What is MSME dispute?

MSME Dispute arises when there is a delay or default in the payment for goods or services supplied by a micro or small enterprises to buyer.

In accordance with section 15 of the MSMED Act 2006, if a buyer fails to make payment for goods or services supplied by the MSME supplier within the mutually agreed time frame, or if no period stipulated, within Forty Five days from the date of supply, such default entitles the supplier to initiate legal proceedings. The supplier is empowered to file a claim for recovery against the defaulting buyer before the Micro and Small Enterprises Facilitation Council (MSEFC).

Supplier means and includes MSMEs U/S 8 or Manufacturer of goods or Service provider.

What is MSMED Act 2006?

The MSMED Act refers to the Micro, Small and Medium Enterprises Development Act 2006, is a key legislation in India to provide for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto.

Key provisions of the MSMED Act 2006:

Classification and Establishment

• Establishes a legal framework for the recognition and classification of MSMEs based on the investment in plant and machinery or equipment, encompassing both manufacturing and service enterprises.

CLASSIFICATION	MICRO	SMALL	MEDIUM
Manufacturing Enterprises and Enterprises rendering Services	Investment in Plant and Machinery or Equipment: Not more than Rs. 2.5 crore and Annual Turnover not more than Rs. 10 crore	Investment in Plant and Machinery or Equipment: Not more than Rs. 25 crore and Annual Turnover not more than Rs. 100 crore	Investment in Plant and Machinery or Equipment: Not more than Rs. 125 crore and Annual Turnover not more than Rs. 500 crore

National Board Formation

• Constitutes a National Board for MSMEs to promote, develop and enhance competitiveness, headed by the Minister for MSME, to examine policies, review government programs and recommend measures. 

Facilitating MSME Registration

• Simplifies registration for MSMEs through Udyam registration and mandates registration for enterprises engaged in manufacturing.

Payment Provisions

• Mandates time-bound payments from buyers to MSME suppliers, with a maximum period of 45 days from acceptance or the agreed date, as per Section 15.
• Imposes liability on buyers to pay compound interest (at three times the bank rate notified by RBI) for delayed payments beyond the stipulated period.

Dispute Resolution

• Provides for the establishment of Micro and Small Enterprises Facilitation Councils (MSEFC) by State Governments to resolve disputes related to delayed payments.
• Empowers the Council to undertake conciliation and, if necessary, arbitration, applying the Arbitration and Conciliation Act, 1996, for dispute settlement within 90 days.

Government Support and Development

• Authorizes the Central Government to introduce schemes, policies, and institutional support to encourage MSME growth, grants, and market facilitation.
• Promotes MSME interests by ensuring access to funds and facilitating market linkages.

Overriding Effect

• The Act overrides other laws regarding MSME matters if provisions conflict, ensuring MSME protection has precedence.

How MSMED Act benefits the supplier

The MSMED Act, 2006 provides significant benefits to suppliers who are micro or small enterprises by granting strong legal protection and support for timely payment.

Statutory obligation for timely Payment

• Under Section 15, the act mandates the buyer to pay supplier on or before the agreed date, or if there is no agreement, before the appointed day (Section 2 (b)). In no case shall the period exceed 45 days from the date of acceptance or deem acceptance.
  • The day of acceptance means,— the day of the actual delivery of goods or the rendering of services; or
  • If there is any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier consider as the day of acceptance.
• The day of deemed acceptance means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services consider deemed acceptance.

Note: “Appointment day” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier

• Interest on delayed payments: if a buyer fails to pay within the stipulated time, the supplier is entitled to receive compound interest at three times the Reserve Bank of India’s notified bank rates under section 16 of the act. 

What is MSME Samadhaan portal for delayed payment

The MSME Samadhaan Portal is a specialized government initiative designed to enable micro and small enterprises to efficiently seek redressal for delayed payments under the MSMED Act, 2006.

Purpose:

The portal allows MSME suppliers to digitally file applications for recovery of dues from buyers who have failed to make timely payments for goods or services supplied. It makes the dispute process more accessible, transparent, and speedy.

Functionality:

Upon submission, applications are sent to the respective State’s Micro and Small Enterprises Facilitation Council (MSEFC) for resolution. The Council can initiate conciliation or arbitration proceedings, and the status of the case can be tracked online.

Who can apply:

Any micro or small enterprise that holds a valid Udyam Registration is eligible to apply for delayed payment recovery through the portal.

Note: The Medium enterprises are excluded from filing through Samadhaan portal.

 Features:

• Buyers are liable to pay compound interest to MSME suppliers at three times the Reserve Bank of India’s notified bank rate if payment for goods or services is not made within forty-five days of acceptance or service rendered (Section 16)
• Any micro or small enterprise with a valid Udyam Registration can file complaints for delayed payments on the portal, making the system inclusive and accessible.
• Every reference made to the Micro and Small Enterprises Facilitation Council (MSEFC) through the portal must be decided within a period of ninety days, ensuring timely justice and resolution for MSMEs.
• If a buyer wishes to appeal against a decision or award issued by the MSEFC, they must first deposit 75% of the awarded amount in advance to the court (Section 19), ensuring security for the supplier.

What process a supplier can adopt for recovery of delayed payment under MSMED Act 2006. 

The supplier under the MSMED Act, 2006 can adopt a structured legal process for the recovery of delayed payment to ensure efficient and enforceable resolution.

Process for Recovery of Delayed Payment.

• Approach the Micro and Small Enterprises Facilitation Council (MSEFC)

If the buyer fails to pay within the stipulated period, the supplier can file a complaint before the state’s Micro and Small Enterprises Facilitation Council under Section 18 of the MSMED Act, 2006.

The application can be made online via the MSME Samadhaan Portal.

• Conciliation Proceedings

The Council will first attempt to resolve the dispute through conciliation (amicable settlement) between the supplier and the buyer.

If conciliation succeeds, a settlement agreement is drawn, which is enforceable by law.

• Arbitration Proceedings

If conciliation fails or is not accepted, the Council proceeds to arbitration under the Arbitration and Conciliation Act, 1996.

The Council’s award (decision) has the same force as a decree of a civil court, making it legally binding and executable.

• Enforcement of Award

The supplier can enforce the award through the civil court process if the buyer does not comply voluntarily, including through attachment of property or execution proceedings.

• Appeal

The Buyer can file an appeal against an award by the MSEFC under Section 19 of the MSMED Act, which is a mandatory requirement to deposit 75% of the award amount in court before the appeal can be heard.

The appeal is made to the District Court or Session Court as the case maybe under Section 34 of the Arbitration and Conciliation Act, 1996, and is generally filed within three months of the award. This pre-deposit requirement is crucial for the appeal to be maintainable and is intended to protect the financial interests of the MSME.

What does legalFund do?

The LegalFund provide complete assistance to the MSMEs to recover the delayed amount arise from the MSME dispute.

Financial assistance: LegalFund supports MSMEs by covering cost associated with filing complaints, Attorney or Advocate’s fee and Administrative expenses as per needed.

Case Management: LegalFund also support MSMEs by helping them to gather documentation and preparation, Compliance with legal procedures required for timely and successfully recovery.

Execution for arbitral awards: Legalfund also provide funds for the execution of the arbitral awards under MSME dispute.