Retrospective Operation of the MSMED Act, 2006

The Micro Small and Medium Enterprises Development Act, 2006 (“2006 Act” or "Act") provides for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for connected and incidental matters. It is a beneficial piece of legislation. The Act provides for resolution of disputes between the Supplier (a micro, or small enterprise) and a buyer through conciliation and arbitration under the aegis of the Micro and Small Enterprises Facilitation Council. For those interested in the features of the 2006 Act, see here.

From the perspective of arbitration, the 2006 Act raises interesting and signficant questions. Till date, only a few questions pertaining to dispute resolution under the Act have been put to rest by the courts. We will be discussing this Act in detail in the future. For the convenience of the reader, we have inserted a new label "MSE Disputes".

In the last post, we looked into the recent judgement of Purbanchal Cables on the retrospective applicability of the Interest on Delayed Payments to Small Scale and Ancillary Industries Act, 1993 (1993 Act) to transactions entered into prior to its coming into force. There we concluded:

"Thus, it appears that the 1993 Act would apply only in respect of transactions that were entered into from 23.09.1992."

We further concluded:

"Going by [Purbanchal Cables], 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." 

In this series of posts, we dwelve into the question as to whether the 2006 Act applies to transactions that were entered into prior to its commencement. This question is signifcant as there are several cases pending in various courts pertaining to the applicability of the 2006 Act to transactions executed prior to the coming into force of the said Act. There are no cases under the 2006 Act on this issue.

Commencement of the 2006 Act:

Section 1(2) of the Act provides:

“[The 2006 Act] shall come into force on such date as the Central Government may, by notification, appoint; and different dates may be appointed for different provisions of this Act and any reference in any such provision to the commencement of this Act shall be construed as a reference to the coming into force of that provision.”

The Ministry of Small Scale Industries appointed 02.10.2006 as the date on which the provisions of the Act would come into force, vide Notification dt. 18.07.2006 (pdf), published in the Official Gazette on 21.07.2006. Thus, the Act came into force on 02.10.2006. Since the Act came into force only on 02.10.2006, it is valid to contend that the Act does not apply retrospectively. It is settled law that every statute is prima facie prospective unless it is expressly or by necessary implication made to have a retrospective effect [See, for example, JS Yadav v. State of Uttar Pradesh (2011) 6 SCC 570, Para 24]. There is nothing in the Act, express or implied, to indicate that it operates retrospectively.

That said, the question arises whether the Act applies to transactions that were concluded prior to 02.10.2006.

Argument:

It could be argued that the Act applies even to transactions entered into prior to it. Sections 24 16, and 18(1) can be cited in support of such a proposition. Sections 18(1) and Section 24 read:

"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 bing in force, be liable to pay compound interest with monthly rests to teh 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 the bank rate notified by the Reserve Bank."
18.(1). Notwithstanding anything contained in any other law for the time being in force, any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council."
"24. Overriding effect: The provisions of section 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any otehr law for the time being in force."

A prima facie of the above provisions seem to indicate that from 02.10.2006, a new right accrues to the supplier- the right to interest at the rate under Section 16. Accordingly, the argument would be that till 01.10.2006, the rate of interest shall be as per contract and in the absence of any provision in the contract, as per the Interest Act, 1978, the Code of Civil Procedure, 1908 and the Arbitration and Conciliation Act, 1996. However, from  02.10.2006, an irreducible right to interest as per Section 16 is applicable. A hyothetical example. Big Enterpise enters issues a purchase order in favour of Small Enterpise on 01.09.2006. Small Enterpise delivers the goods on 10.09.2006. As per the purchase order, payment is to be made on or before 15.09.2006. Big Enterprise does not make any payment. It could be argued that Big Enterprise would be liable for interest under the 1993 Act from 15.09.2006 till 01.10.2006 at the rate specified therein (1.5 times SBI PLR) and with effect from 02.10.2006 at the rate specified in the 2006 Act (three times the Bank Rate as notified by RBI).

A prima facie reading of the relevant portion of the recent decision of the Supreme Court in Purbanchal Cables delivered under the context of the 1993 Act seems to support this argument:

"27. With the commencement of the Act, a new vested right exists with the supplier, that being, if there is delay in payment after the acceptance of the goods by the buyer, the supplier can file a suit for claiming interest at a higher rate, as prescribed by the Act. This position has been approved by this Court in the case of Modern Industries... If a suit for interest simpliciter is maintainable as held by this court in Modern Industries..., then a new liability qua the buyer is created with the commencement of the Act giving a vested right to the supplier in case of delayed payment. In other words, if there is a delayed payment by the buyer, then a right to claim a higher rate of interest as prescribed by the Act accrues to the supplier."   (emphasis added)

Comment on the Argument:

Although this argument appears to be convincing, on a deeper analysis, it is bound to fail for the reasons discussed below.

There is no decision that specifically deals with the question as to whether the 2006 Act applies to prior transactions. Hence, we have to rely on the decisions rendered in the previous Act, that is, the 1993 Act. Reliance on the judgements under the 1993 Act could be objected to but the same would fail. Section 10 of the 1993 Act contained an overriding provision similar to that contained in the 2006 Act. Section 10 reads:

“The provisions of this Act shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.” Section 24 of the 2006 Act reads: “The provisions of Sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force".

However, the overriding effect of the 2006 Act does not mean that it retrospectively applies to transactions that were concluded prior thereto. This is settled law under the 1993 Act. There are several pronouncements of the Supreme Court and the High Courts to the effect that the 1993 Act does not apply to transactions entered into prior to its effective date. Although the 1993 Act was enacted on 2nd April 1993, it was, by a legal fiction deemed to have come into effect from the date of promulgation of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Ordinance, 1992, i.e. 23rd September 1992.

