MSMED Act: Recovering Delayed Payments via the Facilitation Council

A micro or small enterprise that has not been paid can recover the principal, together with statutory compound interest, by making a reference to the Micro and Small Enterprises Facilitation Council under Section 18 of the Micro, Small and Medium Enterprises Development Act 2006. The Council first attempts conciliation; if conciliation fails, it takes up the dispute as an arbitration, and the resulting award is enforceable in the same way as any other arbitral award. Two threshold conditions decide whether the route is open at all: the seller must hold a valid Udyam registration, and the delay must be measured against the credit-period ceiling fixed by Section 15.

As an Advocate practising at the Delhi High Court and Senior Partner at Unified Chambers And Associates, I see delayed-payment references from both sides — suppliers who have been strung along for a year and buyers who have discovered, mid-audit, that a statutory interest liability has been accruing on their books. What follows is the statutory architecture, a worked computation, and the practical checklist that decides whether a reference succeeds.

What does the MSMED Act give a small supplier that an ordinary contract does not?

Three things, and each of them matters more than it first appears.

First, it caps the credit period by statute. A buyer cannot contract for 90-day or 120-day payment terms against a micro or small supplier, however commercially routine those terms are in the sector.

Second, it attaches compound interest at a punitive multiple of the RBI Bank Rate, and it does so "notwithstanding anything contained in any agreement". A no-interest clause in the purchase order does not survive Section 16.

Third, it supplies a forum. The supplier does not have to sue in the buyer's home court or invoke an arbitration clause drafted by the buyer's counsel. It files where it is located, and the buyer must come to that Council.

Sections 15 to 24 sit in Chapter V of the Act, and Section 24 provides that Sections 15 to 23 have effect notwithstanding anything inconsistent contained in any other law for the time being in force. That overriding clause is what makes the rest of the scheme work.

Who counts as a "supplier"? Udyam registration decides the answer

Section 2(n) defines a supplier as a micro or small enterprise that has filed the memorandum referred to in Section 8(1). Since 1 July 2020 that memorandum is the Udyam Registration, filed on the Government's Udyam portal; the earlier Udyog Aadhaar Memorandum and EM-Part II filings were the predecessors.

Without that registration there is no "supplier", and without a supplier there is no Chapter V claim. The enterprise still has its ordinary contractual remedies, but it loses the 45-day ceiling, the statutory interest, the Council forum and the 75 per cent pre-deposit lever described below.

Does the registration have to pre-date the contract?

This is the single most common reason a reference is thrown out. The Supreme Court, in *Silpi Industries v. Kerala State Road Transport Corporation* (2021), held that an enterprise must be registered under the MSMED Act at the time it enters into the contract in order to claim the benefit of Chapter V. Registering after the goods have been supplied or the services rendered does not operate retrospectively over transactions already concluded. The position was reiterated in *Gujarat State Civil Supplies Corporation v. Mahakali Foods* (2022).

The practical consequence for a growing business is blunt: register before you take the order, not after the buyer defaults.

Medium enterprises are outside Chapter V

Because Section 2(n) speaks only of a micro or small enterprise, a medium enterprise is not a "supplier" for delayed-payment purposes even though it is squarely an MSME for every other purpose under the Act. A medium enterprise that is paid late falls back on its contract, a summary suit, its arbitration clause, or — where the default is a genuine inability to pay — the remedies discussed in the Insolvency and Bankruptcy Code guide.

It is worth confirming the enterprise's current classification before filing. The investment and turnover thresholds that separate micro, small and medium enterprises have been revised more than once, most recently with effect from 1 April 2025, and an enterprise that was "small" when it took the order may have re-classified since.

What exactly is the 45-day rule under Section 15?

Section 15 has two limbs, and the difference between them is worth several months of interest.

Where there is no written agreement on the payment date, the buyer must pay before the "appointed day". Section 2(b) defines the appointed day as the day immediately following the expiry of 15 days from the day of acceptance or the day of deemed acceptance.

Where there is a written agreement, the buyer must pay on or before the agreed date — but the agreed period can in no case exceed 45 days from the day of acceptance or deemed acceptance. A contractual term stipulating a longer credit period is simply not enforceable beyond the 45-day ceiling.

Two defined terms carry the weight here:

• **Day of acceptance** is the day of actual delivery of the goods or rendering of the services. But if the buyer objects in writing about acceptance within 15 days of delivery, the day of acceptance shifts to the day on which the supplier removes that objection.
• **Day of deemed acceptance** applies where the buyer raises no written objection within 15 days: the clock then runs from the date of actual delivery or rendering.

