MSME Payment Disputes: How Statutory Conciliation Works

The MSMED Act, 2006 gives qualifying micro and small suppliers a statutory route for delayed payment disputes through state-level Micro and Small Enterprises Facilitation Councils. ## The statutory payment framework Before getting to the dispute resolution mechanism, it helps to understand what the Act requires: **Payment period.** If no payment period is specified in the agreement, buyers must pay MSME suppliers within 15 days. If a period is specified, the maximum permitted period is 45 days. Agreements that specify periods longer than 45 days are void to the extent of the excess. **Compound interest on delayed payment.** If payment is not made within the statutory period, the buyer is liable to pay compound interest at three times the Reserve Bank of India's bank rate. This interest accrues automatically — no separate notice or claim is required to trigger it. **Eligibility and timing matter.** These protections apply to qualifying micro and small suppliers. Later registration does not retrospectively confer the statutory benefits for supplies completed before registration. ## Filing a reference with the MSEFC When a qualifying micro or small supplier has not been paid within the statutory period and direct attempts to recover have failed, it can file a reference with the MSME Facilitation Council (MSEFC) in the state where the MSME is located. **What to file:** - A written reference (application) to the MSEFC - Copies of invoices, purchase orders, or contracts evidencing the amount owed - Evidence of delivery (delivery notes, acknowledgements) - Evidence that the payment period has passed - Any correspondence with the buyer ## The conciliation stage On receipt of the reference, the MSEFC first attempts to settle the dispute through conciliation. In practice, the Council (or an institution it designates) contacts both parties and tries to bring them to an agreed settlement on the amount and timing of payment. Conciliation under the MSMED Act follows the same broad framework as conciliation under Part III of the Arbitration and Conciliation Act, 1996 — the conciliator may propose settlement terms and the parties may negotiate around those proposals. If both parties reach an agreed settlement, it is recorded and has the status of an arbitral award on agreed terms, enforceable as a court decree. ## If conciliation fails If conciliation does not produce a settlement, the MSEFC does not simply close the matter. It then acts either as arbitrator itself or refers the matter to an institution for arbitration. This is the key practical advantage of the MSMED mechanism: the move from failed conciliation to binding arbitration is automatic and does not require the MSME to start a separate proceeding. The arbitration is conducted under the Arbitration and Conciliation Act, 1996, with the MSEFC (or the designated institution) as the arbitral tribunal. ## Protection against the buyer's defences The MSMED Act anticipates a common defence that buyers raise — that the goods were defective, or that the work was not done properly — and addresses it directly. A buyer cannot use a pending counter-claim or dispute about quality as a reason to withhold payment for undisputed amounts. The statutory payment obligation applies to amounts that are not genuinely in dispute; the counter-claim, if any, proceeds separately. ## Practical tips for MSMEs **Check eligibility before relying on the route.** Registration timing and the date of the supplies matter. Later registration does not retrospectively cover completed pre-registration supplies. **Document delivery meticulously.** The MSEFC process turns on whether goods were delivered or services were performed. Signed delivery notes, email confirmations of receipt, and clear invoices are the foundation of a successful reference. **Calculate interest correctly.** The compound interest at three times the RBI bank rate can be significant, particularly for disputes that have been outstanding for months or years. Include the full interest calculation in your reference — it is a statutory entitlement, not a discretionary claim. **File in the right state.** The MSEFC in the state where your MSME is registered is the correct forum. Filing in the buyer's state is generally not available and wastes time.