Delayed payment is the most common commercial grievance of small businesses in India. The Micro, Small and Medium Enterprises Development Act, 2006 answers it with a self-contained machinery: a statutory outer limit on credit periods, compound interest at a penal rate on default, and a reference to the Micro and Small Enterprises Facilitation Council that can be filed online through the MSME Samadhaan portal. This note explains who is protected, what the buyer owes, and how the reference proceeds from filing to award.
Who the Act protects
Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 protects the "supplier" — in substance, a micro or small enterprise that has supplied goods or rendered services to a buyer. Registration matters: an enterprise should hold Udyam registration (the current form of registration under Section 8) evidencing its micro or small status. Medium enterprises, though registrable under the Act for other purposes, fall outside the delayed-payment chapter. The buyer, by contrast, may be any person — a company, a firm, a government department or an individual — who purchases goods or services from such a supplier.
The buyer’s statutory obligation: Sections 15 to 17
Section 15 fixes the payment discipline. Where the supplier and the buyer have agreed on a date of payment, the buyer must pay on or before that date, and the agreed credit period cannot in any event exceed forty-five days from the day of acceptance or the day of deemed acceptance of the goods or services. Where there is no agreement, payment must be made before the "appointed day" — fifteen days from acceptance or deemed acceptance. The forty-five day ceiling is statutory; a contract stipulating sixty or ninety days of credit cannot enlarge it.
Section 16 supplies the sanction. On default, the buyer is liable to pay compound interest with monthly rests, at three times the bank rate notified by the Reserve Bank of India, and this liability arises notwithstanding anything contained in the agreement between the parties or in any other law. Section 17 then completes the scheme: the buyer must pay the amount due together with the interest so computed. Because the rate is penal and compounds monthly, the interest component in a stale claim often approaches or exceeds the principal.
Two further pressure points: Sections 23 and 24
Two ancillary provisions give the scheme commercial teeth. Under Section 23, interest paid or payable by a buyer under the Act is not allowed as a deduction in computing the buyer’s income for income-tax purposes — the delayed-payment interest is therefore an after-tax cost, which materially sharpens the incentive to settle. Under Section 24, Sections 15 to 23 have effect notwithstanding anything inconsistent contained in any other law for the time being in force, giving the chapter overriding force.
Section 18: the reference to the Facilitation Council
Any party to a dispute over an amount due under Section 17 may refer it to the Micro and Small Enterprises Facilitation Council. Section 18 opens with a non-obstante clause, so the reference lies notwithstanding anything in any other law. The process is two-staged. The Council first conducts conciliation itself or refers the matter to an institution for conciliation, and Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 apply to that exercise as if the conciliation were under Part III of that Act. If conciliation fails and stands terminated without settlement, the Council takes up the dispute for arbitration — itself or through an institution — and the provisions of the Arbitration and Conciliation Act, 1996 then apply as if the arbitration were in pursuance of an arbitration agreement under Section 7(1) of that Act.
Two features of Section 18 deserve emphasis. First, under Section 18(4) the Council of the place where the supplier is located has jurisdiction to act, even where the buyer is located elsewhere in India — the small supplier is not dragged to the buyer’s home forum. Second, Section 18(5) requires every reference to be decided within ninety days from the date of the reference. That is the statutory aim; in practice, given conciliation, pleadings and the volume of references before Councils, proceedings commonly run well beyond ninety days, and a supplier should plan accordingly.
Filing through MSME Samadhaan
The MSME Samadhaan portal, maintained by the Ministry of Micro, Small and Medium Enterprises, allows the supplier to file the reference online. The application is made against the Udyam registration, sets out the buyer’s details and the amount claimed, and is supported by uploaded documents — invoices, purchase orders or work orders, proof of delivery or acceptance, and the ledger of account. Once filed, the application lands before the Facilitation Council having jurisdiction over the supplier’s location; States constitute their own Councils, and Delhi-based suppliers appear before the Council constituted for Delhi. The portal also tracks the status of the reference thereafter.
Before filing, the supplier should assemble the record on which the claim will stand or fall.
Udyam registration certificate showing micro or small status
The contract, purchase order or work order under which supplies were made
Invoices, with the dates of acceptance or deemed acceptance of the goods or services
Delivery challans, installation reports or completion certificates
The ledger of account showing the outstanding balance and part-payments received
Correspondence with the buyer and any demand notice issued before the reference
The supplier’s status on the date of supply is significant. Claims relating to supplies made before the enterprise obtained registration are contested territory before Councils, and outcomes vary. An enterprise should therefore preserve clear records of when registration was obtained and correlate its invoices to that date before framing the claim.
The route at a glance
1. Supply
Goods delivered or services rendered; acceptance or deemed acceptance fixes the clock under Section 15.
2. Demand
The supplier raises the outstanding amount with the buyer, ordinarily through a written demand computing interest under Section 16.
3. Reference
A reference under Section 18 is filed, typically online through MSME Samadhaan, before the Council of the supplier’s location.
4. Conciliation
The Council conducts or refers conciliation; Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 apply.
5. Arbitration
If conciliation fails, the dispute proceeds to arbitration as if under an arbitration agreement, governed by the 1996 Act.
6. Award and execution
The award for principal and compound interest is enforced like any arbitral award, subject to the challenge regime under the 1996 Act.
A closing word
The MSMED Act converts a small supplier’s payment grievance into a structured statutory claim: a fixed outer credit period, penal compound interest that the buyer cannot contract out of or deduct for tax, and a forum located at the supplier’s own doorstep. The strength of any reference, however, lies in the paperwork — registration, invoices, proof of acceptance and a clean ledger. An enterprise that keeps these in order is well placed to use the machinery the statute provides.
Frequently Asked Questions
Can a medium enterprise invoke the delayed-payment chapter?
No. The delayed-payment provisions in Chapter V of the MSMED Act protect a "supplier", which the Act ties to micro and small enterprises. A medium enterprise may hold Udyam registration for other benefits, but it cannot maintain a reference under Section 18 for recovery of its dues; it must pursue ordinary contractual remedies.
Does an arbitration clause in the contract exclude the Facilitation Council?
Section 18 opens with a non-obstante clause — it applies notwithstanding anything contained in any other law for the time being in force — and Section 24 gives Sections 15 to 23 overriding effect over inconsistent laws. Statutorily, therefore, the reference to the Council under Section 18 operates on its own terms, independent of the dispute-resolution clause the parties may have agreed.
What rate of interest applies to a delayed payment?
Under Section 16, the buyer pays compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, computed from the appointed day or the agreed date of payment. The liability arises irrespective of anything to the contrary in the agreement between the parties, and Section 17 obliges the buyer to pay the principal together with this interest.
Can the buyer raise a counterclaim before the Council?
The position is contested in practice. The statutory scheme centres on the supplier's claim for the amount due with interest, and buyers frequently attempt to raise quality disputes or set-offs in defence. How far an independent counterclaim can be entertained varies from Council to Council, and a buyer with substantial cross-claims is generally advised to take separate legal advice.