Note what this means for the buyer's most common tactic. An oral complaint, a WhatsApp grumble or a silent refusal to sign the delivery challan does not stop the clock. Only a written objection, raised within 15 days, does — and even then the clock restarts once the objection is cured.

Worked example: fixing the appointed day

Take a supplier that delivers machined components on 3 March.

*Scenario A — purchase order silent on credit terms, no written objection from the buyer.* The day of deemed acceptance is 3 March. Fifteen days expire on 18 March. The appointed day is 19 March, and interest under Section 16 runs from that date.

*Scenario B — purchase order records a 45-day credit period.* Payment falls due on 17 April, being 45 days from 3 March. Interest runs from 18 April, the day immediately following the agreed date.

*Scenario C — purchase order records a 90-day credit period.* The agreement is ineffective beyond the statutory ceiling. The due date remains 17 April.

*Scenario D — the buyer objects in writing on 10 March alleging short supply, and the supplier makes good the shortfall on 25 March.* The day of acceptance becomes 25 March, and both the 15-day and 45-day computations restart from that date.

How is the interest under Section 16 actually calculated?

Section 16 fixes the rate at three times the bank rate notified by the Reserve Bank of India, and the interest is compound, with monthly rests. It runs from the appointed day, or from the date immediately following the agreed date, as the case may be.

Two points are routinely misunderstood.

The reference rate is the Bank Rate, which the RBI notifies separately, and not the repo rate. The two are related but distinct, and pleading the wrong one invites a correction in the award. Check the currently notified Bank Rate on the RBI's website for the relevant period rather than working from memory.

The interest is compound with monthly rests, which produces a materially higher figure than simple interest at the same nominal rate. Take an illustration only: on an unpaid principal of Rs 40 lakh, at an assumed notified Bank Rate of 6.25 per cent, the statutory rate would be 18.75 per cent per annum. Compounded monthly, the effective yield over twelve months is roughly 20.4 per cent, producing interest of about Rs 8.18 lakh rather than the Rs 7.5 lakh a simple-interest calculation would yield. Over a two- or three-year delay the divergence widens sharply.

Section 23 then adds a sting for the buyer: the interest payable or paid under the Act is expressly not allowed as a deduction while computing income under the Income-tax Act 1961.

How do you make a reference to the Facilitation Council under Section 18?

Section 18(1) permits any party to a dispute — supplier or buyer — to make a reference in respect of any amount due under Section 17. In practice it is almost always the supplier.

Step 1 — Confirm eligibility. Udyam registration in force at the time of the contract; the seller is micro or small; the amount claimed is a payment for goods supplied or services rendered.

Step 2 — Compute the claim. Principal, plus Section 16 interest computed from the appointed day to the date of the reference, shown separately.

Step 3 — File. References are ordinarily initiated through the Government's MSME Samadhaan portal, which routes the application to the Council having jurisdiction over the supplier's location. Some States also accept a physical filing before the Council directly.

Step 4 — Conciliation. Under Section 18(2), the Council either conducts conciliation itself or refers the matter to an alternative dispute resolution institution. Sections 65 to 81 of the Arbitration and Conciliation Act 1996 apply as if the conciliation had been initiated under Part III of that Act. A settlement recorded at this stage has the status of an arbitral award on agreed terms.

Step 5 — Arbitration. If conciliation is terminated without settlement, Section 18(3) requires the Council either to take up the arbitration itself or to refer it out. The Arbitration and Conciliation Act 1996 then applies as though there were an arbitration agreement under Section 7(1) of that Act. There need not be any arbitration clause between the parties; the statute supplies one.

Step 6 — Award and enforcement. The award is enforceable as an arbitral award, executed as a decree under Section 36 of the 1996 Act.

Two structural features are worth flagging. Under Section 18(4), the Council has jurisdiction where the supplier is located, over a buyer located anywhere in India — a genuine reversal of the ordinary forum advantage. And the Supreme Court in *Mahakali Foods* held that a Section 18 reference is available notwithstanding an independent arbitration agreement between the parties, so a buyer cannot contract out of the Council by inserting its own arbitration clause. That decision also addressed the objection that the same body cannot act first as conciliator and then as arbitrator, holding that the MSMED Act's overriding effect answers it. *Silpi Industries* confirmed that a counter-claim by the buyer is maintainable in the same proceedings.

The Limitation Act 1963 applies to the arbitration through Section 43 of the 1996 Act. Do not treat the Council as a forum where a stale claim can be revived.

Is the 90-day disposal norm in Section 18(5) real?

Section 18(5) provides that every reference made under Section 18 shall be decided within 90 days from the date of making the reference. It is the statutory benchmark, and it is worth pleading.

