The Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”) was introduced with the aim of developing and promoting micro, small and medium enterprises (“MSME”). MSMEs play a pivotal role in driving employment generation and making substantial contributions to the gross domestic product of the Indian economy. However, their growth is frequently hindered by a recurring issue with respect to the recovery of dues from its clients. In order to resolve this concern, the Government of India introduced the MSME arbitration process as set out under Chapter V of the MSME Act. In accordance with the said provisions, a micro or small enterprise has the authority to commence arbitration proceedings against a buyer who has failed to make timely payment for the goods or services provided within the stipulated period.


As per Section 15 of the MSME Act, a supplier is entitled to receive payments within 45 (Forty-Five) days from the day of acceptance or the day of deemed acceptance of goods or services by the buyer. In the event the buyer fails to make the payment to the supplier, the buyer shall be liable to pay three times the compound interest of the bank rate as notified by the Reserve Bank of India (“RBI”). Upon failure of such payments by the buyer, the supplier can make a reference to the Micro and Small Enterprises Facilitation Council (“Council”) for the process of conciliation[1].


Upon reference of a dispute by a supplier pertaining to any delayed payment, Section 18 of the MSME Act inter alia mandates that: (i) the Council will either conduct conciliation proceedings independently or seek the assistance of any institution or centre providing alternate dispute resolution services as if the conciliation was initiated under Part III of the Arbitration and Conciliation Act, 1996[2] (“Arbitration Act”); and (ii) where the conciliation has failed, the Council shall either by itself or by any institution or centre providing the services for dispute resolution attempt to settle the dispute by arbitration as per the Arbitration Act. Sub-section (4) of Section 18 of the MSME Act is a non-obstante clause and confers jurisdiction upon the Council to act as an arbitrator or a conciliator in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.


ACCEPTANCE AND DEEMED ACCEPTANCE UNDER THE MSME ACT

Under the MSME Act, when a supplier provides goods or services to a buyer, the buyer must make payment by the agreed-upon date as specified in their written agreement or, if no agreement exists, by the Appointed Date[3]. However, it's important to note that the period mentioned in the written agreement between the supplier and buyer cannot exceed 45 (Forty-Five) days from the day of acceptance or deemed acceptance. This means that under the MSME Act, the maximum permissible period for payment is 45 (Forty-Five) days from the date of goods delivery or service receipt, provided no objections are raised within 15 (Fifteen) days from such date. If any objections are raised, the payment period is extended by the number of days it takes to resolve those objections by the supplier.


Hence, the buyer of goods or services from the supplier is required to notify the supplier in writing within 15 (Fifteen) days from the date of receiving the goods or services regarding any complaints or issues. The “Day of Acceptance” refers to the date when the supplier successfully resolves any objection in relation to the goods or services. If the buyer does not raise any written objections to the supplier, the “Day of Deemed Acceptance” is considered to be the date of actual delivery of the goods or services. The “Appointed Date” is the date immediately following either the “Date of Acceptance” or the “Date of Deemed Acceptance”, as defined above.


In the case of M/s Raka Cycle vs M/s Atlas Cycles[4] before the District Level Micro and Small Enterprises Facilitation Council, Ludhiana, the primary contention of the respondent was that the goods supplied were defective as the quality was poor and substandard material was supplied by the claimant. Furthermore, the respondent contended that the respondent had on various occasions communicated to the claimant regarding the issues pertaining to the quality of the products. The Council relied on the judgment of the Allahabad High Court of M/s Hameed Leather Finishers vs M/s Associated Chemicals Industries Kanpur Pvt Ltd.[5] wherein the Court had concluded that “Petitioner at no point of time ever disputed this fact that chemicals have not been supplied rather an issue was sought to be created that it was of sub-standard quality. Facilitation Council considered the matter, and has found that supplies of chemicals have been made which is duly supported by documentary evidences showing supplies and receipts in lieu of the same, and the theory of inferior and sub-standard quality has also not been accepted by Facilitation Council. The theory of sub-standard supply has also been considered and not accepted keeping in view the provisions of Section 2(b) of the MSME Act, 2006.” In view of the above, the issue was resolved in favour of the claimant and the contentions of the respondent were rejected by Council.


