MSME Samadhaan: How to Recover a Delayed Payment

The most expensive mistake in an MSME Samadhaan delayed payment claim is made long before the money goes unpaid. It is registering on Udyam only after the buyer starts stalling. The Supreme Court has held that a supplier must have been registered before entering into the contract for the statutory delayed payment machinery to apply, so a registration taken in month fourteen of a dispute does nothing for the invoices raised in month one. The second most expensive mistake is a supplier assuming the scheme covers him because he is small. It covers micro and small enterprises only. A medium enterprise has no access to it at all.

If you clear both those gates, the Micro, Small and Medium Enterprises Development Act 2006 gives a supplier a far better remedy than a civil suit. Filing is online and free, the reference is decided by a council in your own state, interest runs at a punitive rate that no contract can reduce, and a buyer who wants to challenge the outcome must put 75 percent of it on the table first.

The 45 day rule

Section 15 of the MSMED Act is short and absolute. Where a buyer receives goods or services from a supplier, he must pay on or before the date agreed in writing, and in no case later than 45 days from the day of acceptance or the day of deemed acceptance.

Two definitions carry the weight:

• The day of acceptance is the day of actual delivery, or, where the buyer objects in writing about the goods or services within 15 days of delivery, the day on which the objection is removed by the supplier.
• Deemed acceptance is the day of actual delivery where no written objection is made within those 15 days.
• The appointed day is the day immediately following the expiry of 15 days from the day of acceptance or deemed acceptance. Interest runs from there, not from the invoice date.

The 45 day outer limit cannot be contracted out of. A purchase order saying 90 days or 120 days is ineffective to that extent. This is one of the few places in Indian commercial law where a negotiated payment term is simply overridden, and buyers with long standard credit periods are frequently unaware of it.

The interest, and why it hurts

Section 16 fixes the consequence. From the appointed day, the buyer is liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. There is no discretion to reduce it, and no agreement between the parties can displace it.

Compounded monthly at three times the bank rate, the interest on an eighteen month old invoice can approach the size of the principal. It is deliberately designed that way.

Two further provisions turn the screw on the buyer’s side of the ledger:

• Section 23 denies the buyer any deduction of that interest as expenditure for income tax purposes.
• Section 22 requires a buyer who is required to get its accounts audited to disclose in its annual statement of accounts the principal and interest due to micro and small enterprises, the amounts paid beyond the appointed day, and the interest accrued and unpaid. That disclosure has to be signed off by the auditor, and it is a live document in any later dispute.

Separately, Section 43B(h) of the Income Tax Act 1961 now allows a deduction for a payment due to a micro or small enterprise only in the year the payment is actually made, unless it is paid within the Section 15 time limit. For a buyer with a March year end, an unpaid micro or small supplier is a tax problem, not just a payables problem. This is often the most effective thing a supplier can point out in a reminder letter, and it is also why the half yearly Form MSME-1 return described in our note on annual compliance for a private limited company matters more than it used to.

Who counts as a supplier

Three checks, in order:

1. Classification. Micro or small under the composite investment and turnover criteria notified under Section 7. Medium enterprises are outside Chapter V and cannot file.
2. Registration before the contract. Udyam registration must have been in place before the contract was entered into. Registration after the supply does not reach back.
3. Nature of the enterprise. Retail and wholesale traders are permitted to register on Udyam, but the government’s own clarification limits that registration to the benefit of priority sector lending. It does not open the delayed payment route. Manufacturing and service enterprises are the intended users.

Also worth noting: the reference goes to the Micro and Small Enterprises Facilitation Council of the state where the supplier is located, under Section 18(4). A Jabalpur fabricator supplying a buyer in Gurugram files before the Madhya Pradesh council, and the buyer has to come to it. That reversal of the usual forum advantage is a large part of the practical value of the scheme.

