The Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 contains provisions of delayed payment to Micro and Small Enterprise (MSEs). (Section 15- 24). State Governments to establish Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments. (Section 20 and 21).

It is important to note that MSME Act is applicable only to the manufacturers and the Service Providers and the classification of enterprises is as follows:

An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:–

(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;

(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and

(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.

For being a MSME Unit, both the investment and turnover criteria has to be met. Even, if, one exceeds it will be covered under the other category. Thus, the Traders are not covered in this Act, which are the major part in running Industrial Units i.e. the manufacturers.

As per MSME Act, there has to be a Buyer and Seller, which has been appropriately defined in the Act. The ‘buyer’ means whoever buys any goods or receives any services from a supplier for consideration and the ‘supplier’ means a micro or small enterprise, who is having valid Udyog Adhaar through Udhyam Portal.

The Act has laid down the provisions for recovery of delayed/default payments for MSMEs. It provides that where there is delay in payment beyond 45 days from the day of acceptance or day of deemed acceptance of the goods or services, the recoveries of the principal with an interest with monthly rests to the suppliers three times of the Bank rates notified by RBI are to be paid, even if, the practice of agreed terms are different. Meaning thereby that  if there are agreed terms of payments of over 45 days, even then if, the payment is not received within 45 days then the buyer has to pay the principle alongwith the interest.

The MSME through Samadhaan can get the payment, if, there is default in payment beyond 45 days irrespective of dispute, if any. The dispute or the delayed payment of dues is to be redressed by MSME Facilitation Council to whom reference has to be made, who will conduct the conciliation proceedings or if, conciliation is not successful then through arbitration proceedings under the provisions of Arbitration and Conciliation Act, 1996 as amended from time to time. Mostly, conciliation is successful between the parties through the Council.

It is important to note that if, the conciliation is not successful then it shall be automatically terminated and the Council can refer the matter for arbitration, which has to be decided within 90 days. Generally, it is seen that the dispute or delayed payment is settled through mediation. In case of unsuccessful mediation, arbitration is there, which is a mode for recovery and is an alternative to civil / criminal litigation.

It is fast track legal dispute redressal system, as referred the matter is to be resolved within 90 days by the Facilitation Council. Composition of Micro and Small Enterprises Facilitation Council is as follows:

  • The Micro and Small Enterprise Facilitation Council shall consist of not less than three, but not more than five members to be appointed from amongst the following categories, namely:
  • Director of Industries, by whatever name called, or any other officer not below the rank of such Director, in the Department of the State Government having administrative control of the small scale industries or, as the case may be, micro, small and medium enterprises; and
  • One or more office-bearers or representatives of associations of micro or small industry or enterprises in the State; and
  • One or more representatives of banks and financial institutions lending to micro or small enterprises; or
  • One or more persons having special knowledge in the field of industry, finance, law, trade or commerce.
  • The person appointed under clause (i) of sub-section (1) shall be the Chairperson of the Micro and Small Enterprises Facilitation Council.
  • The composition of the Micro and Small Enterprises Facilitation Council, the manner of filling vacancies of its members and the procedure to be followed in the discharge of their functions by the members shall be such as may be prescribed by the State Government.

Thus, the substantial powers for redressal of disputes have been delegated to the State Government, without considering the plight of the industry at the Central level.

The procedure is as per the Arbitration Act. The Appeal has to be filed with prior payment of 75{551c903f756d5bf12b7d58e2eb1e8b74af35058efa7a05d3e7b41e9147979503} of the award to be paid to the Seller.

It is informed that the FAQ has been prepared by the office of DC(MSME), Ministry of MSME after consulting the legal persons in the field and information available.

MSME Samadhaan is a Portal created by Office of DC(MSME), Ministry of Micro, Small and Medium Enterprises (MSME) where Micro and Small Enterprises (MSEs) having Udyog Aadhaar Memorandum (UAM) can file their applications online regarding delayed payments. MSME SAMADHAAN online portal is developed by Ministry of MSME only to facilitate MSEs filing of their applications regarding delayed payments online. The application once filed is forwarded automatically online to the concerned Micro and Small Enterprise Facilitation Council (MSEFC) established by the State/UTs as per the provisions of MSMED-Act 2006. Action on the applications regarding delayed payment is taken by the concerned MSEFC only. Only the MSEFCs have been empowered as per MSMED Act, 2006 for taking decisions regarding its reference made with them.

