"I realise that some of my criticisms may be mistaken; but to refuse to criticize judgements for fear of being mistaken is to abandon criticism altogether... If any of my criticisms are found to be correct, the cause is served; and if any are found to be incorrect the very process of finding out my mistakes must lead to the discovery of the right reasons, or better reasons than I have been able to give, and the cause is served just as well."

-Mr. HM Seervai, Preface to the 1st ed., Constitutional Law of India.

Tuesday, September 18, 2012

Retrospective Operation of Interest on Delayed Payments Act

Retrospective operation of statutes seems to be a fashionable topic. This post deals with a recent decision of the Supreme Court in Purbanchal Cables and Conductors v. Assam State Electricity Board which discusses the retrospective operation of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (1993 Act). The judgement has a far reaching impact on several cases that are pending before the courts under the 1993 Act and the Micro, Small and Medium Enterprises Development Act, 2006 (2006 Act).

Two matters were jointly heard by the Supreme Court. Facts are slightly different and are noted below:

Facts in Purbanchal Cables v. ASEB:

31.03.1992: ASEB issued a supply order to Purbanchal Cables for supply of cables. Pursuant to the Supply Order, several orders were placed in June 1992, September 1992 and December 1992. 

16.09.1992: Delivery made with respect to three orders but no payment was received. 

25.09.1992 & 30.03.1993: Deliveries were made after the expiry of time in the Supply Order but after extension of time from the Buyer, ASEB.

14.12.1992 & 03.12.1993: Demand for payment with interest was raised by Purbanchal Cables but no response was forthcoming.

1996: Money Suit was filed by Purbanchal Cables for payment of interest under the 1993 Act.

2000: The trial court ordered compound interest at 18.25% to be paid plus interest of 5% above the said rate at monthly rests till payment

2001: On appeal by ASEB, the High Court dismissed the suit on the ground that the suit was not maintainable as no amount was due on the date of institution of the suit. the High Court followed the judgements of a Division Bench of the Guwahati High Court in ASEB v. Trusses & Towers where it was held that a civil suit for interest simpliciter was not maintainable when the principal amount was paid. Consequently,  the High Court ordered Purbanchal Cables to refund Rs. 10 lakhs that was paid consequent to an interim order of the High Court. Purbanchal Cables preferred an appeal against this decision.

Facts in ASEB v. Smitha Conductors:

2003: Against the two Supply Orders placed by ASEB, Smitha Conductors completed supplies between 22.03.1993 and 04.10.1993. 

March 1997: After receiving the entire amount, Smitha Conductors filed a suit for recovery of interest. Rs. 51 lakhs was decreed in favour of Smitha Conductors. 

2000: On appeal, the High Court doubted the correctness of ASEB v. Tresses and Towers and referred the matter to a Full Bench. The Full Bench overruled ASEB v. Tresses and Towers and held that suit for interest simpliciter was maintainable and that the 1993 Act was applicable only to contracts entered into prior to the commencement of the 1993 Act. ASEB preferred an appeal against the decision of the Full Bench,

Primarily, two issues arose before the Court:

1. Whether a Suit on Interest simpliciter was maintainable when the principal amount was already paid?
2. Whether the Act was applicable to contracts concluded prior to the commencement of the Act?

Summary of the Court's decision is given below:

