Recovery of Debt under MSME

MSME = Traders not MSME, Turnover will decide MSME soon, Recovery of Debt under MSME = [Be a Part of MSME Now]

MSME stands for Micro, Small, and Medium Enterprises. In accordance with the Micro, Small, and Medium Enterprises Development (MSMED) Act in 2006, the enterprises are classified into two divisions. Manufacturing enterprises (engaged in the manufacturing or production of goods in any industry) and Service Sector. Both Manufacturing enterprises and Service Sector are classified under the provisions of MSME as under:

Manufacturing Sector:

Service Sector:

Please note that the Government are in the process of changing the criteria to classify MSMEs from “investment in plant and machinery” to “annual turnover.” According to an article by Anil Bharadwaj, Secretary-General of the Federation of Indian Micro Small & Medium Enterprises (FISME), there will be no distinction between the manufacturing and service sectors.

The reading of the above provisions is clear that only the business units which are in manufacturing sector and service sector fall under MSME Act and infact are only eligible for being enrolled under MSME register database thereby excluding all Retail, Traders and Wholesalers. Infact vide Circular No. F. No. UAM/MC/01/2017-SME dated 27.06.2017 it was given the clarification regarding what is not to be included or qualify as MSME which clearly debar the Traders, Retailer. Traders are those who buy specialized line of products and stock them and deliver them to customers.

However, the good news is that the MSME Ministry is considering including Retailers, Professionals and Architect for MSME Registration and it is hoped to get the consent by law very soon and infact it is most required as MSME is the backbone of India’s GDP and this including under MSME will boost them in big ways.

There is no doubt that Delayed Payment has been and is the biggest problem majority of the business entities are facing and there are very less companies who pay to its vendors in time. This delay in payment to MSME creates a huge financial problem as due to this the money is stuck and the MSME business entities are not able to use the money for business growth and are stuck due to less finance and infact sometimes this money becomes claimable money and for this such business entities have to approach Court or Forum for recovery and this is where they have to approach Lawyers for recovery of money and in India to recover the money as such is big headache from legal point of view due to lengthy and more lengthy procedure and also a Litigation is a costly affair.

As per the published Annual Statement of MSME Body they have stated that “The Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and dynamic sector of the Indian economy over the last five decades. It contributes significantly in the economic and social development of the country by fostering entrepreneurship and generating largest employment opportunities at comparatively lower capital cost, next only to agriculture. MSMEs are complementary to large industries as ancillary units and this sector contributes significantly in the inclusive industrial development of the country. The MSMEs are widening their domain across sectors of the economy, producing diverse range of products and services to meet demands of domestic as well as global markets”

There is no doubt of the relevance MSME business sectors are getting from the Government of India and infact many schemes and guidelines are being made to ensure a good future and success for MSME.

It is very interesting to note that more than 38.95 lakh UAMs have been filed since September 2015 upto December 2017.

Benefit of MSME: Registration of an MSME is not legally mandatory but registering it will help you reap several benefits from the government including credit at low interest rate, incentives on products for exports, excise exemption, statutory aid such as reservations, and the interest on the payments delayed due to unavoidable

Fees for MSME registration: There is no fee being charged for MSME Registration or popularly called as Udyog Aadhar Registration

There are many benefits under MSME Act and infact getting business registered under MSME only plays an important part in availing the benefit of all the schemes under MSME Act. One of the most important and best advantages given to all MSME holders is the simplest process and procedure to recovery their pending dues from MSME Forum which is nothing but popularly called as Statutory Arbitration.

Just a quick look on Relevant Provisions for Recovery of Money

Chapter V of MSMED Act contained the provisions with regard to the Recovery of the Outstanding from the Buyer in case of any service(s) availed or good brought by him

• Section 15: It provides that buyer to make payment in case of any service(s) being availed or good brought by him on or before the date as agreed in writing otherwise before the appointed date [The maximum period to be paid to the seller is 45 days from the day of acceptance or deemed acceptance]
• Appointed date means the day following immediately after the expiry of the period of 15 days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
• Day of Acceptance means: (a) the day of the actual delivery of goods or the rendering of services; or (b) where any objection is made in writing by the buyer regarding acceptance of goods or services within 15 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;
• 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.
• Section 16:Buyer shall be liable to pay compound interest with monthly rests in case of failure to comply with the aforesaid provision. Interest Rate will be 3 times of the bank rate notified by the RBI.
• Section 17:Buyer to make payment along with interest.
• Section 18: MSME may make a reference to the Micro and Small Enterprises Facilitation Council (“MSEFC”)and MSEFC may initiative on its own, action as it may deed necessary.

