MSME Council cannot act as an executing court after issuing an award; 75% deposit stops further interest, Gujarat High Court rules

An MSME Facilitation Council award dated 11 September 2014 directed Gujarat State Civil Supplies Corporation Ltd. (“GSCSCL”) to pay M/s Mahakali Foods Pvt. Ltd. (“Mahakali Foods”) ₹5,21,47,402, together with compound interest under Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) in case of default.

GSCSCL challenged the award under Section 19 of the MSMED Act read with Section 34 of the Arbitration and Conciliation Act, 1996, after depositing 75% of the awarded amount with up-to-date interest before the District Court, Gandhinagar.

The District Court permitted Mahakali Foods to withdraw 50% of the deposited principal, while the remaining amount continued to remain in court during the challenge proceedings.

Pursuant to an order of the Supreme Court, GSCSCL later deposited the balance 25% of the principal amount before the High Court, but without up-to-date interest.

The challenge to the award was ultimately dismissed by the Supreme Court on 31 October 2022.

Thereafter, Mahakali Foods sought recovery of post-award interest and submitted a Chartered Accountant’s computation claiming ₹34,89,19,321.

The Industries Commissioner, MSME Council, Bhopal, forwarded the claim to the Collector, Gandhinagar, for recovery, without independently adjudicating the amount or giving GSCSCL an effective hearing.

The learned Single Judge quashed those communications and notices and directed the MSME Council to freshly adjudicate the post-award interest claim in accordance with natural justice.

Whether the MSME Facilitation Council retained jurisdiction, after making the final award, to adjudicate post-award disputes concerning satisfaction, enforcement, or outstanding amounts under its award, in the manner of an executing court?

Whether the award-holder could claim further compound interest under Section 16 of the MSMED Act on the 75% of the awarded amount deposited with up-to-date interest before the District Court under Section 19 of the MSMED Act?

Whether interest continued to accrue on the remaining 25% of the principal amount deposited before the High Court without up-to-date interest, and what procedure governed recovery of that amount?

The court applied Sections 15–19, 20 and 24 of the MSMED Act. Sections 15–17 impose liability on the buyer to pay the supplier’s dues and, upon default, compound interest with monthly rests at three times the RBI-notified bank rate; Section 18 creates the statutory mechanism for conciliation and arbitration of disputes concerning amounts due under Section 17; Section 19 requires a non-supplier challenging an MSME award to deposit 75% of the awarded amount; and Section 24 gives overriding effect to Sections 15–23 over inconsistent laws.

Under Sections 32 and 33 of the Arbitration and Conciliation Act, 1996, arbitral proceedings terminate upon the final award, subject only to correction, interpretation, or an additional award; the arbitral tribunal thereafter becomes functus officio and has no jurisdiction to enforce its own award.

The court relied on Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., (2023) 6 SCC 401, holding that Chapter V of the MSMED Act is a special statutory regime overriding the general Arbitration Act where applicable.

It also applied Himachal Pradesh Housing and Urban Development Authority v. Ranjit Singh Rana, (2012) 4 SCC 505, and Union of India v. M.P. Trading and Investment RAC Corporation Ltd., (2016) 16 SCC 699, for the principle that deposit of the awarded amount in court constitutes payment to the credit of the award-holder and extinguishes post-award interest on the deposited amount.

General principles under Order XXI Rule 1 CPC, including P.S.L. Ramanathan Chettiar v. O.R.M.P.R.M. Ramanathan Chettiar, were held inapplicable where the special interest regime under Section 16 of the MSMED Act governed the matter.

The court held that the MSME Council’s statutory role is confined to conducting conciliation and arbitration under Section 18 and making an award. The MSMED Act contains no provision authorising the Council to execute its award or adjudicate post-award disputes concerning satisfaction of the award; consequently, the Council became functus officio upon termination of the arbitral proceedings.

The Industries Commissioner’s communication merely forwarded Mahakali Foods’ Chartered Accountant’s computation and could not constitute an adjudication or a valid quantified recovery determination.

The 75% deposit had been made with up-to-date interest in compliance with Section 19 and to the satisfaction of the court. Since the buyer had thereby deposited the amount covered by the award, there was no continuing “failure” to make payment within the meaning of Section 16, and the interest clock stopped on that deposited amount from the date of deposit.

Conversely, only the principal amount had been deposited in respect of the remaining 25%; therefore, interest under the award continued to accrue on that amount.

Any recovery had to be preceded by a proper determination of the outstanding interest, with notice and an opportunity to both parties to submit their respective computations; only thereafter could the Collector invoke revenue-recovery proceedings.

No further Section 16 interest was payable on the 75% amount deposited with up-to-date interest before the District Court, but interest continued on the remaining 25% principal deposited before the High Court without up-to-date interest.

The communication dated 13 April 2023 issued by the Industries Commissioner and the consequential recovery notices dated 29 May 2023 and 28 June 2023 were quashed.

The Collector was directed to determine the interest payable on the remaining 25% after giving both parties notice and an opportunity to submit computation sheets, and to initiate recovery only after such determination and failure of payment.

The appeal was disposed of by modifying the Single Judge’s directions.