The Gauhati High Court has reaffirmed that under the Micro, Small and Medium Enterprises Development Act, 2006, interest on delayed payments to registered MSMEs must be calculated as compound interest with monthly rests at three times the Reserve Bank of India’s bank rate - not fixed at the date of default. This ruling provides critical clarity for practitioners handling delayed payment claims under the Act.
Background & Facts
The Dispute
The petitioners, Charu Engineering Industries and its proprietor Lakshmi Ram Thakuria, are a registered small enterprise under the Micro, Small and Medium Enterprises Development Act, 2006 (the Act of 2006). They supplied UPVC pipes to the Public Health Engineering Department (PHE) of the Government of Assam pursuant to multiple work orders issued between 2018 and 2021. Despite delivery and acceptance of goods, the respondents failed to make payment of dues amounting to Rs. 49,99,098/- as per a prior Memorandum of Understanding (MoU) dated 2022, and additional sums for supplies made in 2020 - 2021.
Key Facts
- The petitioner No. 1 was registered as a small enterprise under the Act of 2006.
- Work orders were issued through the Assam Small Industries Development Corporation Limited, indicating intent to engage MSMEs.
- An MoU dated 2022 acknowledged a final payment of Rs. 49,99,098/- towards dues under the NRDWP account.
- Additional supplies were made in 2020 and 2021, for which no payment was made.
- Petitioners submitted representations on multiple occasions from 2022 onwards, all of which remained unaddressed.
- On 17.03.2025, petitioners formally withdrew from the MoU due to non-payment.
- The PHE Department issued a communication dated 29.05.2024 inviting amicable resolution of disputes.
Procedural History
- 17.01.2018: First representation submitted by petitioners for payment of dues.
- 23.05.2018: Writ Petition WP(C) No. 3246/2018 disposed of by this Court directing the Chief Engineer, PHE, to consider the representation within three months.
- 2018: Contempt petition Cont. Cas(C) No. 513/2018 filed due to non-compliance with the 2018 order.
- 2022: Contempt petition withdrawn by petitioners on assurance of resolution.
- 2020 - 2021: Additional supplies made without payment.
- 2022 - 2024: Multiple representations submitted to PHE and Finance Departments, no response.
- 17.03.2025: Petitioners withdrew from the MoU and escalated the matter.
- 2026: Present writ petition WP(C)/1509/2026 filed seeking payment of dues with interest under Section 16 of the Act of 2006.
The Parties' Positions
For the Petitioners: The petitioner is a registered MSME entitled to statutory interest under Section 16 of the Act of 2006. The respondents have not disputed the claim but remained silent despite repeated representations. The alternative remedy under Section 18 is not applicable where there is no dispute over the debt itself.
For the Respondents: The petitioners have an efficacious alternative remedy under Section 18 of the Act of 2006, which mandates conciliation and arbitration before approaching the High Court. The MoU already settled part of the claim, and the interest calculation methodology is not established.
Relief Sought
The petitioners seek a direction to the respondents to pay all outstanding dues along with compound interest at three times the RBI bank rate, compounded monthly, from the appointed day as defined under Section 2(b) of the Act of 2006.
The Legal Issue
The central question is whether interest under Section 16 of the MSME Act, 2006 must be calculated at a fixed rate from the appointed day, or whether it must be compounded monthly at three times the RBI bank rate prevailing at the end of each month (monthly rests).
Arguments Presented
For the Petitioner
The petitioners relied on the judgment in Garg Poly Industries v. State of Assam (2026 (1) GLT 1), which held that Section 16 imposes a statutory obligation to pay compound interest with monthly rests, and that the rate must vary according to the RBI bank rate prevailing at each monthly interval. They argued that silence in the face of repeated representations amounts to admission of liability, making recourse to Section 18 unnecessary. The Calcutta High Court’s reasoning in V.K. Patel v. Simplex Infrastructure Ltd. was cited to establish that compound interest with monthly rests cannot be frozen at the appointed day.
For the Respondent
The respondents contended that the petitioners must first approach the MSME Facilitation Council under Section 18, which provides a statutory mechanism for conciliation and arbitration. They argued that the MoU had settled the principal amount and that the interest calculation methodology was not established. They further contended that the High Court should not entertain the petition where an alternative remedy exists.
The Court's Analysis
The Court undertook a detailed statutory interpretation of Section 16 of the MSME Act, 2006, which mandates that where payment is delayed, the buyer shall pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. The Court emphasized that the language of the provision is unambiguous: interest accrues from the appointed day, but the rate is not fixed on that day.
The Court adopted the reasoning from V.K. Patel v. Simplex Infrastructure Ltd. (2024 SCC Online Cal 6617), which explained that compound interest with monthly rests implies a variable rate tied to the RBI bank rate prevailing at the end of each month. The Court observed:
"The very character of compound interest makes it fluid and variable. If the rate of calculation of interest is fixed at the date of inception of calculation, the same would be a counter-intuitive, artificial and arbitrary superimposition on the normal mode of calculation as given in the statute, since Section 16 provides that the compound interest will be calculated with 'monthly rests', at which points the prevailing bank rate of interest is to be taken into account."
The Court rejected the respondents’ argument that Section 18 provides an exclusive remedy. It held that where the buyer has not disputed the debt and has remained silent despite representations, the statutory right under Section 16 can be enforced directly under Article 226. The Court distinguished Garg Poly Industries, where the same principle was applied, and reaffirmed that the Facilitation Council’s jurisdiction is not triggered in the absence of a dispute over the existence or quantum of the debt.
The Court further noted that the petitioners had not provided a detailed calculation of interest, and that factual questions - such as the exact dates of acceptance, deemed acceptance, and the RBI bank rates applicable during each monthly rest - could not be determined by the Court without evidence. The burden of proof lay with the petitioners to substantiate their claim with documentary evidence.
The Verdict
The petitioners are granted liberty to submit a detailed representation to the Special Chief Secretary, PHE Department, within 60 days, calculating the interest component under Section 16 using compound interest with monthly rests at three times the RBI bank rate prevailing at the end of each month. The PHE Department shall verify the claim, including the petitioner’s MSME status, and make payment within four months of receipt of the representation. If the claim is rejected, a speaking order must be issued within the same period. During the 60-day submission and four-month verification period, interest shall be frozen. If disputes arise thereafter, either party may approach the MSME Facilitation Council under Section 18.
What This Means For Similar Cases
Interest Must Be Calculated Dynamically, Not Fixed
- Practitioners must now calculate interest under Section 16 using monthly compounding, not simple interest or a fixed rate.
- The rate applicable for each month is three times the RBI bank rate notified on the last day of that month.
- Interest cannot be calculated using a single rate from the appointed day; doing so violates the statutory mandate.
Silence Equals Admission - Section 18 Not Mandatory
- Where the buyer has not disputed the debt and ignored representations, recourse to the MSME Facilitation Council under Section 18 is not a precondition to filing a writ petition.
- Courts may directly enforce statutory rights under Sections 15 and 16 where liability is admitted by conduct.
- Legal notices and representations must be meticulously documented to establish non-dispute.
Documentation Is Critical for Enforcement
- Petitioners must maintain records of: (a) dates of supply, (b) dates of acceptance or deemed acceptance, (c) RBI bank rates for each relevant month, and (d) work orders and delivery challans.
- Without this data, claims for interest will be dismissed for lack of substantiation, even if liability is admitted.
- Legal teams should engage finance experts to compute compound interest with monthly rests accurately.
