2024 (5) TMI 682 - SC - Companies Law

MSSIDCL vs SSPL: Section 3 proviso on 120-day payment limit doesn't apply to pre-1998 contracts

The SC dismissed an appeal regarding interest on delayed payments to small scale industrial undertakings. The case involved a contract between MSSIDCL and ... Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings - HELD THAT:- The contract postulated and the parties had agreed that MSSIDCL would be liable to pay SSPL only after the goods are delivered and accepted by the consignee, namely, Maharashtra State Electricity Board (MSEB) and on the payment being received by MSSIDCL from the MSEB. If the proviso to Section 3 applies, this contractual clause will get modified in terms of the proviso to Section 3, which has fixed the upper time limit for payment to 120 days from the day of acceptance or the day of deemed acceptance. However, the question would arise as to whether the said proviso would be applicable to the agreement in question, which was entered into between the parties on 30.03.1995, albeit the proviso was enacted and enforced with effect from 10.08.1998. There are no good ground and reason to interfere with the conclusion in the impugned judgment passed by the Division Bench of the High Court, setting aside the arbitral award dated 30.06.2003 - appeal dismissed. ISSUES PRESENTED AND CONSIDERED 1. Whether the proviso to Section 3 of the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (which caps contractual payment terms at 120 days from acceptance or deemed acceptance) applies to a contract entered into prior to the proviso's effective date but involving payments or supplies due after that date. 2. The correct legal interpretation of Sections 3, 4 and 5 of the 1993 Act concerning (a) the interplay between contractual payment terms and statutory limits, (b) the date from which interest becomes payable (appointed day / acceptance / deemed acceptance), and (c) the liability to pay compound interest under Section 5. 3. Whether adjudication of interest under the 1993 Act requires joinder of the consignee/ultimate recipient to ascertain the day of acceptance or deemed acceptance. 4. Consequences of setting aside an arbitral award on these questions and procedural remedies available to a respondent who has already made payments under the award. ISSUE-WISE DETAILED ANALYSIS Issue 1: Applicability of the proviso to Section 3 to contracts antecedent to the proviso's effective date Legal framework: Section 3 imposes a statutory obligation on buyers to pay suppliers by an agreed date or, absent agreement, by the appointed day; a proviso (effective 10.08.1998) limits any agreed payment period to a maximum of 120 days from acceptance or deemed acceptance. Precedent Treatment: No prior authority was relied upon by the Court in the reported judgment to decide the temporal application of the proviso. Interpretation and reasoning: The Court held that the proviso restricts contractual freedom prospectively by fixing an upper limit (120 days) for payment. If a contract stipulates a payment period exceeding 120 days, the proviso operates to make interest payable for any period beyond 120 days from acceptance or deemed acceptance. The Court framed the question whether the proviso applies to an agreement executed before 10.08.1998 but involving supplies/payments after that date as a live issue requiring determination in the context of facts. Ratio vs. Obiter: Ratio - the proviso, once in force, curtails contractual terms by rendering any contractual payment period in excess of 120 days ineffective to the extent it postpones liability for interest beyond 120 days; it therefore applies to payment obligations arising after its effective date. Obiter - finer temporal application nuances to individual contracts entered before the amendment but involving future payments were noted as fact-sensitive and were not exhaustively decided. Conclusions: The proviso to Section 3, effective 10.08.1998, governs payments falling due thereafter and will modify contractual payment terms that exceed 120 days by making interest payable after the 120-day cap. Issue 2: Interplay of contractual terms with Sections 3 and 4 - date of payment, appointed day, and commencement of interest Legal framework: Section 3 requires payment by the agreed date or the appointed day; Section 4 prescribes interest from the appointed day or the day immediately following the agreed date, at 1.5 times the SBI Prime Lending Rate, and contains a non-obstante clause overriding contractual provisions that bar interest; Section 2(b) defines 'appointed day', 'day of acceptance' and 'day of deemed acceptance'. Precedent Treatment: The Court did not rely on or distinguish established precedents; its analysis derives from textual and purposive construction of the statute. Interpretation and reasoning: The Court emphasized that before the proviso, parties could agree the date of payment and, if none, the appointed day governed. Section 4's non-obstante language is directed at contractual clauses that negate liability to pay interest, not at clauses fixing dates of payment; thus Section 4 does not displace contractual stipulations as to the date of payment except to impose interest where contractual law attempts to exclude it. After the proviso, contractual payment dates are constrained by the 120-day