MSME payment recovery: the 45-day rule, Section 18 and the Samadhaan route

The Micro, Small and Medium Enterprises Development Act, 2006 gives registered micro and small enterprises a statutory remedy for delayed payment that most eligible businesses never use — usually because they do not know it exists, or assume it is slower than it is.

Who this applies to

The delayed payment provisions in Chapter V of the MSMED Act apply to a supplier that is a micro or small enterprise holding a valid registration. Medium enterprises are outside the delayed payment mechanism.

Registration is now through Udyam. The registration must be in place, and in practice the Council will look at whether it was in place at the relevant time, so registering after the dispute arises is a weak position. If you are eligible and unregistered, register now — it takes minutes and is free.

The payment deadline

Section 15 sets the rule. Where a supplier supplies goods or renders services to a buyer, the buyer must pay:

• on or before the date agreed in writing between them; or
• where there is no agreement, before the appointed day — fifteen days from the day of acceptance or deemed acceptance.

Critically, an agreed credit period cannot exceed forty-five days from the day of acceptance or deemed acceptance. A contractual term giving the buyer ninety or a hundred and twenty days is, to that extent, of no effect against the statute.

“Day of acceptance” means the day of actual delivery, or — where the buyer has objected in writing within fifteen days of delivery — the day the objection is removed.

The interest is the leverage

Section 16 provides that where a buyer fails to pay as required by Section 15, the buyer is liable to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India, from the appointed day or the agreed date.

This is not a penalty the parties can contract out of, and Section 23 provides that the interest so payable is not deductible for income tax purposes — which means the buyer pays it out of post-tax income.

In our experience this single provision resolves more disputes than the proceedings do. A properly drafted demand that sets out the statutory interest calculation, the non-deductibility, and the Section 15 cap on credit periods frequently produces payment before anything is filed.

There is also a disclosure consequence: under Section 22, a buyer required to get its accounts audited must disclose unpaid amounts due to micro and small enterprises and the interest accrued, in its annual statements. Companies are separately required to file half-yearly returns of outstanding dues to MSMEs.

Section 18 and the Facilitation Council

Section 18 allows a party to a dispute over an amount due under Section 17 to make a reference to the Micro and Small Enterprises Facilitation Council of the State.

The Council first conducts conciliation. If conciliation fails, the Council either takes up the dispute for arbitration itself or refers it to an institution providing alternate dispute resolution services — and the Arbitration and Conciliation Act, 1996 then applies as if the arbitration were under an arbitration agreement.

Section 18(5) directs that a reference shall be decided within ninety days from the date of making it. Councils vary considerably in how closely they hold to that, but the route remains materially faster than a civil suit.

Jurisdiction lies with the Council located where the supplier is situated — a significant advantage, since the buyer is drawn to the supplier’s forum rather than the other way round.

Filing on Samadhaan

References are filed through the Government of India’s MSME Samadhaan portal. In practical terms you will need:

• the Udyam registration number;
• the purchase orders or work orders;
• invoices, with dates of supply and acceptance;
• proof of delivery or completion — e-way bills, GRNs, sign-offs, acceptance emails;
• the ledger and any part-payments;
• correspondence, particularly anything acknowledging the dues;
• the interest computation.

The quality of the delivery and acceptance evidence is what decides these references. Where a buyer raises a quality objection for the first time after non-payment is alleged, the fifteen-day objection window in Section 2(b) becomes the central issue — so keep the delivery record clean and contemporaneous.

Section 19 and the 75 per cent deposit

This is the provision that gives an award real force. Under Section 19, no application to set aside a decree, award or order of the Council shall be entertained by any court unless the appellant — where the appellant is not the supplier — deposits seventy-five per cent of the amount in terms of the decree or award.

The court has discretion to order part of that deposit to be paid out to the supplier pending disposal. The combination makes a challenge expensive and considerably reduces the incentive to appeal for delay alone.

Where this route works and where it does not

It works well for straightforward non-payment against clean documentation, particularly against larger buyers who are sensitive to the disclosure and tax consequences.

It works less well where there is a genuine and well-documented dispute about quality or scope, or where the contract contains its own arbitration clause and the counterparty is willing to litigate the interplay between that clause and Section 18. There is a body of case law on whether Section 18 overrides an existing arbitration agreement, and the position is not uniform.