Objectives of MSMED Act 2006 in regard to Recovery of Money:

• Statutorily bind the buyer to pay the MSME supplier within the statutory due date (within 45 days of the acceptance of the goods/service rendered)
• Provide for penal interest statutorily in case buyer defaults in making payment (The buyer is liable to pay compound interest with the monthly rests to the supplier on the amount at the three times of the bank rate notified by RBI)
• Provide for efficient statutory mechanism for expeditious resolution of supply and payment related disputes
• Statutorily ensure to recover at least 75% of the due amount along with interest for disbursal of finance to the MSME supplier to keep it viable in case buyer appeals in court [Please note that if the Appellant (not being the supplier) wants to file an appeal, no application for setting aside any decree or award by the MSEFC shall be entertained by any court unless the appellant (not being supplier) has deposited with it, the 75% of the award amount] – The objective of the remedy at Section 19 incorporating mandatory deposit of 75% amount in terms of the Award to entertain the appeal/ contest by the Buyer under Section 34 of Arbitration Act by the Buyer in the Court is in order to ensure timely flow of finance to MSME supplier so as to remain viable in the event of delay, default or dispute regarding payment by the buyer. The object of effective and expeditions remedy incorporated at Section 18(5) and section 19 of MSMED Act 2006 is to be appreciated by reading together with Section 34(3) and Sec. 36 of Arbitration Act. The remedy and relief can be fairly deducted to securing at least 75% amount and disbursing that amount through Court to MSME supplier within six (6) months with the intent to retain its viability and financial health and to reduce incipience of sickness

How to register at MSME?

Go to website, www.msme.com, just put the name of the Director/Owner/Partner and his Aadhar Card No and details of investment in Plant and Machinery and accordingly the Business Entity will be designated as either Micro or Small or Medium and Certificate is issued.

How MSME Registration helps in the Recovery of Dues?

There is a defined period for raising any dispute regarding goods or services under MSME rules from delivery and if there is no such raised dispute/s, then raising dispute at later stages is of no use and these reasons have been used by many in court matters in any monetary claim as defense and hence this benefit take away one of the major Defense of the proposed defaulter and secondly, the invoice payment has to be made within 45 days from the date of invoice except for any credit period mutually agreed between parties to the business. In case there is a default in making the payment, the following steps be followed:

(The person who files the case is called Aggrieved Party/Claimant/s and against whom it is filed is called as Opposite Party/Respondent/s)

• Issue MSME Civil Notice stating the provisions of MSME
• In case of no payment, issue another Demand Notice
• In case of no payment, then start drafting MSME Petition in the format as per MSME Act with the help of legal advisor and not else as a legal advisor is the best to understand the importance of drafting and its relevance at the time of argument. The process is that one has to submit the reference letter as per Form1 of said Act and rules and thereafter Petition and then Petition once accepted then will be forwarded to MSME Department for Conciliation/Arbitration and in the event, there is no response from defaulter, the Arbitration Proceedings will start to be held at MSME Office. As per MSME Act, all MSME proceedings shall be closed within 180 days and one of the prayers in MSME Petition shall always be claiming interest at the compound rate and other damages.

The biggest advantage of MSME Act is that MSME overrides the Contractual Arbitration clause between the Parties (Refer, GET & D India Limited Vs Reliable Engineering 2017 SCC Online 6978)

One can also file the MSME Petition (prefer getting this drafted by Legal Advisor) on MSME portal in following manner:

• https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx
• Click on Case Filing for Entrepreneur/MSME.
• Enter Udyog Aadhaar Number (UAM) which will be received by Business Entities when MSME Certificate is issued
• Enter Aadhaar Number or Mobile Number as in Udyog Aadhaar(Only For Assisted filing cases)
• Enter verification code as displayed
• Click on Validate Udyog Aadhaar button to receive OTP on email registered during Udyog Aadhaar registration.
• Cases can be updated from the said website by all aggrieved party
• Now, you will see an option Application entry which will help you to file an application and/or compliant with the appropriate authority, before filling it please keep the details of work orders and/or details of invoices ready or any other document which can prove your claim. You can provide the details over the portal, if it is less than 5 however, in case it is more than 5 then you can combined all invoices in single PDF and upload it over the web-portal and submit it, thereafter one more page will be pop-up for the review and final submission
• All done now MSEFC will send this application to the concerned respondent and status of your compliant can be seen Entrepreneur Application list, the application will be proceed faster than that of the court, furthermore the concerned officer may ask you to come and advise you in case of any other document and/or information being required by him

What is MSME Samadhaan portal?