maximum; if parties contract for payment beyond 120 days, interest becomes payable for the excess period. Determination of when interest runs requires precise ascertainment of the day of acceptance or deemed acceptance because the 120-day clock runs from that date. Ratio vs. Obiter: Ratio - Section 4 overrides contractual clauses that attempt to negate interest liability but does not nullify contractual fixation of payment dates except insofar as the proviso to Section 3 imposes the 120-day cap. Obiter - discussion on examples and application to particular factual sequences (e.g., payments contingent on receipt from a third party) served illustrative purposes. Conclusions: Interest liability under Sections 3 and 4 is triggered by the appointed day computed from the day of acceptance/deemed acceptance; contractual clauses fixing dates of payment remain effective subject to the statutory cap introduced by the proviso and to Section 4's preventive scope against clauses that exclude interest. Issue 3: Liability to pay compound interest under Section 5 and whether compounded interest becomes part of the principal Legal framework: Section 5 makes the buyer liable to pay compound interest (with monthly rest) at the rate specified in Section 4, notwithstanding any agreement to the contrary. Precedent Treatment: The award under challenge had granted compound interest; the Court observed that the sole arbitrator had not considered whether compounded interest becomes a principal amount for subsequent compounding, but no prior authority was cited. Interpretation and reasoning: The Court recognized a dispute of law/fact as to whether, once interest is paid or recovered, the interest element, when compounded under Section 5, is to be treated as part of the principal for future interest computation. The sole arbitrator's award granting compound interest on interest without addressing whether compounded interest should be treated as principal was noted as a lacuna. Ratio vs. Obiter: Obiter - the Court did not finally determine the legal character of compounded interest as principal; rather it identified the issue as unsettled on the record and thus requiring adjudication in appropriate proceedings. Conclusions: The question whether compounded interest becomes part of the principal for further interest computation under Section 5 remains open; the arbitrator's failure to address this point contributed to the setting aside of the award and requires determination in further proceedings. Issue 4: Requirement of joinder of consignee (third party) for determination of acceptance/deemed acceptance date Legal framework: Sections 2(b) and related provisions require ascertainment of the day of acceptance or deemed acceptance to compute the appointed day and interest commencement. Precedent Treatment: No specific precedent was relied upon. Interpretation and reasoning: The Court held that adjudication of interest under the 1993 Act may necessitate fact-finding concerning the consignee's acceptance (or deemed acceptance) of goods; however, this does not mean that the consignee must be made a party to proceedings. The statutory amendments that treat certain organizations as suppliers for claims against their buyers do not alter the contractual privity between the original contracting buyer and supplier. Ratio vs. Obiter: Ratio - ascertainment of facts regarding the consignee's acceptance is necessary to determine the appointed day, but joinder of the consignee is not mandatory. Obiter - observations on administrative orders and statutory deeming provisions that treat specified corporations as suppliers were explanatory and fact-specific. Conclusions: Determination of the appointed day may require examination of facts involving the consignee, yet such factual inquiry can be undertaken without making the consignee a necessary party; contractual privity between the original contracting buyer and supplier remains intact despite deeming provisions. Issue 5: Consequences of setting aside the arbitral award and remedies where payments under the award have been made Legal framework: Arbitration and Conciliation Act, 1996 (Section 43(4) was cited regarding the effect of setting aside an award); Code of Civil Procedure, 1908 (Section 144) for restitution or execution remedies. Precedent Treatment: None cited; Court applied statutory machinery. Interpretation and reasoning: The Court declined to interfere with the High Court's setting aside of the arbitral award given the unresolved statutory and factual issues identified. It noted that Section 43(4) of the Arbitration Act would operate upon setting aside. Where payments have been made pursuant to the award, the respondent may pursue restitution or execution remedies (including applications under Order 41/Section 151/CPC procedures) and enforce security if repayment is not made. Ratio vs. Obiter: Ratio - setting aside the award brings into play statutory consequences under arbitration law and permits restitution or execution remedies for payments already made. Obiter - procedural guidance on available remedies was practical commentary rather than foundational law. Conclusions: The award was appropriately set aside; affected parties may pursue restitution or execution remedies, and enforcement of security is available where funds already paid are not refunded.