Date:March 28, 2023
Delayed payments to Micro and Small Enterprises under MSME Act – Law Article by NB Associates
Micro, Small and Medium Enterprises Development Act, 2006 came in the year 2006.
The preamble of the Act provides the following objectives:
‘An Act 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’.
This Act is now primarily known for Chapter V which provides for provisions related to Delayed payments to Micro and Small Enterprises.
Chapter V contains provisions starting with section 15 to section 25, out of which sections 15 to 19 primarily deals with Delayed payments to Micro and Small Enterprises.
These provisions are having overriding effect on any other laws as per section 24 of the Act.
The provisions for delayed payments to MSMEs are aimed at protecting the interests of businesses, which are often small-scale enterprises with limited financial resources.
Delayed payments can have a significant impact on the cash flow and working capital of these businesses, which can affect their ability to operate and grow.
Overall the provisions for delayed payments to MSMEs are designed to protect the interests of these businesses and ensure their continued growth and development. By ensuring that they are paid on time, these provisions help to improve the cash flow and working capital of MSMEs, which in turn can lead to increased investment, job creation, and economic growth.
Section 15 of MSME Act imposes liability on the buyer to make payment on or before the date agreed. And, where there is no agreement in this behalf, before the appointed day.
This Section further provides that in no case the period agreed to exceed forty-five (45) days from the day of acceptance or the day of deemed acceptance.
As per Section 2(b) of MSME Act, “appointed day” means the day following immediately after the expiry of the period of fifteen days (15) from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
This definition is important as it sets the timeline for the payment of dues to micro, small and medium enterprises (MSMEs) under the Act.
As per Explanation (i) of section 2(b) the day of acceptance means :
(1) the day of the actual delivery of goods or the rendering of services; or
(2) where 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.
As per Explanation (ii) of section 2(b) the day of acceptance means :
“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.
16 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 provides for the payment of interest by a buyer to a supplier in case of delayed payment.
According to this section, if a buyer fails to make payment to an MSME supplier within 15 days from the “appointed day”, the buyer is liable to pay compound interest with monthly rests to the supplier at the rate three times of prevailing bank rate notified by RBI (Reserve Bank of India)
The appointed day is already defined above.
It is important to note that the interest payable under this provision is compound interest with monthly rests. This means that the interest amount for each month is added to the principal amount, and the interest for the next month is calculated on the total amount (principal + interest for the previous month).
The provision for payment of interest on delayed payment is a significant step towards promoting a timely payment culture in the business ecosystem. It provides a legal remedy for MSMEs to recover their dues and acts as a deterrent for buyers who may be tempted to delay payments. The provision also helps in improving the financial health of MSMEs by providing them with a predictable cash flow, which is crucial for their growth and sustainability.
Section 17 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 provides for the recovery of amount due to a micro, small or medium enterprise (MSME) by a buyer who has failed to make payment for the goods or services supplied.
Section 18 of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 provides for the reference of disputes between a buyer and a micro or small enterprise (MSE) to the Micro and Small Enterprises Facilitation Council (MSEFC)
Under this section, an MSE supplier can make a reference to the MSEFC regarding any dispute arising out of a transaction with a buyer
This section Provides that any party to dispute may make reference to MSEFC in respect of any amount due under section 17.
On such reference, section 18 (2) provides for conciliation between the parties.
The council can itself conduct conciliation proceedings or it may seek the assistance of an institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre for conducting conciliation.
The provisions of sections 65 to 81 of the Arbitration & Conciliation Act, 1996 apply to such a dispute as if conciliation was initiated under part III of the Arbitration & Conciliation Act, 1996.
Where the conciliation is not successful or stands terminated without any settlement between the parties, a reference to the arbitration is made for adjudication of the dispute as per law.
The council can itself take the dispute for arbitration or refer the dispute to any institution or centre providing alternate dispute resolution services for such arbitration.
The provisions of the Arbitration & Conciliation Act, 1996 apply to the dispute.
Section 19 of the MSME Act, provides for an application for setting aside a decree, award or order arising out of an arbitration proceeding can be filed.
The provisions of the Arbitration and Conciliation act, 1996 are applicable to an alternate dispute resolution/arbitration initiated under this Act.
Hence an objection / Application for setting aside the decree, or award order can be filed as per provisions of section 34 of Arbitration and Conciliation Act, 1996 read with section 19 of MSME act.
The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
These provisions are having overriding effect on other laws. The provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force, as says section 24 of the Act.
To conclude Delayed payment provisions under MSME Act is the best and effective mechanism available to a micro and small enterprise for MSME delayed payment .
This Act provides for the completion of proceeding within a period of 90 days. However it is taking time because of lack of effective system in place.
This law is certainly going to evolve during the passes of time. This Law with an effective mechanism with speedy disposal of cases definitely going to give much relief to the small business houses.
This Article is written by Managing Partner Naveen Bhardwaj with assistance and research from the NB Associates team.
The content(s) of this Article cannot be copied or reproduced without the express written consent of NB Associates.
‘NB Associates’ provides comprehensive MSME related legal consultancy.
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