The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993: A Legal Analysis

A Scholarly Analysis of The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993

Introduction

The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (hereinafter referred to as "the 1993 Act" or "the Act")[1] was a significant legislative intervention by the Parliament of India aimed at addressing the chronic issue of delayed payments faced by small scale and ancillary industrial undertakings. These delays critically hampered the working capital and overall financial health of such enterprises, which form a vital component of the Indian economy. This article undertakes a comprehensive analysis of the 1993 Act, examining its key provisions, legislative intent, and the judicial interpretations that have shaped its application. It will delve into landmark judgments that have clarified the scope, applicability, and operational mechanics of the Act, particularly concerning the liability of buyers, the computation of interest, and the dispute resolution mechanisms established thereunder.

Historical Context and Legislative Intent

The enactment of the 1993 Act was preceded by a policy statement on small scale industries made by the Government in Parliament, which acknowledged the need for legislation to ensure prompt payment to these units.[2, 3] The Statement of Objects and Reasons accompanying the Bill highlighted the "serious and endemic problems" caused by inadequate working capital in small scale and ancillary industrial undertakings due to delayed payments.[4, 5] It was recognized that these industries often lacked the bargaining power to enforce timely payments from larger buyers. The Small Scale Industries Board, an apex advisory body, also advocated for statutory measures.[4, 6]

The core objective of the 1993 Act was, therefore, to statutorily ensure prompt payments and to make mandatory provisions for the payment of interest on outstanding amounts in case of default. The legislative intent was that the legal obligation to pay interest would deter buyers from withholding payments.[4, 6] The Act came into force with effect from 23rd September 1992, the date on which the precursor Ordinance was promulgated.[7, 8]

Key Provisions of the 1993 Act

The 1993 Act laid down a framework to govern the payment timelines and the consequences of default. Some of its salient provisions are discussed below:

Definitions (Section 2)

Section 2(b) defined the "appointed day" as "the day following immediately after the expiry of the period of thirty days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier."[8, 9] This definition is crucial for determining the due date for payment in the absence of a specific agreement.

Liability of Buyer to Make Payment (Section 3)

Section 3 mandated that where a supplier supplies goods or renders services to a buyer, the buyer must make payment on or before the date agreed upon in writing. If no such agreement exists, payment must be made before the "appointed day."[8, 9] A proviso stipulated that any agreed credit period could not exceed one hundred and twenty days from the day of acceptance or deemed acceptance.[8] This provision established a clear statutory liability on the buyer.

Date from which and Rate at which Interest is Payable (Section 4)

Section 4 provided that if a buyer failed to make payment as required under Section 3, they would be liable to pay interest on the outstanding amount from the appointed day (or the day following the agreed date). This liability arose "notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force."[8, 9] The rate of interest was initially specified as one and a half times the Prime Lending Rate of the State Bank of India.[10] This section underscored the mandatory nature of the interest payment, overriding contrary contractual stipulations.

Liability to Pay Compound Interest (Section 5)

Section 5 further strengthened the position of the supplier by stipulating that the interest payable under Section 4 was to be compounded with monthly rests.[11, 12] This provision aimed to compensate the supplier more adequately for the financial strain caused by delayed payments.

Recovery of Amount Due and Dispute Resolution (Section 6)

Section 6(1) stated that the amount due from a buyer, together with the interest calculated under Section 4, could be recovered by the supplier by way of a suit or other proceeding under any law. More significantly, Section 6(2) provided that any party to a dispute regarding any amount due under the Act could make a reference to the Industry Facilitation Council (IFC) for acting as an arbitrator or conciliator. The provisions of the Arbitration and Conciliation Act, 1996 were made applicable to such disputes as if the arbitration or conciliation were pursuant to an arbitration agreement.[13, 14]

Requirement of Pre-deposit for Setting Aside Decree/Award (Section 7)

Section 7 (later Section 7A, and analogous to Section 19 of the MSMED Act, 2006) stipulated that no application for setting aside any decree, award, or order made by the Council or any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree or award.[15] This provision aimed to prevent frivolous challenges by buyers and ensure that a substantial portion of the awarded amount was secured.

Overriding Effect of the Act (Section 10)

Section 10 gave the 1993 Act an overriding effect, stating that its provisions "shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force."[13] This reinforced the special status of the Act in protecting the interests of small-scale suppliers.

Judicial Interpretation and Application

The judiciary has played a crucial role in interpreting and applying the provisions of the 1993 Act. Several landmark cases have clarified its ambit and operational aspects.

Prospective Application of the Act

A significant line of judicial pronouncements has established that the 1993 Act is prospective in nature and does not apply to contracts concluded or transactions completed before its commencement date (23rd September 1992). In Assam Small Scale Industries Development Corpn. Ltd. And Others v. J.D Pharmaceuticals And Another (2005), the Supreme Court held that the Act would apply only to transactions post its enactment date.[7, 16] Consequently, for transactions prior to this date, simple interest at the prevailing bank rate was applicable, while the 1993 Act's provisions applied only to later transactions.[7]

This principle was reiterated in Purbanchal Cables And Conductors Private Limited v. Assam State Electricity Board And Another (2012), where the Supreme Court affirmed that the Act does not retroactively apply to contracts entered into before its enactment, as substantive laws do not generally operate retrospectively unless explicitly stated.[17] The Bombay High Court in Snehadeep Structures Pvt. Ltd. v. Maharashtra Small Scale Industries Development Corporation Limited (2006) also held that supply orders issued prior to the Act's enactment were outside its purview.[16] However, in Shanti Conductors (P) Ltd. (S) v. Assam State Electricity Board And Others (S) (2019), the Supreme Court clarified that the incidence of liability under the Act is the supply of goods or rendering of services, implying that if supplies were made after the Act came into force, the Act could apply even if the initial agreement predated it, subject to the specific facts.[18, 19]

