Executive Summary

Delayed payments can severely affect micro and small enterprises. The Micro, Small and Medium Enterprises Development Act, 2006 provides a statutory remedy for recovery of delayed payments through the MSME Facilitation Council.

The remedy is significant because it provides for conciliation, arbitration and statutory interest.

Legal Framework

Sections 15 to 18 of the MSMED Act are central to delayed payment claims.

A buyer is required to make payment within the agreed period or within the statutory period where no period is agreed. On default, the supplier may invoke the jurisdiction of the Facilitation Council.

MSME Recovery Flow

Supply of Goods / Services
        ↓
Invoice Raised
        ↓
Payment Delayed
        ↓
MSME Council Reference
        ↓
Conciliation
        ↓
Arbitration / Award
        ↓
Execution / Challenge

Arbitration Clause and MSME Proceedings

A common buyer defence is that the contract contains an arbitration clause and therefore the MSME Council should not proceed.

The Supreme Court in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd., (2023) 6 SCC 401, held that the statutory remedy under Section 18 of the MSMED Act cannot be defeated merely because the contract contains an arbitration clause. The MSMED Act, being a special legislation, has overriding effect in this context.

This judgment strengthens the position of eligible MSME suppliers.

Registration Timing Issue

The date of MSME registration may become critical. In Silpi Industries v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC 439, and M/s Vaishno Enterprises v. Hamilton Medical AG, 2022 SCC OnLine SC 355, the Supreme Court considered the relevance of MSME registration and whether benefits under the MSMED Act can be invoked where registration was obtained after entering into the contract.

Therefore, before filing an MSME claim, the supplier must review:

  1. date of contract;
  2. date of supply;
  3. date of invoice;
  4. date of Udyam/MSME registration;
  5. nature of goods/services;
  6. buyer’s place of business;
  7. jurisdiction of Council.

Statutory Interest

In Principal Chief Engineer v. Manibhai and Brothers, (2017) 14 SCC 685, the Supreme Court recognised the statutory nature of interest under the MSMED Act. This makes delayed payments financially serious for buyers.

Conclusion

MSME recovery is a powerful statutory remedy, but it must be filed with proper documentation and jurisdictional assessment. Registration timing, arbitration clause, limitation and genuine disputes must be evaluated before initiating proceedings.