Violation Of Reasonableness And Fairness: Madras High Court Criticizes MSME Facilitation Council's Interest Imposition

Violation Of Reasonableness And Fairness: Madras High Court Criticizes MSME Facilitation Council's Interest Imposition

Justice R. N. Manjula of the Madras High Court has ruled that imposing three times the bank rate of interest on the award amount by the Micro, Small, and Medium Enterprises Facilitation Council violates fundamental principles of reasonableness and fairness. The court determined that such a high rate of interest indirectly deprives the petitioner of their right to appeal.

The petitioner, involved in a dispute with M/s Unicon Engineers (Second respondent), had their case referred to the Facilitation Council of Micro, Small, and Medium Enterprises (MSME). An ex-parte arbitration award was issued against the petitioner by the Facilitation Council, prompting them to challenge it through a writ petition in the Madras High Court (High Court). The High Court disposed of the writ, instructing the Facilitation Council to adhere to proper procedures under Section 18 of the MSMED Act, resulting in fresh arbitration proceedings. Subsequently, a new arbitral award was passed. The petitioner once again approached the High Court, filing a writ petition against the new arbitral award.

The petitioner contended that although the award was issued on March 27, 2023, they only received a copy on November 2, 2023. Their main argument centered on the interest component of the award, especially its computation at three times the bank rate interest on specific invoices, which encompassed the period during which the earlier writ petition was pending.

The petitioner contended that under Section 19 of the MSMED Act, 2006, any challenge to the award requires a deposit of 75% of the award amount. They argued that due to the excessively high interest rate and the failure to account for the period during the pendency of the writ petition, their right to file an application under Section 19 is effectively nullified.

Conversely, the second respondent argued that the petitioner's recourse was exclusively under Section 34 of the Arbitration and Conciliation Act, 1996 ("Arbitration Act"), which requires a deposit of 75% of the decreed amount. It contended that this requirement cannot be circumvented by seeking relief through writ jurisdiction under Articles 226 and 227 of the Constitution of India.

The court addressed the petitioner's contention that while they had the legal right to challenge the award under Section 19 of the MSMED Act, 2006, combined with Section 34 of the Arbitration and Conciliation Act, 1996, the award had been issued without adequate consideration for their practical ability to exercise this right. This lack of consideration stemmed from the significant financial burden imposed on the petitioner, requiring them to deposit 75% of the award amount, including interest accrued during the period when the writ petition was pending.

Highlighting the prolonged pendency of the writ petition for seven years, the court observed that neither party nor the court itself expedited its disposal. Despite the practical challenges faced by the petitioner, including the financial strain of the deposit requirement, the respondent and the court did not take the necessary steps to address these issues in a timely manner. Consequently, the petitioner was compelled to seek relief from the court to ensure their access to justice.

While recognizing that the writ petition could not serve as a substitute for the application under Section 19 of the MSMED Act, 2006, read with Section 34 of the Arbitration and Conciliation Act, 1996, the court underscored the importance of not unduly restricting the avenues available to challenge the award. Imposing onerous conditions, such as the pre-deposit requirement, should not deprive parties of their legal right to challenge the award effectively.

Due to the breach of fundamental principles of reasonableness and fairness, the High Court opted to refer the issue back to the council for a reassessment, focusing solely on the interest component of the award. The court instructed the council to re-evaluate the interest rate and provide new directives within a span of four weeks, explicitly limiting the scope of reconsideration solely to the interest aspect and excluding any other elements of the award from review.

Considering the breach of fundamental principles of reasonableness and fairness, the High Court opted to refer the issue back to the council solely for a reassessment of the interest element of the award. It instructed the council to re-evaluate the interest rate and provide new directives within a span of four weeks. Notably, the court specified that this reconsideration should focus exclusively on the interest aspect of the award, excluding any other elements from review.