How the reference actually runs

Stage	What happens	Timing
Application	Filed online on the Samadhaan portal with the Udyam number, work orders and invoices. No filing fee.	Any time within limitation
Registration	The application is routed to the Facilitation Council of the supplier’s state	Automatic
Notice to buyer	Council issues notice and calls for a reply	Council’s discretion
Conciliation	Council conciliates itself or refers it to an institution providing alternate dispute resolution services	Section 18(2)
Arbitration	If conciliation fails, the Council takes up arbitration itself or refers it out. The Arbitration and Conciliation Act 1996 applies as though there were an arbitration agreement	Section 18(3)
Decision	Every reference is to be decided within 90 days from the date it is made	Section 18(5)

The 90 day period in Section 18(5) is treated as directory in practice, and many references take longer. It is still worth citing in correspondence with the council, and worth planning around rather than relying on.

Because the second half of the process is a statutory arbitration, everything that governs an ordinary arbitration governs it. The award is an arbitral award. It is challenged, if at all, under Section 34 of the Arbitration and Conciliation Act 1996 within three months of receipt, extendable by 30 days on sufficient cause and no further. It is enforced as a decree under Section 36. Conduct of the reference sits comfortably within our litigation and arbitration practice, and the tactical decisions in it are arbitration decisions, not recovery suit decisions.

Section 19: the 75 percent deposit

This is the provision that makes the scheme work. Under Section 19, no application to set aside a decree, award or order of the Council or of an arbitrator shall be entertained by any court unless the appellant, not being the supplier, has deposited 75 percent of the amount in terms of the decree, award or order.

The court can order that part of that deposit be paid out to the supplier during the pendency of the challenge, on terms it considers reasonable. A buyer who wanted to litigate for four more years has to fund three quarters of the claim on day one to do it. Many settle instead.

The clause in your contract will not save either side

Section 24 gives Sections 15 to 23 overriding effect over anything inconsistent in any other law in force. The Supreme Court has read that as meaning the statutory reference to the Facilitation Council prevails over an independent arbitration clause in the same contract. A buyer cannot insist on its own named arbitrator or its own seat to keep the dispute away from the council.

That said, a buyer is not defenceless. Counterclaims and set off can be raised in the reference, and a genuine dispute about quality, short supply or a service failure has to be dealt with by the council like any other arbitration. The scheme accelerates the forum; it does not decide the merits in advance.

Limitation applies too. Because the second stage is an arbitration, the three year period under the Limitation Act 1963 governs, running from when the payment fell due. A supplier sitting on invoices from 2021 in the hope of preserving the relationship may find the relationship gone and the claim gone with it. A signed balance confirmation, or a part payment, taken before the three years expire, resets the clock under Sections 18 and 19 of the Limitation Act, and it is the cheapest protection available.

When Samadhaan is not the right door

• The buyer has given a cheque that bounced. A complaint under Section 138 of the Negotiable Instruments Act 1881 runs on much shorter deadlines and can proceed in parallel. The 30 day notice window there is unforgiving.
• The buyer is insolvent and the claim is Rs 1 crore or more. An operational creditor’s application may be the stronger pressure point, and the sequence matters. Our guide to IBC Sections 7, 9 and 10 sets out the demand notice and the pre-existing dispute defence that decides most of those petitions.
• You are a medium enterprise, a trader, or you registered late. Then it is an ordinary recovery matter: a summary suit under Order XXXVII of the Civil Procedure Code where the claim is on a written contract or an acknowledged account, or arbitration if the contract provides for it.

We act in delayed payment references and in the challenges that follow them as part of our corporate and commercial practice. The pattern we see most often is a supplier who kept delivering through the arrears because the buyer was 60 percent of his order book, and who is then negotiating from a position no legal remedy can fully repair.

Before you file, put four things in one folder: the Udyam certificate with its date, the purchase orders or written contract, the delivery proof and invoices with dates of acceptance, and every reminder you sent. That folder is the case.

This note is general information on the MSMED Act 2006 and is not legal advice on any specific claim. Classification criteria, the bank rate and portal procedure change from time to time, and whether a particular supply is covered depends on dates that have to be checked one by one. To discuss unpaid invoices or a reference already filed against you, please reach us through the contact page.