MSME stands for Micro, Small and Medium Enterprises. These enterprises have emerged as important players in the Indian economy, by lending heavily to the GDP growth rate, improvising the manufacturing industry and creating job employment in the country. Enterprises are classified into these 3 groups, based on the investments made in setting up the plant and machinery, and the annual turnover accrued by the enterprise:[i]
a. Micro enterprises are those where investment is not more than Rs. 1 crore and Annual Turnover is within Rs. 5 crores.
b. Small enterprises are those where investment is limited to Rs. 10 crores and Annual Turnover does not exceed beyond Rs. 50 crores.
c. Medium Enterprises are those where investment is not more than Rs. 50 crores & Annual Turnover is within Rs. 250 crores.
Most businesses suffered from the problem of delayed payments despite delivery of goods and services. These defaults tightened the purse strings of companies, prevented them from investing in business growth, or worse, made it onerous for them to remain afloat in this competitive world. Approaching courts for repayment of dues too was not much viable, given the long pendency of cases and time taken by courts to arrive at a decision.[ii] To remedy these problems, the government enacted a legislation.
The promulgation of the Micro, Small and Medium Enterprises Development Act 2006[iii], to strengthen the competitiveness of these enterprises, came as a major boon for industry players. Chapter V of the MSMED Act 2006 deals with the issue of debt recovery. This chapter elaborates the legal rules and procedures for recovering outstanding debt in commercial transactions between a buyer and a seller for sale of goods or supply of services.
Definitions under the Act
Section 2(d) of the Act defines a buyer to mean someone who buys goods from a supplier for a consideration. Section 2(m) defines a supplier to be either a micro or small enterprise which has registered itself in the Entrepreneurs Memorandum/Udyog Aadhar with the concerned authority. The definition clause leaves out medium enterprises, making them ineligible to claim relief under Chapter V of the Act. While registration of MSMEs is not mandatory, it is highly advisable as only registered MSMEs can avail the benefits of government schemes like credit at low interest rate, incentives on products for exports, excise exemption and statutory aid such as reservations. However, even unregistered MSMEs can claim relief under Chapter V of the Act, as the Delhi High Court held in Ramky Infrastructure Private Limited Vs Micro and Small Enterprises Facilitation Council that unregistered MSME would be regarded as “supplier” under the definition clause of Section 2(m).[iv]
Time limit for payment of dues
Section 15 of the Act provides that where the seller has supplied good or rendered a service, the buyer has to pay the consideration within a fixed time limit.
– If the date of payment had not been pre-decided by the parties, then the buyer is obligated to make the payment within 15 days from the date of delivery of goods or services. In case, the buyer raises some objection, he has to make the payment within 15 days from the date when the supplier removes the objection.
– If the date of payment had been pre-mediated by the parties, then the dues have to be paid by the buyer within 45 days of the delivery of the goods or supply of service. Where a buyer raises some objection, he has to make the payment within 45 days from the date when the supplier removes the objection.
Interest rates applicable
Section 16 of the Act provides that where the buyer fails to make the payment within the time limit stipulated under Section 15, he would be liable to compensate the supplier with a compound interest, calculated monthly, on the dues. The rate of interest would be thrice the lending rate of banks as notified by the RBI. The interest is charged from the date of default till the date of complete payment.
Additionally, Section 23 provides that the interest payable under Section 16 would not be allowed as a deduction while computing income under the provisions of the Income Tax Act, 1961.
Dispute resolution mechanism
Section 18 of the Act establishes a Micro and Small Enterprises Facilitation Council (‘MSEFC’) to aid the parties in deciding a dispute. If the buyer defaults on the payment or the interest, then the supplier can register a complaint with the MSEFC. Every state government has to establish a council in their own jurisdiction. The council consists of 3 to 5 members, including a director, one or more office bearers of State MSMEs, one or more representatives from banks, and one or more persons having expert knowledge in industry, finance, law, trade or commerce.[v]
To simplify the process, the government also launched the MSME Samadhan portal on October 30, 2017.
Services provided by the MSME Samadhan Portal are:[vi]
a. MSMEs can file online applications to report defaults in payments by the buyer. In order to do so, they require an Udyog Aadhaar Number that is validated with Aadhaar.
b. MSMEs are notified of case status and relevant updates on the portal.
c. The portal also provides the status of delayed payment of MSMEs with public sector enterprises, central and state governments. The heads of these PSE and government ministries can then monitor the cases and issue directions to resolve it.