On Whether Suit for Interest Simplicer was Maintainable
  • On 23.09.1992, an Ordinance titled Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Ordinance, 1992 was promulgated. Subsequently, the 1993 Act was passed repealing the Ordinance but was made effective from 23.09.1992, that is, the date of the Ordinance. 
  • The Full Bench of the Guwahati High Court had already decided in ASEB v. Smitha Conductors that a suit for interest simpliciter was maintainable under the 1993 Act. The rationale there was that in case it was held that such a suit was not maintainable, the objective of the Act, that is, to afford interest in case of delayed payments to small scale industries, would become frustrated. This decision was approved by a two judge Bench of the Supreme Court in Modern Industries v. SAIL AIR 2010 SC 1625 and hence the issue is not new.
On Whether the Act was Applicable to Contracts Concluded Prior to its Commencement (23.09.1992)
  • Prior to the commencement of the 1993 Act, the supplier could file a civil suit to recover the principal plus interest as per Section 34, Code of Civil Procedure, 1908 (CPC). The court had the discretion to award interest.
  • From the commencement of the 1993 Act, a new "vested right exists". If there was a delay in payment, the supplier could file a civil suit claiming interest at the rate prescribed under the Act.
  • This provision on right to higher interest is substantive in nature. In view of several judgements of the Supreme Court, the Act being substantive law applies retrospectively and not prospectively. There is no express provision making the application of the Act retrospective. Hence, the supplier would have a right to claim a higher rate of interest only in respect of sale agreements concluded on or after the date of commencement of the Act, i.e. 23.09.1992.
  • The reference event was the date of the agreement and not the date of completion of performance of the agreement.
  • There are precedents of the Supreme Court in favour of this proposition. Examples are Assam Small Scale Industries Development Corporation v. JD Pharmaceuticals (2005) 13 SCC 19, Shakti Tubes v. State of Bihar (2009) 7 SCC 673, Rampur Fertilizers Limited v. Vigyan Chemical Industries (2009) 12 SCC 324, Modern Industries v. SAIL AIR 2010 SC 1625
Thus, it appears that the 1993 Act would apply only in respect of transactions that were entered into from 23.09.1992. Going by the above judgement, it would also seem that the Industrial Facilitation Councils would have jurisdiction to entertain claims in respect of Agreements entered into from 10.08.1998, the date on which the 1998 amendment establishing the Industrial Facilitation Councils came into force, in the absence of any indication to retrospectivity in the 1998 amendment. Therefore, in respect of transactions prior to 10.08.1998, a supplier could not have approached the Industrial Facilitation Council.

[Disclaimer: The above post is based on research that was conducted in respect of a pending dispute.]


Unknown said...

Your article is interesting. There still seems to be a controversy to my understanding.Suppose the order date is prior to the act coming in force , but has been extended and supplies have been made after the Act came in force , and payment has been delayed . Will then the SSI unit be entitled to higher rate of interest ? See Modern Industries judgement . The SSI units take loan from Bankers at monthly compound interest , as interest is debited by the bank monthly.The Act only tries to compensate the loss made by SSI units. In such an event , i fail to understand why contracts entered into prior to coming of the Act will not get the benifit , if cause of action i.e. delayed payments are made for supplies made after the Act came in force. Please , can you elaborate and give your views . dcchaudhry@gmail.com

Unknown said...

Will the act apply for supplies made on order placed before the act came in force but order was amended / extended/modified after the Act came in force . dcchaudhry@gmail.com

Bhavana Uppaluri said...

Modern Industries Vs Sail judgement covers the question. Novation was considered.

Arun Singh said...

Wish to share your expertise on an ongoing matter.

I supplied good to Indian Army in 2005. By March 2006 part payment was made. Last year I approached the Facilitation council under the MSMED Act, which in turn appointed an Arbitrator. Arbitrator awarded the decision in our favour in March 2015.

Till date the payment has not been made and then I approached the local district courts. The opposite party counsel argues that the Act does not have a retrospective effect. I argue that the opposite party's case cannot be entertained.

Now the judge has given us the date of 14.08.2015 for filing reply and arguments to decide the matter.

Please suggest or provide some inputs.


Arun Singh

saurendra said...

Hi ,
Mr singh,

You have to tell us when was the case filed before 2006 came into force or after. if it is after then the submission made by the opposite party is of before the District judge is of no use. Since i don't know what is pending before the District Judge.

If a section 34 of Arbitration act 1996 has been filed challenging the award by the Respondent then one has to see that if such plea has been taken by them before the council. if not they cannot take fresh grounds under 34.

Secondly such ground taken by them is not tenable under law.
further comment can be given on full details of the case.

Saurendra Rautray
Rautray& Co
New delhi