MSME Delayed Payment Recovery: Legal Remedies Every Practising CA Should Know

Summary: The Micro, Small and Medium Enterprises Development Act, 2006 provides an important statutory mechanism for recovering delayed payments owed to micro and small enterprises. Sections 15 to 24 prescribe payment timelines, compound interest with monthly rests at three times the RBI-notified bank rate, and dispute resolution through the Micro and Small Enterprises Facilitation Council (MSEFC). Eligible suppliers can pursue recovery through the MSME Samadhaan portal or the appropriate Facilitation Council, where conciliation is followed by arbitration if settlement fails. Section 19 requires a buyer challenging an award to deposit 75% of the awarded amount, while Section 24 gives the statutory framework overriding effect over inconsistent laws. The Supreme Court’s decision in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. clarifies important questions concerning registration and the Council’s jurisdiction notwithstanding contractual arbitration clauses. The article explains eligibility, revised MSME classification limits effective from 1 April 2025, procedural documentation, limitation, interest computation and common mistakes that may weaken recovery claims. It also highlights the professional responsibilities of Chartered Accountants under Section 22 of the MSMED Act, MSME-1 reporting requirements and Section 43B(h) of the Income-tax Act. Regular examination of overdue receivables, verification of Udyam registration and timely initiation of recovery proceedings can help CAs protect their clients’ working capital and improve payment discipline.

Getting Paid on Time: What Every Practising CA Should Know About MSME Recovery

Why the MSMED Act was brought in

In my years of litigation practice, one conversation repeats itself more than any other. A small manufacturer or service provider walks in, puts a file of invoices on the table and says, “They have not paid us for over a year. What can we do?” Very often, the file has already passed through the hands of the client’s CA, who has been carrying the same receivable in the books quarter after quarter. This article is written for those CAs, because you are usually the first professional who can tell a client that a fast, low-cost remedy already exists in law and is going unused.

The Micro, Small and Medium Enterprises Development Act, 2006 came into force on 2 October 2006. Its larger purpose was to promote and develop the sector, but anyone who works with small businesses knows what really keeps them awake at night: not lack of orders, but delayed payments. A small unit supplies goods to a bigger buyer, pays its own workers and vendors on time, and then waits months for its money. Ordinary civil suits take years, and a small enterprise rarely has the cash or patience for that.

The Act tackles this head-on in Sections 15 to 25. It fixes a statutory time limit for payment, imposes interest at a rate that actually hurts, and sends the dispute to a dedicated forum with a time-bound process. For the business community this is a real solution. It improves cash flow, lowers litigation cost and, frankly, makes large buyers think twice before treating small suppliers as free financing.

Who can claim the benefit

The protection is for the supplier, and only if the supplier is a micro or small enterprise that has filed a Udyam Registration (earlier, an Entrepreneurs Memorandum under Section 8). A few points to keep in mind:

• Medium enterprises do not get the delayed-payment remedy under Sections 15 to 24. This surprises many clients.
• Classification is based on investment in plant and machinery or equipment and annual turnover. From 1 April 2025 the limits stand at: micro up to ₹2.5 crore investment and ₹10 crore turnover; small up to ₹25 crore investment and ₹100 crore turnover; medium up to ₹125 crore and ₹500 crore.
• The Supreme Court has held, in Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (2022), that the supplier must be registered on the date it enters into the contract. Registration obtained later does not rescue earlier supplies.
• The Act covers supply of goods and rendering of services. The buyer can be any person, including a company, a government body or a PSU.
• Entities that are purely traders, with no manufacturing or service activity of their own, have been a grey area, and courts and Councils have taken different views. Please check the registered activity carefully before recommending a claim.

The legal framework in short

Section 15 (time for payment). The buyer must pay on or before the agreed date. If there is a written agreement, the credit period cannot exceed 45 days from the day of acceptance or deemed acceptance. If there is no agreement, payment is due within 15 days.

Section 16 (interest). On delay, the buyer must pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. This cannot be waived by contract.

Section 17 (liability). The buyer is liable to pay the amount along with interest.

Section 18 (reference to the Council). Any party can make a reference to the Micro and Small Enterprises Facilitation Council (MSEFC). The Council first attempts conciliation. If that fails, it either arbitrates itself or refers the matter to an institution for arbitration, under the Arbitration and Conciliation Act, 1996. The Act expects the dispute to be decided within 90 days of the reference.

Section 19 (challenge). A buyer who wants to challenge the award must deposit 75% of the awarded amount with the court before the application is even entertained. This single provision discourages many buyers from fighting for the sake of delay.