Scope of "Amount Due" and Jurisdiction of IFC

The Supreme Court in Modern Industries v. Steel Authority Of India Limited (2010) provided a definitive interpretation of "amount due" under Section 6(1) of the Act.[14, 17] The Court held that "amount due" encompasses both the principal sum and the interest as stipulated under Sections 4 and 5. It rejected the narrow interpretation that IFC's jurisdiction was limited to admitted or settled liabilities, affirming that the IFC possesses the authority to adjudicate disputes related to both the principal amount and the interest, irrespective of whether the liability is admitted or disputed.[14] This inclusive interpretation ensures that the Act serves its purpose of providing a streamlined remedy.

Maintainability of Claims for Interest Alone

The question of whether a suit solely for interest under the 1993 Act is maintainable has been subject to judicial scrutiny. The Gauhati High Court in Assam State Electricity Board And Anr. v. Trusses And Towers (P.) Ltd. (2001) held that a suit for interest alone was not maintainable.[20] This view was seemingly supported by the Supreme Court in Purbanchal Cables (2012), which noted that the High Court had dismissed the suit for interest alone as no principal amount was due at the time of filing, and the Act was held not to apply retrospectively to the contract in question.[17] However, Modern Industries (2010) clarified that the IFC could adjudicate claims for the principal "together with" interest, implying that if the principal is due, interest can certainly be claimed. The critical factor often is whether the principal amount was paid before the institution of proceedings for interest and whether the Act itself is applicable to the transaction. If the Act applies and the principal was delayed, interest accrues statutorily.

Interaction with the Limitation Act, 1963

The interplay between the 1993 Act and the Limitation Act, 1963 has also been addressed. In Shanti Conductors (P) Ltd. (S) v. Assam State Electricity Board And Others (S) (2019), the Supreme Court emphasized the stringent application of the Limitation Act, particularly the requirements for pleading and substantiating grounds for invoking exceptions like Section 19 (effect of payment on account of debt).[18] Conversely, in Shakti Tubes Limited Through Director v. State Of Bihar And Others (2008), the Court adopted a liberal approach towards Section 14 of the Limitation Act (exclusion of time of proceeding bona fide in court without jurisdiction), holding that time spent pursuing a writ petition in good faith could be excluded.[21] These cases highlight that while the 1993 Act provides special remedies, general laws like the Limitation Act continue to apply unless specifically overridden.

Judicial Non-Intervention in IFC Proceedings

The Supreme Court in Secur Industries Ltd. v. Godrej & Boyce Mfg. Co. Ltd. And Another (2004) reinforced the principle of minimal judicial intervention in arbitration proceedings, including those before the IFC.[22] The Court held that since Section 6(2) of the 1993 Act incorporated the provisions of the Arbitration and Conciliation Act, 1996, the IFC (acting as an arbitral tribunal) had the authority to rule on its own jurisdiction, and courts should not unduly interfere with or stay such proceedings, adhering to the limitations on intervention prescribed in Section 5 of the 1996 Arbitration Act.[22]

Contractual Stipulations v. Statutory Mandate

A key feature of the 1993 Act is its power to override contractual terms inconsistent with its provisions. Section 4 explicitly states that the buyer's liability to pay interest arises "notwithstanding anything contained in any agreement between the buyer and the supplier."[8, 9] This was affirmed in Assam Small Scale Industries (2005), where the Supreme Court indicated that contractual clauses like "No interest/compensation can be claimed for delay in payment" would be ineffective against the statutory liability to pay interest for transactions falling under the Act's purview.[7]

The Transition to the MSMED Act, 2006

The 1993 Act was repealed by the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act, 2006)[23], which came into force on October 2, 2006. The MSMED Act, 2006, provides a more comprehensive framework for the development and regulation of micro, small, and medium enterprises. Chapter V of the MSMED Act, 2006 (Sections 15-25) deals with delayed payments to Micro and Small Enterprises (MSEs). Many principles established under the 1993 Act, such as the mandatory payment of interest (compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India - Section 16, MSMED Act), the mechanism of Industry Facilitation Councils (now Micro and Small Enterprises Facilitation Council - MSEFC), and the requirement of pre-deposit for challenging awards (Section 19, MSMED Act), have been retained and, in some aspects, strengthened in the MSMED Act, 2006.[12, 15, 19] Therefore, the jurisprudence developed under the 1993 Act remains highly relevant for interpreting analogous provisions in the current legislative framework.

Conclusion

The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 was a landmark piece of legislation that sought to provide crucial financial protection to small-scale suppliers by mandating timely payments and imposing stringent interest penalties for delays. Judicial interpretations have consistently upheld the Act's prospective nature, clarified the scope of the Industry Facilitation Council's jurisdiction, and emphasized the overriding effect of its provisions over contrary contractual terms. While the 1993 Act has been succeeded by the MSMED Act, 2006, its principles and the body of case law developed around it continue to inform the legal landscape governing commercial transactions involving micro and small enterprises in India. The legislative intent to foster a more equitable payment regime for these vital economic contributors remains a cornerstone of industrial policy, carried forward by its successor legislation.

References