Procedure post filing of complaint[vii]
Once a complaint is filed by the complainant, MSEFC sends an online intimation to both the parties. The council may by itself, or with the help of a third party, initiate conciliation between both the parties to amicably resolve their disputes. If the conciliation process collapses with no results, the council checks the matter itself and either accepts the matter to be continued as a case, or rejects it.
If the matter is accepted, the case is referred to arbitration under the provisions of Arbitration and Conciliation Act 1996. The jurisdiction of MSEFC or arbitration centre depends upon the location of the seller. The proceedings have to be completed within 90 days of reference and the award so pronounced is final and binding in nature. The award is communicated to the Interim Resolution Professional as well as the National Company Law Tribunal (NCLT) during the insolvency procedure. The award cannot be appealed.
Section 19 of the Act provides that a court could entertain an application to set aside an arbitral award only if the buyer deposits 75% of the amount prescribed in the award. The money from this deposit is used to pay the supplier within 6 months of filling of the application. The objective of setting this 75% threshold is to ensure availability of finance to the enterprise and keep the business viable.
Section 22 of the MSME Act provides that if the buyer is required to get his annual income audited under any law, he would have to provide the details of the principal amount and the interest due to any MSME in his account statement at the end of every financial year.[viii] With an aim to further the interest of MSMEs, the government issued a notification dated January 22, 2019, making ROC compliance for companies mandatory.[ix] This notification provides that all the specified companies, having any outstanding dues to Micro or small enterprises, have to file the MSME FORM 1 with the Registrar of Companies, citing the details of the default within 30 days from the publication of the notification. Additionally, the companies have to file both a half-yearly and a one-time report, highlighting the amount due and the reasons for default. Non-compliance of this notification or filing of false information attracts penal punishment. The defaulting company may be fined up to Rs 25,000/-, while the directors of the company may be punished with imprisonment for a term of 6 months or a fine ranging from Rs 25,000 to Rs. 3 lakhs.
The law of limitation provides that a complaint has to be filed within three years of the impugned event. However, as the law of limitation is not applicable to statutory law, the supplier or complainant may file a case. Moreover, the ROC compliance automatically acknowledges debt owed which renews the period of limitation.[x]
Thus, the recovery mechanism under the MSME Act helps to protect the interest of MSMEs by imposing statutory obligations on the buyers to pay the consideration, establishing efficient dispute resolution mechanism. Mandatory ROC compliance along with penal punishments would effectively reduce defaults.
[i]Ministry of Micro, Small and Medium Enterprises; Notification dated June 1, 2020; https://msme.gov.in/sites/default/files/MSME_gazette_of_india.pdf.
[ii] Mirza Aslam Beg, Avani Sinha, MSMED Act- An Alternative For Debt Recovery Over IBC, Mondaq; May 23 2020; https://www.mondaq.com/india/insolvencybankruptcy/939488/msmed-act-an-alternative-for-debt-recovery-over-ibc.
[iii] Micro, Small and Medium Enterprises Development Act, 2006.
[iv] Rohit Lalwani, Supplier in MSMED Act; Mondaq; August 31 2018; https://www.mondaq.com/india/arbitration-dispute-resolution/732198/supplier-in-msmed-act. M/S Ramky Infrastructure Private Limited v. Micro and Small Enterprises Facilitation Council & Anr, W.P.(C) 5004/2017 & CM No. 21615/2017
[v] Section 21 of the Micro, Small and Medium Enterprises Development Act, 2006.
[vi] Lalit Jain, Recovery of Debt under MSME; May 12, 2020; https://taxguru.in/corporate-law/recovery-debt-msme.html.
[vii] Section 18 and 19 of the Micro, Small and Medium Enterprises Development Act, 2006. Anant Merathia, Dhanisha Giri, Poornima Devi, Debt Recovery under MSMED Act – An alternative to IBC?;IBC Laws; May 8 2020; https://ibclaw.in/debt-recovery-under-msmed-act-an-alternative-to-ibc/.
[viii] Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006. Kunal Gokhale, Recovery of outstanding dues under the MSME Act by Micro and Small scale Enterprises; Vaishali Bhagwat Advocate; https://vaishalibhagwat.com/publications/recovery-under-msme-act/#.
[ix] Ministry of Corporate Affairs; Notification dated January 22, 2019; https://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf.
[x] Lalit Jain, Recovery of Debt under MSME; May 12, 2020; https://taxguru.in/corporate-law/recovery-debt-msme.html.
Authored by: Meenal Maheshwari
Meenal Maheshwari is a 2nd year law student, pursuing BA.LLB from Maharashtra National Law University, Nagpur.