MSMEs and Debt Recovery through the MSMED Act

Introduction

 

The Micro, Small, and Medium Enterprises (MSMEs) sector plays a vital role in the Indian economy. Their regulation is governed by the MSMED Act, 2006. This post provides an in-depth overview of the classification, debt recovery mechanisms, and arbitration procedures under the Act, helping MSMEs navigate their legal and financial challenges.

 

Classification of MSMEs

 

Under the MSMED Act, 2006, MSMEs are classified into two broad categories:

1. Manufacturing Enterprises: Enterprises engaged in the manufacture or production of goods or employing plant and machinery in the process of value addition to create a final product having a distinct name/character of use.

2. Service Enterprises: Enterprises engaged in providing or rendering services and are defined in terms of investment in equipment.

In addition, since 2018, MSMEs are also defined based on their annual turnover, reflecting their evolving role in the economy.

Debt Recovery Mechanisms Under the MSMED ACT

 

Chapter V of the MSMED Act outlines the provisions for recovering outstanding amounts from buyers. These provisions apply when buyers have availed services or purchased goods.

A. Section 15: Payment Deadlines for Buyers:

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.

B. Section 16: Interest Penalties for Delayed Payments:

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.

C. Section 17: Payment of Principal and Interest:

Buyer to make payment along with interest.

D. Section 18: Role of the Micro and Small Enterprises Facilitation Council (MSEFC):

MSME 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 the MSMED Act in Debt Recovery

 

The MSMED Act aims to:

Objective A: Ensuring Timely Payments

Statutorily bind the buyer to pay the MSME supplier within the statutory due date. Ideally, within 45 days of the acceptance of the goods/service rendered.

Objective B: Penalizing Delayed Payments

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. This is on the amount at the three times of the bank rate notified by RBI.

Objective C: Expediting Dispute Resolution

Provide for efficient statutory mechanism for expeditious resolution of supply and payment related disputes.

Objective D: Securing Supplier Viability

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. 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.

When read in conjunction with Section 34(3) and Sec., the intent behind the effective and expeditious remedy incorporated in Section 18(5) and Section 19 of the MSMED Act 2006 becomes clearer. 36 of Arbitration Act. The court can fairly deduct at least 75% of the amount and disburse it to the MSME supplier within six months to preserve the supplier’s viability and financial health and to prevent the onset of sickness.

 

Benefits of the MSMED Act for MSMEs

 

The MSMED Act provides several advantages for MSMEs, including:

a. Faster and most affordable process for the MSME-vendors

b. Most beneficial as MSME-vendors are mainly Operational Creditors.

c. The MSME SAMADHAAN online portal allows businesses to file cases.

d. The total amount due along with interest accrued during the period. It’s possible to obtain this without relying solely on the Resolution plan and Liquidation Amount.

e. Defaulter approaching for appeal must deposit 75% of the Award amount prior to filing of appeal.

f. MSME can check the status through online portal

The MSMED Act may offer a step in the right direction toward financially stabilizing MSMEs in these trying times. This is especially so in light of the growing need to protect these businesses and promote growth. The suspension of the trigger clauses in the IBC for about six months as proposed may not be sufficient. Looking at it from a practical angle, there could be an extension of this period. It becomes only logical that the MSMEs take recourse under the MSMED Act for sustenance and stability. We must protect this sector from unwarranted litigation by strengthening and making the process set up under the Act very effective. Most importantly effective execution to help out the sector.

 

Filing a case on MSME Samadhaan portal – Delayed Payment Monitoring System

 

To file a case on the MSME Samadhaan portal, follow these steps:

a. Access the MSME Samadhaan portal at samadhaan.msme.gov.in/.

b. Enter your Udyog Aadhaar Number and mobile number as in the Udyog Aadhaar. Once you’ve entered the verification code as displayed, proceed to click the “validate Udyog Aadhaar” button. You will get an OTP on your email. Fill the OTP and start filing the case.

c. To file a case on the MSME Samadhaan Portal, you must be registered under Udyog Aadhaar. If you haven’t already, head to udyogaadhaar.gov.in to complete your registration process.

d. Upload a maximum of three work orders and three invoices in PDF format to the portal. File size should not exceed 1MB.

e. You can check status of your case by entering Udyog Aadhaar Number or application number.

 

MSMEs and Arbitration

 

Enhancing competitiveness and facilitating development and promotion are the main goals of the Micro, Small, and Medium Enterprises Development Act of 2006. The MSME Act requires buyers of products or services from MSMEs to pay sellers within 45 days or face a high interest rate. If the MSME Facilitation Council fails to resolve a dispute through conciliation, alternatively, Section 18 allows the parties to either submit the matter to an arbitration institution or initiate arbitration proceedings.

The MSME Act’s provisions would apply to a dispute between parties in which one of the parties is a supplier, provided that the supplier first asserts its jurisdiction before the other parties do. However, the MSME Act’s requirements might not apply to arbitration proceedings if the Buyer initiates arbitration first in accordance with the terms of the parties’ contract. To put it simply, if the Buyer wants to avoid Arbitration under the MSME Act, it must act proactively and initiate arbitration under the contract before the Seller does.

Under the MSME Act, appellants have to deposit 75% award in order to appeal. According to the Arbitration and Conciliation Act, a 100% deposit of the amount is necessary. Therefore, we must carefully consider which procedure to choose.

 

Useful Links

 

http://www.ipface.org/pdfs/schemes/MSMESchemes-OriginalDocument.pdf
https://msme.gov.in/ip-facilitation-centre-msme
http://www.dcmsme.gov.in/schemes/IPRDetail.html
http://www.dcmsme.gov.in/emerge/intpr.htm
https://economictimes.indiatimes.com/small-biz/sme-sector/why-msmes-should-treat-intellectual-property-rights-as-assets/articleshow/69304077.cms?from=mdr
https://www.wipo.int/edocs/pubdocs/en/wipo_natstudy_sme_india.pdf
https://www.altacit.com/publication/msmes-and-intellectual-property-rights/

 

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