Ministry of MSME does not intervene in the matters of MSEFC being individual functioning. MSME Samadhaan Portal has been created only to facilitate online applications regarding delayed payments. Physical applications can also be filed at the concerned MSEFC and the applications are converted into case by the concerned MSEFC. Thus, after submission, the application is automatically forwarded online to concerned MSEFC. Therefore, concerned MSEFC is to be contacted after filing the application online on MSME Samadhaan Portal. The contact address of concerned MSEFC is mentioned on the acknowledgement sent on the registered email of the applicant. The work order is compulsory for filing the application. However, in case purchase order is oral an affidavit to that effect is to be submitted. Multiple invoices can be combined into single PDF and can be uploaded. The affidavit of oral purchase order is to be included in single PDF. The OTP is sent to the registered email ID in Udyog Aadhaar.

Categories admitted in MSEFCs are in respect of goods manufacturing and service rendering sector for which UAM has been obtained. These categories cannot be challenged by the respondent/buyer. Application under Section 19 of the MSMED Act, 2006 cannot be entertained by any court. Deposited amount can be released to the applicant as per the directions to the Court. It is the act of court for which applicant cannot suffer. The silence of buyer is confirmation of liabilities upon him.

The 90 days period of settlement of claim begins only after notice of Arbitration under Section 18(3) of MSMED Act, 2006. The council should deliver a conciliation award after the successful conciliation. It is called award by mutual consent. It is valid award and buyer cannot make appeal against it. Council Members are judges having equal power. They should be well-versed in factual aspect of the case before them. Under administrative exigencies, the Chairperson can delegate the presiding power to another subordinate official or another member, but, the meeting/proceeding can take place, if Coram of three members is complete, members can elect the Chairperson and take further proceedings.

It is necessary to mention why Chairperson could not attend the hearing. There is provision for a Member Secretary as council Member and he can act as a Member in case of any exigency. Member Secretary is acting as Registrar of MSEFC and judge also when he sits in Council. A legal notice by the supplier to buyer is not necessary before filling the case in the Council. But, a claim can be filed for interest alone where the claimant has received principal of dues already. Only the claim under Section 6 of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertaking Act, 1993 if pending, before IFC or Civil Courts, they can be considered. However, to approach the MSEFC, liberty of court is to be obtained on earlier claims.

If there is a false claim from the applicant, a penalty cannot be imposed by Council, but the petition is to be rejected summarily. A grace period given for MSEs registration to the supplier can be considered while entertaining the claim. It is not hurdle in the matter of claim. The receivables from buyer such as advance deposit, EMD, Statutory deposits as other than supply of goods and services can be claimed in the claim before the Council, which includes in the total due amount. Breach of contract is not within scope of MSMED Act, 2006. Rejection of goods should be genuine within 15 days of the receipt of goods and its immediate communication to supplier. The penal interest is calculated on a monthly compounding basis.

The jurisdiction of State Council can be extended to a district where no council is available. The power of dissent to a member of Council in the proceedings is available and recording in minutes is to be done, but majority decision prevails. If the conciliation conducted by Council fails, Council can take up Arbitration automatically, but diverse view is taken by Bombay High Court. Hon’ble Supreme Court says that conciliation and arbitration are the legally vested functions of the Council. It is not necessary for Full Council to conduct conciliation. It is sufficient for Chairman or any member alone to participate in conciliation. It is not commercial conciliation or analysis of various contractual liabilities. It is simple arbitration to get compliance of Section 16 of MSMED Act, 2006.

State Government under Section 20 of MSMED Act, 2006 is empowered to constitute additional Councils. The process/procedure of execution of Award and the role of Council in assisting the Claimant is under Section 36 of Arbitration and Conciliation Act, 1996 as amended from time to time. The Council has no power to review, revise or amend its own award. After final award it becomes “Funcous officio” means having no relation to award. A Government Department as a buyer can be proceeded against in the Council.

Whenever a notice is received by Council from an Appellate Court to represent as witness, the Council is not required to appear in any court as it is only a formal party. There is no limit of pecuniary jurisdiction for State and District Council. The date of receipt of the copy of award is only effective date. If amount is claimed in the Civil Court, then it cannot be claimed before MSEFC. If an Appellate Court reverts back the case to the Council, it is to be decided as per instructions of the Higher Court. In case of IBC proceedings, the Award by MSEFC is to be communicated to Interim Resolution Professional (IRP) and then to NCLT as per procedural law. An Award holder from MSEFC can gain any preference as creditor in Insolvency proceedings. The Award Holder is considered as a secured creditor. Notices should be served to a dissolved buyer firm and partners even if subsequently reconstituted/merged with a new entity in partnership liabilities are unlimited. It is a lengthy procedure as first claim is to be kept alive. Council cannot deal with criminal offences related to subject matter of claim.

