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.

Delayed-payment disputes look different from each side — a supplier that has been kept waiting for months, and a buyer that discovers, mid-audit, that a statutory interest liability has been accruing on its 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.

What did the 2026 amendment change?

The Micro, Small and Medium Enterprises Development (Amendment) Act 2026 (Act 16 of 2026) received assent on 13 August 2026. A notification of 12 October 2026 (S.O. 5575(E)) brought most of it into force on 15 October 2026, including the substituted Section 8 on registration, a new Section 15A requiring Central Public Sector Enterprises to settle invoices from MSMEs through a Trade Receivables Discounting System platform, the substituted Section 20 on Facilitation Councils and revised penalty provisions. The substituted Section 21, on the composition of Councils, takes effect on 15 December 2026.

Its amendments to Sections 18 and 19, and the new Section 18A, were not brought into force by that notification. When they commence, mediation before the Council must be completed within ninety days of the first appearance, the award must be made within ninety days of completion of pleadings, a mediated settlement or award will be recoverable as an arrear of land revenue, and a court hearing a challenge that has been pending for more than six months must release at least fifty per cent of the awarded amount to the supplier. Those amendments build on Section 18 as substituted by the Mediation Act 2023, which replaces conciliation with mediation and had not been brought into force on that point when this note was revised. The rest of this note describes the provisions currently in force.

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. Section 8, as substituted with effect from 15 October 2026, provides for free and voluntary filing of the memorandum on a national digital platform notified by the Central Government, and registrations already made continue under the saving clause in Section 17 of the amending Act. Voluntary does not mean optional for a delayed-payment claim: without a filed memorandum the enterprise is not a "supplier".

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 condition described below.

Does the registration have to pre-date the contract?

This is a frequent threshold objection to a reference. The settled position is 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 objection is jurisdictional rather than technical: if the registration post-dates the contract, there is no "supplier" within Section 2(n) for that transaction, the Council is not seized of a Chapter V dispute at all, and the buyer is entitled to take the point at the threshold rather than on the merits.

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.

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 easily 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. Section 16 does not say which date's Bank Rate governs where the rate changes during the delay, so the computation should state the rate applied for each period and the basis for applying it.

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 INR 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 INR 8.18 lakh rather than the INR 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 in computing income for income-tax purposes. Section 23 still names the Income-tax Act 1961. That Act was repealed and re-enacted by the Income-tax Act 2025 with effect from 1 April 2026, and by Section 8 of the General Clauses Act 1897 a reference to a repealed and re-enacted enactment is read as a reference to the re-enacted one, so the disallowance now operates under the 2025 Act.

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. New delayed-payment applications are filed on the Ministry of MSME's ODR portal (odr.msme.gov.in), which routes each application to the Council having jurisdiction over the supplier's location. The MSME Samadhaan portal, used for filings since 2017, now directs all new applications to the ODR portal. The procedure before each Council is otherwise governed by the rules made by its State Government.

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 it is settled 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 into the purchase order; the overriding effect given by Section 24 is what produces that result. The related objection — that the same body cannot act first as conciliator and then as arbitrator, contrary to the general scheme of the 1996 Act — is answered the same way, the statutory override displacing the ordinary rule. It is also established that a counter-claim by the buyer is maintainable in the same proceedings, so the Council can determine the whole account between the parties rather than only the supplier's half of it.

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: Councils meet periodically rather than continuously, their members are officials and representatives with other responsibilities, and proceedings depend on service of notice on buyers who have every incentive to avoid it. The substituted Section 20, in force from 15 October 2026, requires each State to establish an adequate number of Councils and requires every Council to meet on a regular basis at intervals the State prescribes; the substituted Section 21, from 15 December 2026, requires a Chairperson not below the rank of Joint Director and at least one member from the field of law. 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. A court may permit the deposit to be made in instalments where genuine hardship is demonstrated, but it cannot dispense with the deposit altogether, reduce it below three-quarters of the awarded sum, or entertain the challenge on an undertaking to pay later. The condition attaches to the entertaining of the application itself, which is why an application filed without the deposit is not merely defective in form.

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. The substituted Section 19 enacted in 2026, not yet in force, keeps the 75 per cent deposit, requires at least half of the awarded amount to be released to the supplier once a challenge has been pending for more than six months, and requires the challenge to be filed in the court within whose jurisdiction the supplier's registered address lies.

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 37(2)(g) of the Income-tax Act 2025 (formerly Section 43B(h) of the Income-tax Act 1961, inserted by the Finance Act 2023 and operative from assessment year 2024-25). Any amount payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSMED Act is allowed as a deduction only in the tax year in which it is actually paid. Section 37(3) gives the other listed sums the relief of payment after the year end but on or before the due date for the return, and expressly excludes clause (g) from that relief. For tax years beginning before 1 April 2026, Section 536(2) of the 2025 Act keeps the 1961 Act, and so Section 43B(h), in operation. 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 complaint under Section 138 of the Negotiable Instruments Act may also be available, on its own statutory conditions. 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.

Debt recovery and legal advisory are among the chambers' practice areas, and the Delhi forums are listed on the courts and tribunals 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.