MSME & Solutions for Delayed Payments

In a country like India with a population size of about 1.3 billion, the Micro, Small and Medium Enterprises (MSME) sector has a vital role in the economy. It fosters entrepreneurship and generates large employment opportunities. As per the National Sample Survey (NSS) 73rd round conducted during the period 2015-16, MSME sector has been creating 11.10 crore jobs. India's MSME Sector comprises of 633.88 lakh units as per National Sample Survey 73rd Round (2015-16).

So which enterprises are considered as MSME?

MSME Act, 2006 is an act for facilitating the promotion and enhancing the competitiveness of Micro, Small & Medium Enterprise

Earlier, as per this act, the micro, small and medium enterprises (MSMEs) were defined on the basis of investments in Plant & Machinery as under.

Investment in Plant & Machinery





Manufacturing Enterprise

Less than Rs. 25 Lac

Less than Rs. 5 Cr.

Less than Rs.10 Cr.

Service Enterprise

Less than Rs. 10 Lac

Less than Rs. 2 Cr.

Less than Rs. 5 Cr.

Revised MSME Definition for Manufacturing & Services (W.E.F. 1/07/2020)

Composite Criteria- Investment and Annual Turnover






Less than Rs.1 Cr.

Less than Rs. 10 Cr.

Less than Rs. 50 Cr.

Annual Turnover

Less than Rs. 5 Cr.

Less than Rs. 50 Cr.

Less than Rs. 250 Cr.

Few Important Provisions under MSME act, 2006-

  1. Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 contained the provisions with regard to the recovery of the outstanding from the buyer in case of any service(s) availed or goods brought by him.
  2. If any micro or small enterprise that has MSME registration, supplies any goods or services, then the buyer is required to make payment on or before the date agreed upon between the buyer and the micro or small enterprise.
  3. In case there is no payment date on the agreement, then the buyer is required to make payment within 15 days of acceptance of goods or services.
  4. Further, in any case, a payment due to a micro or small enterprise cannot exceed 45 days from the day of acceptance or the day of deemed acceptance.
  5. In case of failure by the buyer to make payment on time, the buyer is required to pay compound interest with monthly interest rests to the supplier on that amount from the agreed date of payment or 15 days of acceptance of goods or service.
  6. The penal interest chargeable for delayed payment to a MSME enterprise is 3 times of the bank rate notified by the Reserve Bank of India.
  7. In the case of delay in payment beyond 45 days, MSEs suppliers may approach the Micro and Small Enterprises Facilitation Council (MSEFC) constituted under the Act in all State/UTs.
  8. Every reference made to MSEFC shall be decided within a period of ninety days from the date of making such a reference as per provisions laid in the Act.
  9. If the customer wants to appeal against the case filed, they have to pay 75% of the dues first.

Who can apply?

  • Any Micro or small enterprise having valid Udyog Aadhar (now UDYAM) can apply. Registration for Udyog Aadhaar can be done online on the official website of Ministry of MSME free of cost.
  • Only Micro and Small enterprises are covered under the aforesaid provisions. Medium enterprises have been kept outside the purview of this.

Process to apply?

Both online & Physical applications regarding delayed payments can be filed.


Challenges & Prerequisites for recovery claim under MSME

General Challenges

Being Careful about

Buyer not being aware that you are registered under MSME.

Inform Buyer by providing MSME Certificate or mentioning your Udyog Aadhar No. on Invoice. This intimation can be done at any stage.

Buyer didn't provide proof of delivered goods or services.

Asking for Proof of delivery of goods & services e.g. Invoice acknowledgment, Delivery Challan, Acknowledged LR.

No Documentation trail

Maintain communication trails such as ledger confirmations, reminders & responses through letters, Mails, messages etc.

  • Purchase order is compulsory. In case purchase order is oral an affidavit to that effect is to be submitted.
  • 90 days period for settlement of claim starts only after notice of Arbitration under Section 18(3) of MSMED Act, 2006.
  • Breach of contract (such as rejection of goods/service for quality deficiencies by buyer as a ground for refusal of dues to supplier) is not within scope of MSMED Act, 2006. Rejection of goods /services should be genuine within 15 days of the receipt of goods/ services and its immediate communication to supplier.
  • If amount is claimed in the Civil Court, then it cannot be claimed before MSEFC.
  • The MSMED Act, 2006 is set in motion after supplies of goods and services made by supplier and buyer accepts them but does not pay the bill within 45 days.
  • Claim preparation is the responsibility of the claimant. It is advisable to get certified from Chartered Accountant.

Good Points to Know -

  • An appellate court can now allow an appeal against Award of Council without depositing of 75% of Award amount.
  • There is no any legal disqualification, if a case is decided after 90 days as stipulated in the Act.
  • The silence of the buyer after physical receipt of goods cannot make a claim ineligible for admission by the Council. The silence of buyer is confirmation of liabilities upon him.
  • The responsibilities and powers of Council members are equal to judges.
  • A legal notice by the supplier to buyer is not necessary before filling the case in the Council. But the buyer should be informed about the MSME status of the supplier for better communication.
  • A claim can be filed for interest alone where the claimant has received principal of dues.
  • The petition is to be rejected summarily, If there is a false claim from the applicant without any penalty by Council.
  • An award holder from MSEFC is considered as a secured creditor in Insolvency proceedings.
  • Notices can be served by e-mail/SMS/Whattsapp.
  • If Goods are purchased/taken by foreign buyer and he returns to his country. Payment terms are not honored in these circumstances, matter can be filed before the Council. After following due procedure of law, the Council can issue award and same could be sent to both Consulates i.e Foreign buyers Consulate in that country. It can be enforced.
  • It is not absolutely necessary to have purchase/work order as evidence. Council can allow secondary and corroborated evidence like acknowledgement on invoice, delivery challans or part payment, email etc. all are accepted.

So let us know the statistics of applications as on 29 Sep 2020 from Government Sources

55,680 applications filed by MSEs

Rs. 16,217.47 Cr amount involved in applications

4,890 mutual settlements with buyer

Rs. 740.90 Cr amount involved in mutual settlements

3,969 applications disposed by council

Rs. 719.97 Cr amount involved in disposed cases

13,748 cases currently under consideration

Rs. 5217.52 Cr amount involved in applications converted into cases

9,442 applications rejected by council

Rs. 1991.69 Cr amount involved in rejected applications

23,631 applications yet to be reviewed by council

Rs. 7,239.21 Cr amount involved in applications yet to be reviewed by council


22,883 cases filed

Rs. 8,387.92 Cr amount payable

7,237 cases disposed

Rs. 1,823.02 Cr amount involved in disposed cases


Conclusion -

Apart from other options, Micro & Small Enterprises can surely explore this option for recovery of delayed payments as this is more cost effective & resulted oriented alternative with defined timeframe for resolution. The above statistics supports this fact.

Happy reading!!!

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