To address Delayed Payment to MSME Section 15-24 of The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 deal with the issues relating to the Delayed Payments to Micro and Small Enterprises (MSEs) by the buyers to the MSE supplier. In the case of delay in payment beyond 45 days, MSME suppliers may approach the Micro and Small Enterprises Facilitation Council (MSEFC) constituted under the Act in all States/UTs. Under Section 16 of the MSMED Act, delayed payment to supplier units, attracts compound interest with monthly rests at three times of the bank rate notified by the Reserve Bank. To further the objectives of MSMED Act, 2006 Ministry of MSME launched a portal (http:// samadhaan.msme.gov.in/) on 30^th October, 2017.

It is relevant to note that from the date of launch of MSME SAMADHAAN Portal, i.e. 30th October 2017, MSME have filed 2927 applications related to delayed payments. These cases involve an amount of Rs. 744.65 Crore. This portal has also helped in getting the delayed payments getting settled mutually between seller and buyer. 105 mutual settlements have been done amounting to Rs. 8.87 Crore. Applications are getting converted to cases by MSE-Facilitation Councils in States. 264 applications have been converted to cases by 31.1.2018.This has empowered the MSEs to file their delayed payments cases directly. This is being monitored by respective Ministries/ CPSEs and State governments (this para has been taken from the Annual Statement for Year 2017-2018 by MSME)

Features of MSME Samadhaan:

1. File online application by MSME: Entrepreneurs / MSE can file online applications for delayed payments using the portal. A user is to have Udyog Aadhaar Number that is validated with Aadhaar to file application.

2. Check case status: Entrepreneurs / MSE can check status of the filed online applications for delayed payments using the portal.

3. Dashboard of pending payments: The Portal will give information about the pending payment of MSEs with individual CPSEs / Central Ministries, State Governments, etc. The CEO of PSEs and the Secretary of the Ministries concerned will also be able to monitor the cases of delayed payment under their jurisdiction and issue necessary instructions to resolve the issues.

MSME + ROC Compliance = Removes Law of Limitation on Recovery of Dues: In order to protect the interest of MSME the Central Government on 22.01.2019 has issued a notification under the MSMED Act, 2006 to ensure timely and smooth flow of credit to MSMEs and minimize sickness among them. As Per the Notification Number S.O. 5622(E), every specified company shall file an Initial Return in MSME Form I stating details of all outstanding dues to Micro or small enterprises suppliers existing on the date of notification of this order within thirty days from the date of publication of this notification. Please note that the Registrar of Companies (ROC) is asking the detail of the default and delay in payments to MSME (means Micro, Small and medium Business entities whether they are individual, firm, LLP or companies) along with the complete list of the name, amount outstanding, period of delay with reason and total outstanding to MSME exceeding 45 days through filing the ‘MSME FORM I’ with ROC. The companies are also required to file the half yearly report on the delay of payment to MSME as well as a one-time report. A half-yearly return MSME-1 specifying the payments outstanding to micro and small enterprises suppliers which are outstanding for more than  45 days from the date of acceptance or the date of deemed acceptance of goods or services stating the following: a)The amount of payment due, and b) the reasons of delay. The Penal provisions are serious for non-compliance. If the said details are not submitted to Registrar of Companies on MCA on or before 22.02.2019 or the information submitted is incorrect or incomplete, then the fine on company is up to Rs. 25,000 and the Directors, CFO & CS shall be punishable for imprisonment up to 6 months OR fine not less than Rs. 25,000 up to Rs. 3,00,000 per person each.

The Law on Limitation is very clear that three years is the Limitation period in which one has to claim their money under the laws of India and MSME being statutory law, Law of Limitation is not applicable. Further this ROC compliance will automatically confirm the legitimate dues of MSME and such confirmation is nothing but Acknowledge of Debt which will in turn renew the Limitation Period, if at all is applicable

Unregistered MSME will also be treated as ‘supplier’ u/s 2(n) of MSMED Act: The Delhi High Court has in “M/s Ramky Infrastructure Private Limited Vs Micro And Small Enterprises Facilitation Council & ANR” stated very clearly that an entity which falls within the definition of the micro/small enterprise will be treated as a ‘supplier’ under Section 2(n) of the MSMED Act even if it has not filed a Memorandum as required under Section 8(1) of the MSMED Act. Unregistered MSME will also be treated as ‘supplier’ u/s 2(n) of MSMED Act

Read Relevant FAQ’s on MSME Recovery Process at below link-

*Content of this post is a Copyright work and is owned by THE LEGAL DESK (Adv Lalit K Jain)