Recovery of outstanding dues under the MSME Act by Micro and Small scale Enterprises

Introduction

The provisions of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSME Act’) contains provisions regarding the time period for payment of outstanding dues and also provides remedial measures in case of delay in the payment of outstanding dues to a micro or small-scale enterprise.

Applicable transactions

The provisions of MSME Act pertaining to payment of consideration and recovery of outstanding dues apply to a transaction for sale of goods or supply of services between a ‘supplier’ and a ‘buyer’. The term ‘buyer’ is defined under section 2(b) of the MSME Act to mean whoever buys goods from a supplier for a consideration. The term ‘supplier’ is defined under section 2(n) of the MSME Act to mean a micro or small enterprise which has filed the Entrepreneurs Memorandum/Udyog Aadhar with the concerned authority. It should be noted the term ‘supplier’ does not include medium scale enterprises within its scope for the purpose of the MSME Act. Hence, medium scale enterprises would not be eligible to claim benefits of the provisions of the MSME Act applicable to outstanding dues.

Time limit for payment of dues

The Section 15 of the MSME Act provides that where any supplier supplies goods or renders services to any buyer, the buyer is obligated to make the payment for such supply on or before the following dates:

  • Where the date of payment is not agreed between the parties – payment is required to be made within a period of 15 days from (i) the day of actual delivery of the goods, where no objection in writing is raised by the buyer or (ii) where any objection is raised by the buyer in writing, then the day on which such objection is removed by the supplier.
  • Where the date of payment is agreed in writing between the parties– on the agreed date provided such date shall not exceed a period of 45 days from (i) the day of actual delivery of the goods, where no objection in writing is raised by the buyer or (ii) where any objection is raised by the buyer in writing, then the day on which such objection is removed by the supplier.

Interest liability

The Section 16 of the MSME Act provides that where the buyer fails to make payment to the supplier within the time period as stipulated under the provisions of Section 15 of the MSME Act, then the buyer shall be liable to pay compound interest (with monthly rests) to the supplier on the dues, from the date of default. The prescribed rate of such compound interest is three times of the bank rate notified by the Reserve Bank of India.

Section 17 of the MSME Act provides that for the goods supplied, the buyer shall be liable to pay the amount with interest thereon.

Section 23 of the MSME Act provides that the amount of interest payable or paid by a buyer to a supplier under Section 16 of the MSME Act shall not be allowed as a deduction for purpose of computation of income under the provisions of the Income Tax Act, 1961.

Reporting requirements for buyers

Section 22 of the MSME Act provides that where the buyer is required to get his annual accounts audited under any law, then the buyer is required to furnish in its statement of annual accounts, the details of the principal amount and the interest due to any supplier as at the end of a financial year.

Similarly, under the provisions Companies Act, the buyer (being a company) who has outstanding dues towards a supplier is required to submit Form MSME-1, providing details of the outstanding dues and the reasons for the delay in payment of dues. Failure to file the Form MSME -1 attracts penal consequences for the buyer.

Resolution process

Section 18 of the MSME Act provides that where the buyer fails to make the payment of the principal amount of dues or the interest arising thereon as per Section 16 of the MSME Act, then the supplier can file its complaint with the Micro and Small Enterprises Facilitation Council (‘MSEFC’). The Government of India has launched the MSME Samadhan portal for ease of filing such complaints.

As a first step, the MSEFC shall initiate conciliation proceedings to resolve the dispute between the buyer and supplier. Where the conciliation proceedings fail and there is no settlement between the buyer and seller, then the arbitration proceedings are initiated for the resolution of the dispute. Such arbitration proceedings are governed by the provisions of the Arbitration and Conciliation Act, 1996.

Remarks

The recovery mechanism under the MSME Act is an alternative route to initiation of proceedings before the National Company Law Tribunal under the Insolvency and Bankruptcy Code, 2016 or filing of a suit for recovery of dues before the Civil Courts. Furthermore, statutory interest has been prescribed which makes the provisions more onerous for the buyers. Hence, a micro or small-scale enterprise should ensure that it has obtained Udyog Aadhar Registration so that it is eligible to claim benefits under the MSME Act for recovery of outstanding dues.

Author

Kunal Gokhale, Advocate

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