The request of any party to have representation by an attorney or any other authorized agent can be allowed by Council by way of irrevocable power of Attorney. His commitment must be binding upon buyer. Resolution is required for this. No limitation is applicable in Arbitration by Council, as law of limitation is not applicable. But, delay and latches principle is applicable. Supplier sleeping over his legal rights cannot get assistance of Council. It is only summery proceedings and on the basis of affidavits of both the parties, the dispute can be resolved.

The MSMED Act, 2006 is set in motion after supplies of goods and services made by supplier and buyer accepts them but does not pay the bill within 45 days. Petition with Purchase Order, Bills, delivery challans of goods and services and demand letter etc. are to be kept if the matter is challenged in any higher court. In any other case, where the amount is already realized by the supplier, it is at the discretion of the MSEFC. Notices can be served by e-mail/SMS/Whattsapp because Email is legal document and even Whattsapp. The claim should be submitted in hard copy because it is necessary as submission is required duly signed and verified.

The notice of Council is to be published in daily Newspaper of the area where the Respondent is located, with the orders of Council after 3 notices are issued. It is at the discretion of the MSEFC Council and it can exercise its own diligence by giving opportunity to the applicant since he has to prove his claim before council. When the supplier is a micro or small enterprises and agreement is made between Micro/ Small Enterprises in India. Goods are purchased/taken by foreign buyer and he returns to his country. Payment terms are not honored in these circumstances, matter can be filed before the Council. After following due procedure of law, the Council can issue award and same could be sent to both Consulates i.e. Foreign buyers Consulate in that country. It can be enforced.

A private Arbitration clause in sale contract prevents admission of claim for Arbitration by Council. The proceedings can be conducted in local language, but with English also so that Higher Court should understand later on. Claim preparation is the responsibility of the claimant. It is advisable to get certified from C.A. Deceased buyer is liable through his legal heirs, but dissolved company is always under some authority and claim is maintainable.

A Company through its M.D. with resolution of Board of Directors and Partnership firms through its Managing Partner/s. It is absolutely necessary to have purchase/work order as evidence. A Council cannot allow secondary and corroborated evidence. Acknowledgement on invoice, delivery challans or part payment, email etc. all are accepted. Members of Council are not liable for prosecution, if inadvertently an erroneous judgment is delivered by the Council. On the contrary they are expected to act without fear and favour.

Chairman has no veto power in judging a case. No GM, DIC is ex-officio member in Council and any new official in his official position can take over as Chairman. An Award should be with seal of the Council. Original is to be retained by the MSEFC and only certified copies to be delivered. Award should bear round seal on every page. The consent of absentee members for Award can be obtained by circulation to fulfil quorum requirement. The Coram of three Members physically is must.

It looks on the paper a fast track legal disputes redressal system, as the recoveries are very fast and as the award has to be given within 90 days of the reference made is a decree in itself. But, it is seen that this is not actual state of affairs for MSME Act, as generally as we have seen that when human intervention is there, there is always delayed decisions despite the fact that there is Champions Portal, which means Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength.

The single window system for the MSMEs 

It has been felt necessary to put up and promote a unified, empowered, robust, bundled and technology driven platform for helping and promoting the Micro, Small and Medium Enterprises (MSMEs) of the country. As the name suggests it will aim at Creation and Harmonious Application of Modern Processes for Increasing the Output and National Strength. Accordingly, the name of the system is CHAMPIONS. This is basically for making the smaller units big by helping and handholding, in particular, by solving their problems and grievances

Three basic objectives of the CHAMPIONS: 

  1. To help the MSMEs in this difficult situation in terms of finance, raw materials, labour, permissions, etc.
  2. To help the MSMEs capture new opportunities in manufacturing and services sectors.
  3. To identify the sparks i.e. the bright MSMEs who can withstand at present and become national and international champions.

As the composition & decision is to be taken by Micro & Small Enterprise Facilitation Council and is to be created and decided by State Government., the Act does not provide the provisions within what time the State Government has to constitute the Facilitation Council or to hold the meetings to decide the issue.

The experience says either there is delay in constitution of Facilitation Council and even when the said Council has been constituted, no meetings are held for disposal of application reference made under the Act for getting default payment recoveries. The Government must consider this aspect seriously and the Act is to be amended in such a way that minimum human intervention is there and there is maximum period to be allowed for Facilitation Council to get the award from date of reference including creation of the Facilitation Council, holding meetings, issuance of Notices, adjournment of hearings and holding of conciliation and arbitration proceedings, as maximum period to decide all legal issues of 300 days from the date of acceptance of application by adjudication authority is under IBC.

Therefore, under this Act also, such provisions has to be laid down otherwise on one or the other ground, the buyer tries to get the matter delayed in Facilitation Council and the purpose of laying the said provisions is forfeited.

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