court determined that 75% of the awarded sum applies only to the portion the Council had adjudicated, i.e., the principal amount.
The application was disposed of, and the award-debtor was directed to deposit an amount of approximately Rs 26 lakhs, which represented 75% of the awarded sum of around Rs 35 lakhs, as the Council had not specified the applicable interest rate.