In practice, references frequently run well beyond it, for the same reasons that afflict every under-resourced tribunal: Councils meet periodically rather than continuously, are composed largely of ex-officio members with departmental duties, and depend on service of notice on buyers who have every incentive to avoid it. A supplier planning cash flow around a 90-day recovery will be disappointed. A supplier that treats 90 days as the target it presses the Council towards, with complete documents filed at the outset, tends to do better than one that files thin and supplements later.

The 75 per cent pre-deposit: why Section 19 changes the buyer's arithmetic

Section 19 is the provision that gives an MSEFC award its practical bite. No court may entertain an application to set aside any decree, award or other order made by the Council — or by an ADR institution to which it referred the matter — unless the appellant, not being a supplier, has deposited 75 per cent of the awarded amount in the manner the court directs.

Three consequences follow.

The deposit applies only to the buyer. A supplier dissatisfied with an award faces no such condition.

The courts have consistently treated the requirement as mandatory rather than discretionary. In *Gujarat State Disaster Management Authority v. Aska Equipments* (2021) the Supreme Court held that while a court may permit the deposit to be made in instalments having regard to hardship, it cannot dispense with it; *Tirupati Steels v. Shubh Industrial Component* (2022) reaffirmed that the deposit cannot be waived.

Under the proviso to Section 19, the court is to order that such percentage of the deposited amount as it considers reasonable be paid to the supplier pending disposal of the challenge, subject to such conditions as it thinks fit to impose. In other words, a buyer contemplating a Section 34 challenge must find three-quarters of the award in cash, and may see part of it released to the very party it is litigating against.

For a buyer, this is the point at which the commercial calculation usually changes. For a supplier, it is the reason a well-founded reference is a stronger instrument than a civil suit for the same money.

What does Section 22 force the buyer to disclose?

Section 22 requires every buyer whose annual accounts are subject to audit under any law to disclose, in the annual statement of accounts: the principal and interest due and unpaid to any supplier at year end, shown separately; the interest paid under Section 16 together with payments made beyond the appointed day; the interest due for the period of delay; the interest accrued and unpaid at year end; and the further interest remaining due in succeeding years, for the purposes of disallowance under Section 23.

This turns a private commercial delay into a matter of record in audited financials, visible to lenders, investors, auditors and acquirers. Companies additionally file the half-yearly MSME Form I return with the Ministry of Corporate Affairs where amounts to micro and small suppliers remain outstanding beyond 45 days.

Layered on top is Section 43B(h) of the Income-tax Act 1961, inserted by the Finance Act 2023 and operative from assessment year 2024-25. Any sum payable to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act is deductible only in the previous year in which payment is actually made — and, unlike other clauses of Section 43B, the relief of paying before the return-filing due date is not available. Late payment therefore carries a direct tax cost in the year of the delay, which is frequently a more persuasive argument in a buyer's boardroom than the interest liability itself.

A pre-filing checklist

• Udyam registration certificate, with the registration date preceding the contract date
• Purchase order or work order, and any written credit-period term
• Invoices, delivery challans, e-way bills, GST returns and proof of receipt
• Any written objection from the buyer within 15 days of delivery, and proof that it was cured
• A dated computation of the appointed day for each invoice
• A separate interest computation at three times the notified Bank Rate, compounded monthly, showing the rate applied for each period
• Correspondence, reminders and any part-payments or acknowledgements of liability
• Confirmation that the claim is within limitation

Where this route sits alongside other recovery options

A delayed-payment reference is not the only instrument, and it is not always the right first one. Where a cheque has been dishonoured, a parallel complaint under Section 138 of the Negotiable Instruments Act may generate faster pressure. Where the buyer is insolvent rather than merely delaying, the question becomes one of insolvency strategy rather than recovery. Where the amount is disputed on quality or short-supply grounds, ordinary commercial litigation may be the more honest forum. The wider landscape of enforcement mechanisms is set out in the complete guide to debt recovery in India, and the terminology used across these statutes is collected in the legal glossary.

What distinguishes the MSMED route is that it converts a commercial grievance into a statutory one, moves the forum to the supplier's doorstep, prices the delay at three times the Bank Rate compounded monthly, and makes any challenge to the outcome expensive before it is even heard. For a micro or small enterprise with clean paperwork and a registration that pre-dates the contract, that combination is difficult for a buyer to outlast.

Unified Chambers And Associates advises on debt recovery and related legal advisory matters, and appears before the tribunals and courts listed on the practice jurisdictions page.

This article is general information on the law as it stands and is not legal advice; the position in any particular matter turns on its own facts and documents. Queries may be directed through the contact page.