Inder Chand Jain

The Indian Economy is passing through a period of acute recession. The Government itself has accepted that the country is gripped with recession. The sales, production, order position have gone down drastically and the MSME sector is the worst affected. On top of this, the issue of delayed payments has broken the backbone of the MSME sector which is facing acute cash crunch making them almost sick.

The Government enacted the MSME Act, 2006 and enacted Chapter V which specifically deal with delayed payments to MSME. The Chapter contains Section 15 to Section 25 which deal in length with the issue of delayed payments to MSME. Section 15 of the said Act mandates that the supplier of goods and services shall be legally entitled to receive payment within 45 days of the supply of goods or service. Section 16 of the said Act mandates that where any buyer fails to make payment after the period of 45 days from the supply shall be liable to pay compound interest @ 3 times the rate notified by the Reserve Bank of India. In case of failure of the buyer to make payment of amount with compound interest u/s 18 the supplier can refer the matter to the MSME Facilitation Council. The Council shall either conduct conciliation themselves or seek the help of any institution for conducting conciliation. However, if the conciliation between the parties is not successful, the Council shall either take up the dispute for arbitration or refer the matter to any institution for providing Alternate Dispute Resolution under the provisions of Arbitration & Conciliation Act 1996. The Council has jurisdiction itself to act as an Arbitrator or Conciliator for any dispute within its jurisdiction although the buyer may be located anywhere in India. This Section also mandates that every reference u/s 18 shall be decided within a period of 90 days from the date of filing of the reference.

Under Section 19 of the said Act, the award of the MSME Facilitation Council can be assailed in the Designated Court but the application for setting aside the award shall not be entertained by the Court until the buyer has deposited 75% of the amount awarded by the Council. This is a pre- requisite condition for the admission & maintainability of appeal against the award of the MSME Facilitation Council. However it would be the discretion of the Court to pay whatever amount it deems reasonable to the buyer. Section 20 & 21 lays down that these Facilitation Councils shall be established by the State Government and shall comprise of the Director of Industries as the chairperson, office bearers of association of the MSME, representatives of Banks & Financial Institutions & persons having special knowledge of industry, finance, law, trade or commerce.

Section 22 of the Act mandates where any buyer is required to get his accounts audited under any law, such buyer would have to mandatorily furnish details of the principal amount due to any supplier and the interest due there upon u/s 16 of the Act separately at the end of each accounting year. If the buyer fails to furnish such information, he shall be punishable u/s 27 of the Act with a fine which shall not be less than Rs. 10000/-.Under section 23 of the Act, such interest paid or payable by the buyer shall not be allowed as a deduction for the purpose of computation of income under the Income Tax Act. Section 24 of the Act mandates that the provisions of Section 15 to 23 shall have overriding effect and hence no other law or Act shall be applicable when proceedings have been initiated under this Act.

Inspite of the MSME Act being in force for the last 13 years, not much has been achieved in terms of delayed payments to MSME’s. The Government realized its failure on this count & on 2 November 2018, the Union government issued a notification under the MSME Act, 2006 to ensure timely and smooth flow of credit to MSMEs and minimize sickness among MSME sector. The Government directed all companies who get supplies of goods or services from micro and small enterprises and whose payments to such suppliers exceed forty five days from the date of supply of goods & services shall submit a half yearly return to the Ministry of Corporate Affairs stating the amount of payments due & the  reasons of the delay. However, it is important to note that the notification has not prescribed any form for filing such a return. It is expected that MCA will come up with a notification in this regard. The question is who will have the power to monitor this and in case of non-filing of the return, what shall be the penalty/fine imposed on the debtors of the MSMEs? In order to ensure that this notification does not turn out to be a futile effort, the government should soon come out with some clarification in this regard.

The government has also launched an online delayed payment monitoring system called the MSME Samadhaan for the ease of filing an application under the MSEFC. Any MSME, having a valid Udyog Aadhaar Memorandum (UAM) can make an application via this portal. After an application is made by the MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of the due amount along with the interest. From the date of launch of the MSME Samadhaan portal, i.e., 30 October 2017, MSMEs have filed 23,773 applications related to delayed payments. These cases involve an amount of Rs 6098.56 crore. This portal has also helped in getting the delayed payments settled mutually between seller and buyer. About 1849 mutual settlements have been made, involving Rs 237.89 crore.  Around 1374 applications have been disposed by MSEFC Councils involving a sum of Rs. 267.86 crores. Around 5870 applications have been converted into cases by MSEFC Council while 3902 applications have been rejected by MSEFC Council.

The numbers as reported on the MSME portal do not reflect the true state of affairs of the problem of Delayed Payments of the MSME’s. Some units do not wish to make the buyers unhappy and do not resort to Samadhaan. Most of the others do not have the requisite knowledge of this scheme. The MSME department & the MSME associations should popularize this scheme and educate its constituents about this wonderful weapon to combat the problem of Delayed Payments.

If you have supplied goods or services to a private or public limited company or an LLP or any business entity which is required to get its accounts audited, we should try to get a copy of the buyer’s audited balance sheet and profit and loss account. In all probabilities the auditor should not have observed section 22 of MSME Act 2006. It would be advisable to send a letter to auditor stating therein that:

i) That we are manufacturers of __ products. We are registered as Small Enterprise under Micro Small and Medium Enterprises Development Act, 2006 bearing Entrepreneurs Memorandum Number ___.

ii) That during financial years________ on written orders as placed by the said Company, we have sold, supplied and delivered to the said Company goods under diverse Invoices. Till date, the said Company has willfully failed and neglected to make payments of principal sum of Rs._____/- towards the said goods sold, supplied and delivered to them.

iii) That we have perused the Annual Report of the said Company for the year _______ which inter-alia contained Auditor’s report by your goodself and further also contained Audited Books of Accounts of the said Company for the Financial Year _______. We were shocked to note the contents of the same especially contents of Notes to Accounts – Note ___ Trade Payables and Note ___ -Disclosure in accordance with Section 22 of the Micro, Small and Medium Enterprises Development Act, 2006. As per the same, the balance due to Micro, Small and Medium Enterprises as defined under the MSMED Act, 2006 is shown as Rs. NIL. Admittedly, we are Enterprise failing under the MSMED Act, 2006 and further, admittedly our legitimate dues are till date not paid by the said Company. Hence the said statutory disclosures as made in your Audit report and/or Audited Books of Accounts of the said Company are incorrect. It appears that the said Company has deliberately with malafide intentions furnished you incomplete information and documents which has led to such erroneous and misleading statutory disclosures.

iv) That, in view of the above facts you are requested to look into the matter, rectify the said incorrect statutory disclosure and thereafter clarify and publish the correct financial position of the said Company, not only to us but also to all other Statutory Bodies and Investors and Shareholders of the said Company to whom such incorrect and misleading information has been disclosed.

A copy of this notice should be sent to the Secretary, Institute of Chartered Accountants of India, Mathura Road, Delhi & Ministry of MSME,Udyog Bhawan, Rafi Marg, NewDelhi. Such a letter shall put pressure on the auditor for settlement & would help in recovery of your Delayed Payment.

(Author can be reached at [email protected] and M: 9319215672)

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June 2021