Section 24 (overriding effect). Sections 15 to 23 override anything inconsistent in other laws. The Supreme Court has confirmed that the Council’s jurisdiction is not defeated by an arbitration clause in the contract.

Procedure, step by step

1. Collect the paper trail. Purchase order or contract, invoices, delivery challans, transport receipts, e-way bills, and proof of delivery or acceptance.

2. Check the Udyam certificate. Confirm the date of registration, the category, and that the activity matches what was supplied.

3. Send a demand notice. A legal notice for the principal and statutory interest, with a clear reasonable time to pay. It is not mandatory under the Act, but it helps settle many cases and strengthens the file.

4. File on the Samadhaan portal or directly before the MSEFC with jurisdiction, with a statement of claim, the documents above and an interest working.

5. The Council calls both parties. A good number of disputes end here.

6. If conciliation fails, the Council or the institution it designates arbitrates and passes an award.

7. The award is enforceable as a decree of a civil court. A buyer’s challenge needs the 75% pre-deposit.

Appointed day and interest: worked examples

The “appointed day” is the date from which interest starts running. Under Section 2(b), it is the day following the agreed credit period (maximum 45 days), or, if there is no agreement, the day following the expiry of 15 days from the day of acceptance or deemed acceptance. Deemed acceptance applies where the buyer does not raise a written objection within 15 days of delivery.

Example 1: no written agreement

• Goods delivered and accepted on 12 January 2026. No objection from the buyer.
• Fifteen days from acceptance end on 27 January 2026.
• Appointed day: 28 January 2026.

Example 2: agreement says 60 days credit

• Goods accepted on 12 January 2026. The contract says 60 days, but the Act caps it at 45.
• Forty-five days from 12 January ends on 26 February 2026.
• Appointed day: 27 February 2026, not 14 March.

Example 3: interest calculation

Take Example 1 with a principal of ₹5,00,000 and payment made six months after the appointed day. For illustration, assume a bank rate of 6.5% p.a. (please use the rate actually notified by the RBI for the relevant period).

• Interest rate: 3 × 6.5% = 19.5% per annum, which is 1.625% per month.
• Compounded monthly for 6 months: ₹5,00,000 × (1.01625)^6 = ₹5,50,774 approximately.
• Interest payable: about ₹50,774.

The interest is on the principal outstanding. Practice varies on whether the GST portion of the invoice forms part of the principal, so it is wise to state your basis clearly in the claim. Where the bank rate changed during the delay period, compute each period at the rate then in force.

Points to remember before filing

• Confirm registration date versus contract date. This is the first thing the buyer’s lawyer will check.
• Keep acceptance evidence. Signed challans, emails confirming receipt, and the absence of any written objection all matter.
• Mind limitation. The usual three years from the date the amount fell due applies, so do not let old receivables drift.
• File before the Council that has jurisdiction over the supplier’s location.
• Avoid conflicting documents. A later “balance confirmation” or letter from the supplier agreeing to extended credit can be used against the claim.
• Present interest properly, with a date-wise working sheet. Councils appreciate clarity.

Mistakes that cost business owners their claim

1. Registering after the supply. Many owners take Udyam registration only after the dispute begins. Supplies made before registration generally fall outside the Act.

2. Weak acceptance proof. Goods go out on a phone call and a basic invoice, with no signed challan.

3. Agreeing to long credit terms such as 90 or 120 days in a purchase order, then assuming the Act will still help for the full period. The cap is 45 days, but the paperwork becomes muddled.

4. Ignoring buyer objections. If the buyer writes about quality or short supply and the supplier never replies, the appointed day itself can be disputed.

5. Waiting too long. Limitation quietly kills perfectly good claims.

6. Filing in the wrong place or against the wrong legal entity, for example a sister concern that did not place the order.

7. Mixing up classification. Some firms have outgrown the category by the time of the claim, or are registered for an activity different from what they actually supplied.

8. Accepting part payment letters that say “full and final” without legal advice.

Why this matters for CAs

The Act is not only a litigation matter. Section 22 requires disclosure in the buyer’s annual accounts of the principal and interest due to micro and small suppliers, and companies file the half-yearly MSME-1 return for payments pending beyond 45 days. Under Section 43B(h) of the Income-tax Act, amounts owed to micro and small enterprises beyond the permitted period are deductible only when actually paid. So buyer-side clients need your advice on compliance, and supplier-side clients need your push to recover. Both sets of clients end up at your desk.

A gentle suggestion: when you review the debtors ledger of a small client, mark every receivable that is more than 45 days old and ask one question, “Are you registered under Udyam, and since when?” That one question may save a business its working capital.

This article is for general information and does not replace advice on specific facts. Interest rates, thresholds and case law should be verified for the relevant period before filing.