Evolution of Case Law under the 1993 Act:

One of the earliest decisions on this issue is the case of Assam State Electricity Board v. Shanti Conductors MANU/GH/0114/2002 where the Full Bench of the Guwahati High Court held that the 1993 Act applied even to transactions that were entered into prior to the coming into the force of the 1993 Act but interest is to be calculated from the coming into the force of the Act. The court relied on the overriding clause to support such a conclusion. The court held:

“After hearing the learned counsel for the parties on this point we are of the view that the 1993 Act would be applicable even to the contract which may have been entered into prior to the enforcement of the Act, i.e., 23.09.1992 where the payments as envisaged by the contract are delayed and made after enforcement of the Act, on such delayed payment the buyer would be liable to pay interest under the Act of 1993. The incidence or the sine qua non for payment of interest under the Act of 1993 is not the terms of the contract but the delayed payment Sections 4 and 5 of the Act of 1993 as observed above, contain non obstante clause, i.e., 'notwithstanding anything in the agreement'. In other words, even if a buyer and the supplier were to agree that on delayed payments interest would not be paid as per the provisions of the Act of 1993 such a term in the contract cannot be enforced or come to the rescue of the buyer in view of provisions of Sections 4 and 5 of the Act which clearly provide 'Notwithstanding anything in the agreement'. However, in such a case interest on the delayed payment which is made after the coming into force of the Act of 1993 would be calculated under the Act from the date of the enforcement of the Act and not from the date of payment prescribed under the agreement. To illustrate, supposing the payment under the contract was to be made by 1st of January, 1992, however, the payment is made on 1st of January, 1994. The interest under the Act of 1993 on the delayed payment will be calculated in accordance with the provisions of Section 5 of the Act from 23.09.1992 to 1st January, 1994 and not from 01.01.1992.”

In Assam Small Scale Ind. Dev. Corp. Ltd. v. J.D. Pharmaceuticals and Anr. AIR 2006 SC 131, a two Judge Bench of the Supreme Court had the opportunity to consider the question as to the applicability of the 1993 Act to transactions that were entered into prior to 23.09.1992. The Court, disagreeing with the above judgement of the Full Bench of the Guwahati High Court, held that the 1993 Act would not apply to transactions concluded prior to the coming into force of the 1993 Act. The court observed:

“Section 3 of the 1993 Act imposes a statutory liability upon the buyer to make payment for the supplies of any goods either on or before the agreed date or where there is no agreement before the appointed day. Only when payments are not made in terms of Section 3, Section 4 would apply. The 1993 Act came into effect with effect from 23.9.1992 and will not apply to transactions which took place prior to that date… Mr. Choudhary has placed reliance upon a Full Bench decision of Guwahati High Court in Assam State Electricity Board and Ors. v. Shanti Conductors (P) Ltd. and Anr. MANU/GH/0114/2002 which having regard to the non-abstain clause contained in Sections 4, 5 and 10 of the 1993 Act opined that interest payable thereunder shall embrace within its fold even the contracts which might have been entered into prior to the enforcement of the Act. With respect, we do not subscribe to the said view as payment of interest at an enhanced rate cannot be made in relation to the transactions where Section 3 will have no role to play. We, therefore, are of the opinion that in relation to the transactions made prior to coming into force of the said Act, simple interest at the rate of 9% per annum, which was the bank rate at the relevant time, shall be payable both prior to date of filing of the suit and pendente lite and as future interest in terms of Section 34 of the Code of Civil Procedure. Interest, however, will be payable in terms of the provisions of the 1993 Act (compound interest at the rate of 23.5.% per annum) in relation to the transactions made after coming into force of the Act, both in respect of interest payable upto the date of institution of the suit and pendente lite and till realisation. The judgment and decree to that extent requires to be modified. It is directed accordingly.”

This legal position has been reiterated in several pronouncements of the Supreme Court, including, Shakti Tubes Ltd. v. State of Bihar (2009) 7 SCC 673, Rampur Fertilizers Limited v. Vigyan Chemical Industries (2009) 12 SCC 324, Modern Industries v. Steel Authority of India Limited MANU/SC/0251/2010 : (2010) 5 SCC 44, and Purbanchal Cables and Conductors Pvt. Ltd. v. Assam State Electricity Board MANU/SC/0540/2012. Coming to Purbanchal Cables, although a prima facie reading of Para 27 of the judgement supports the conclusion of the Full Bench of the Guwahati High Court, an in-depth reading of the judgement provides otherwise.

Purbanchal Cables: The question relevant to our context was whether the 1993 Act applied to contracts that were concluded prior to its commencement. The supply order was issued in Purbanchal Cables on 31.03.1992. Goods were delivered on 16.09.1992 and between 25.09.1992 and 30.03.1993.  Due to the failure by the buyer, the supplier approached the court and claimed statutory interest with effect from the commencement of the 1993 Act. The trial court granted a decree in favour of the supplier. On appeal, the first appellate court affirmed the decree. The buyer appealed to the High Court, which allowed the appeal. On appeal, the Supreme Court considered various pronouncements on the issue and concluded as follows:

"40. In the absence of any express legislative intendment of the retrospective application of the Act, and by virtue of the fact that the Act creates a new liability of a high rate of interest against the buyer, the Act cannot be construed to have retrospective effect. Since the Act envisages that the supplier has an accrued right to claim a higher rate of interest in terms of the Act, the same can only said to accrue for sale agreements after the date of commencement of the Act, i.e., 23rd September 1992 and not any time prior."

Since, the 1993 Act does not apply to any transaction prior to its commencement, Purbanchal Cables cannot be read to mean that the buyer is liable for interest under the 1993 Act from the date of its commencement for delay in payment for goods supplied under contracts entered into prior to the commencement of the 1993 Act. More on this in the next post.