OVERRIDING EFFECT OF SETTLEMENT PROCEEDINGS UNDER THE MSME ACT

The MSME Act, being a special Statute, will have an overriding effect vis-à-vis the Arbitration Act, which is a general act[6]. Even if there is an agreement between the parties for the resolution of disputes by arbitration, if a supplier is covered by the MSME Act, the supplier has a statutory right to approach the Council and such right cannot be set aside on account of an arbitration agreement entered into between the parties. Thus, the Arbitration Act in general governs the law of arbitration and conciliation, whereas the MSME Act regulates disputes of a particular nature that arise among specific categories of individuals, and such disputes are to be resolved by adhering to a specified process within a specified forum. However, it is pertinent to take into consideration that once an arbitration agreement has been invoked prior to the reference to the Council, the arbitration mechanism as set out under the arbitration agreement shall proceed[7].


COMPLAINT MECHANISM UNDER THE MSME ACT

The Ministry of MSME has launched a MSME Samadhaan portal to allow suppliers or micro and small enterprises to file their applications online regarding delayed payments. The establishment of the portal aimed to enable efficient monitoring of delayed payments and to address the significant concerns of sellers in various sectors. By making the information on this portal publicly accessible, it serves to exert moral pressure on the defaulting parties. Additionally, MSMEs can utilize the portal to track and monitor their own cases. While the MSME Samadhaan Portal has been created only to facilitate online applications regarding delayed payments, physical applications can also be filed with the concerned Council.


Prerequisites for making a complaint before the Council:

a.   The concerned enterprise must have a Udyog Aadhar Memorandum (UAM) or Udyam Registration.

b.   The MSME should have a written purchase agreement, a work order, an affidavit of the oral purchase order, etc., to substantiate the claim.

c.    The statutory period of 45 (Forty-Five) days from the “day of acceptance” or the “day of deemed acceptance” of goods or services should have expired.


PRE-DEPOSIT OF AWARD AMOUNT

The provisions of Section 19 of the MSME Act provide that for any application for setting aside a decree, award or order, made by the Council or any institution to which the disputes have been referred, to be maintainable, a pre-deposit of 75% (Seventy Five) of such decretal sum or award amount has to be made by the challenging party. Hence, in case the buyer wishes to appeal against the award/decree, it is a mandatory requirement for them to deposit 75% (Seventy Five) of the award amount.


In the case of Gujarat State Disaster Management Authority Vs. Aska Equipment Limited[8], the Supreme Court observed that the requirement of a deposit of 75% (Seventy Five) of the amount in terms of the award as a pre-deposit as per Section 19 of the MSME Act is mandatory. It was also observed that if the appellate court is satisfied that there shall be undue hardship caused to the appellant to deposit 75% (Seventy Five) of the awarded amount, the court may allow the pre-deposit to be made in instalments.


However, in the case of AVR Enterprises vs Union of India[9], the Delhi High Court held that Section 19 of the MSME Act would apply only to proceedings initiated under Section 18 of the MSME Act and would not apply to an award published by an arbitrator appointed by the parties otherwise than in accordance with Section 18 of the MSME Act. Hence, it can be inferred that even if any of the parties are covered under the MSME Act and the provision of Section 18 of the MSME Act is not invoked, the benefit of pre-deposit under Section 19 of the MSME Act will not be applicable.


OTHER INITIATIVES


A.   Disclosure of debts owed to MSME.

A significant change brought by the MSME Act was mandatory disclosures by buyers of amounts due to suppliers in their audited financial statements. In January 2019 the “Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019” (Order) was notified by the Ministry of Corporate Affairs under the Companies Act, 2013.

 

Section 22 of the MSME Act and Rule 3 of the Order provide for disclosures on unpaid amounts to suppliers in the financial statements of the buyer. The Order states that all companies who get supplies of goods/services from MSMEs and whose respective payments to such MSMEs exceed 45 (Forty-Five) days from the date of acceptance or the date of deemed acceptance of such goods/ services, are required to submit a half yearly return to the Ministry of Corporate Affairs stating the amount of payment due and the reasons for the delay. The Order required all such companies to furnish details of all such outstanding dues by filing Form MSME 1.

