Supreme Court Verdict on Interest in Industrial Dispute: Fertilizer Corporation vs. Coromandal Sacks

The Supreme Court recently delivered a landmark judgment in the case of Fertilizer Corporation of India Limited (FCIL) versus M/s Coromandal Sacks Private Limited, which revolved around a dispute concerning contractual obligations, delayed payments, and the imposition of compound interest. This case is particularly significant for its interpretation of the Sick Industrial Companies (Special Provisions) Act, 1985 (SICA) and the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (1993 Act).

The judgment dealt with two primary legal questions: (1) Whether Section 22(1) of SICA bars the adjudication of a civil suit for recovery of money, even if the liability is not acknowledged by the sick company? and (2) Whether the imposition of 24% compound interest by the High Court was justified?

Background of the Case

Fertilizer Corporation of India Limited (FCIL), a public sector undertaking under the Government of India, had been procuring High Density Poly Ethylene (HDPE) bags from Coromandal Sacks Private Limited since 1986. The terms of the contract mandated payment within 20 days of receiving the goods, with specific penalties applicable for delays.

However, disputes arose regarding the payment structure, price variations, liquidated damages, and the alleged non-acceptance of certain supplied bags. Coromandal Sacks, the supplier, claimed that FCIL arbitrarily deducted penalties and delayed payments, resulting in financial losses. Consequently, the supplier initiated a lawsuit seeking:

Recovery of Rs. 8,27,100.74 for price differences and losses incurred due to non-acceptance of bags.
Interest of Rs. 10,31,803.14 on the delayed payments.

The trial court partially ruled in favor of Coromandal Sacks, granting interest at 12% per annum. However, the High Court revised this to 24% compound interest under the 1993 Act, leading FCIL to challenge the decision before the Supreme Court.

Arguments by the Appellant (FCIL)

FCIL, represented by senior counsel, presented the following arguments:

As a sick company under SICA, FCIL was under the jurisdiction of the Board for Industrial and Financial Reconstruction (BIFR) since 1992.
Section 22(1) of SICA prohibits recovery suits against a sick company unless permitted by BIFR.
The deductions made on the contract price were legitimate and based on the agreement between the parties.
The 24% compound interest awarded by the High Court was excessive and would inflate the payable amount disproportionately.
The 1993 Act should not override SICA, as SICA is a special law designed to protect sick industries.

Arguments by the Respondent (Coromandal Sacks)

Coromandal Sacks, through its legal representatives, argued:

Section 22(1) of SICA does not apply since FCIL never acknowledged its liability before BIFR.
The deductions imposed by FCIL were arbitrary and contrary to contractual terms.
The 24% interest awarded by the High Court was legally justified under the 1993 Act, which mandates such interest for delayed payments to small-scale industries.
FCIL’s reliance on SICA to avoid paying contractual dues was a misuse of the law.

Supreme Court’s Judgment

The Supreme Court, led by Justice J.B. Pardiwala, analyzed the case and ruled on the two primary legal issues.

1. Applicability of Section 22(1) of SICA

The Court held that Section 22(1) does not apply to cases where the liability of a sick company is under dispute.
Suspension of legal proceedings under SICA aims to protect rehabilitation efforts, not to provide blanket immunity to sick companies.
The Court cited previous judgments emphasizing that proceedings determining liabilities, as opposed to enforcing them, are not barred under SICA.

2. Legitimacy of 24% Compound Interest

The Supreme Court upheld the 24% compound interest rate, citing the 1993 Act.
However, it excluded the interest period during which FCIL was under BIFR (1992–2013), reasoning that allowing interest accrual during this period would contradict the objectives of SICA.
The Court emphasized that harmonizing SICA and the 1993 Act was essential to ensure that both laws serve their intended purposes without overriding each other.

Key Takeaways from the Judgment

The judgment provides crucial legal clarifications:

Suits for adjudicating disputed liabilities are not barred by SICA.
Execution of decrees against sick companies can be suspended under SICA, but this does not prevent courts from determining liabilities.
Interest under the 1993 Act applies, but with limitations. Interest cannot be charged for the period a company was under BIFR, as it would undermine SICA’s rehabilitation framework.
The ruling protects both parties. Coromandal Sacks is compensated for its delayed payments, while FCIL is not unfairly penalized for being a sick company.

Implications of the Judgment

This ruling sets a precedent for industrial disputes involving sick companies:

It clarifies the boundaries of SICA and prevents its misuse as a shield against legitimate claims.
It reinforces the applicability of the 1993 Act, ensuring timely payments to small industries.
It provides a balanced approach that safeguards both the interests of creditors and the rehabilitation prospects of sick companies.

Conclusion

The Supreme Court’s verdict in this case establishes a critical balance between protecting sick industries under SICA and ensuring rightful compensation to small-scale suppliers under the 1993 Act. While it upholds the right of Coromandal Sacks to claim interest, it also prevents FCIL from being unfairly burdened by high interest rates during its rehabilitation period.

This judgment will serve as a guiding principle for future disputes involving industrial contracts, delayed payments, and legal protections under SICA and the 1993 Act.

Petitioner Name: Fertilizer Corporation of India Limited.
Respondent Name: M/s Coromandal Sacks Private Limited.
Judgment By: Justice J.B. Pardiwala, Justice Sandeep Mehta.
Place Of Incident: Telangana, India.
Judgment Date: 26-04-2024.

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