Delayed Payments to MSME Suppliers: Interest and the Facilitation Council

A small supplier that is paid late has a statutory remedy that is stronger than its contract. The Micro, Small and Medium Enterprises Development Act, 2006 limits the time in which a buyer must pay, adds compound interest to late payments, and gives the supplier a dedicated forum. This note explains the rules, the forum, and the points on which claims commonly fail. It is general information, not advice on a particular claim.

The payment period

Under Section 15, where a supplier has supplied goods or rendered services, the buyer must make payment on or before the date agreed in writing, and in no case later than forty-five days from the day of acceptance or the day of deemed acceptance. If no date is agreed, payment is due within fifteen days of acceptance. The day of acceptance is the day the supplier delivers the goods or renders the services. Where the buyer objects in writing within fifteen days of delivery, giving reasons, the day of acceptance is the day the supplier removes the objection. The definitions in Section 2(b) should be read against the facts of each supply.

Interest on late payment

Section 16 provides that the buyer must pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India, from the appointed day or the agreed date. This applies despite any agreement between the parties to a lower rate. Because the bank rate is revised from time to time, the interest should be calculated month by month against the rate notified for each period.

Who may use the Act

The Act protects a supplier that is a micro or small enterprise registered under Section 8, through Udyam registration. The supplier should hold the registration on the date it enters into the contract with the buyer. In Silpi Industries v. Kerala State Road Transport Corporation (2021), the Supreme Court held that the Act applies to a supplier registered at the time of the contract, and that a later registration does not apply retrospectively to claims under it. A supplier that is not yet registered should therefore register before taking on new work.

The Facilitation Council

Section 18 allows any party to a dispute concerning an amount due under Section 17 to make a reference to the Micro and Small Enterprises Facilitation Council, set up by the State Government. The Council first attempts conciliation, applying the provisions of the Arbitration and Conciliation Act, 1996 on conciliation. If conciliation does not succeed, the Council either arbitrates the dispute itself or refers it to an arbitration institution, and the Act then applies the Arbitration and Conciliation Act as if the arbitration were under an agreement.

The Supreme Court held in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2022) that Section 18 operates notwithstanding any arbitration clause in the contract, so that a supplier is not required to go to the forum the contract names.

Challenging the award

Under Section 19, an application to set aside a decree, award or order of the Council is not entertained unless the applicant first deposits seventy-five per cent of the amount awarded. The condition makes it costly for a buyer to delay payment by challenging an award.

A tax consequence for buyers

Section 43B(h) of the Income-tax Act, 1961, effective from the 2023–24 financial year, allows a buyer a deduction for sums payable to a micro or small enterprise only in the year they are actually paid, where payment is made beyond the period permitted by Section 15. This gives buyers a reason to pay on time, and suppliers may refer to it in their correspondence.

Steps for a supplier

• Hold the registration. Confirm the Udyam registration, and its date, before the contract is signed.
• Record acceptance. Keep proof of delivery, and note any written objection from the buyer and its date.
• State the dates. Calculate the due date, forty-five days from acceptance at the latest, and the interest from that date.
• Send a notice. Write to the buyer for payment with interest, citing Sections 15 and 16, and keep the proof of delivery.
• Make the reference. If the buyer does not pay, file a reference with the Facilitation Council in the State where the supplier is located.

The Act is available to the smaller supplier, and the claim is often stronger than the supplier realises. The sequence is registration, record, notice and reference, and each step is easier when the earlier ones were done at the time.