 

The Order ensured that any incorrect or incomplete disclosures made by a company would attract a penalty of INR 20,000 (Indian Rupees Twenty Thousand) subject to a maximum of three lakh rupees under the Companies Act, 2013.

 

B.   Income Tax Deduction allowed only On “Actual Payment” of the sum payable by Assessee to MSMEs

With the objective of promoting timely payments to MSME, the Finance Ministry had proposed in the Budget of Financial Year 2023-24 to insert a new clause (h) in Section 43B of the Income Tax Act, 1961 to provide that any sum payable by the assessee to a micro or small enterprise beyond the time limit specified in Section 15 of the MSME Act shall be allowed as deduction only on actual payment. Section 43B of the Income Tax Act, 1961 provides for certain deductions to be allowed only on actual payment.

 

Hence, if any amount is outstanding at the year-end to a micro or small enterprise, the same should be paid by the assessee before the time limit as specified in Section 15 of the MSME Act. In case of failure to make the payment, such an amount shall not be allowed as a deduction in that financial year but in the year in which such an amount is actually paid.

 

The amendment has taken effect from April 01, 2024, and will accordingly apply to the assessment year 2024-25 and subsequent assessment years.

 

C.   New Portal Launch by MSME Body - Chamber of Indian Micro Small & Medium Enterprises (“CIMSME”)

CIMSME, a non-profit organization, representing the interest of the MSME sector, recently launched its online portal – nodefaulters.com (“NoDefaulters”). This portal enables the suppliers to report payment defaults after 45 (Forty-Five) days of default and allows suppliers to check defaulters.


The NoDefaulters portal will also assist and reach out to the buyers based on the supporting documents related to the defaults committed by them in order to settle payments within a mutually agreed period before listing them as defaulters on the portal, which will be visible to all registered users.


The buyers can also submit their response on the default reported against them. The NoDefaulters offers conciliation or arbitration services if required by both parties. It also assists the suppliers in conducting the due diligence of their proposed buyers.


Unlike the MSME Samadhaan portal, the NoDefaulters portal will publicise the default amount details, private or public defaulters' entity names, and the complaint filed against them.


D.   Emergence of Online Platforms for invoice discounting

The RBI in its joint venture with Small Industries Development Bank of India and National Stock Exchange launched the Trade Receivables Discounting System (“TReDs”) which is an electronic platform for facilitating the financing and discounting of trade receivables through multiple financiers. The platform also provides for due reporting and recourse measures against defaulting buyers.

 

For retail investors, FinTech companies have introduced unregulated platforms such as Jiraaf, KredX, Tyke, TradeCred, and Leaf Round, offering similar services. However, these platforms come with significant risks, primarily due to potential payment defaults by the original buyer purchasing from MSMEs and the absence of regulatory frameworks for effective redressal. Offering MSMEs digital lending and alternative financing options, such as supply chain financing, invoice discounting, securitization of MSME credit, and cash flow-based lending, are essential methods to enhance their access to working capital.

 

The RBI vide its press release dated July 26, 2024, permitted Indian Banks' Digital Infrastructure Company (“IBDIC”) and Finagg Technologies Private Limited (“Finagg”), to test products under the regulatory sandbox scheme which will enhance MSME lending and provide affordable credit accessible to lower-tier and small MSMEs.


[1] Section 18(1) of the Act

[2] Section 18(2) of the Act

[3] Section 2(b) of Act.

[4] District Level Micro and Small Enterprises Facilitation Council, Ludhiana, Reference No. MSEFC/DIC/03/21/1223, dated June 29, 2022.

[5] Allahabad High Court, Writ No. 52747 of 2013 dated October 11, 2013.

[6] Principal Chief Engineer vs M/S Manibhai and Bros (Sleeper), Supreme Court, Diary 16845/2017, decided on July 05, 2017.

[7] Gujarat State Civil Supplies Corporation Limited vs. Mahakali Foods Private Limited, Supreme Court, Diary No.- 21518/2020, decided October 31, 2022.

[8] Civil Appeal No. 6252 of 2021, decided on March 15, 2012.

[9] CM APPL. 27219/2018, decided on May 08, 2020.