The MSMED Act, 2006: Delayed Payments and the MSEFC Route

The MSMED Act's delayed-payment regime is directed to qualifying micro and small suppliers. The familiar expression "MSME" also includes medium enterprises, but medium enterprises do not obtain the Chapter V delayed-payment remedy merely from that label.

Payment dates and interest

Section 15 requires payment by the written agreed date, but the agreed period cannot exceed 45 days from acceptance or deemed acceptance. Where there is no written agreement, the statutory appointed day follows the 15-day period defined in Section 2(b).

Section 16 imposes compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. The guide should not describe this simply as "treble-rate interest" without explaining the statutory bank-rate base and compounding.

Registration and timing matter

The statutory definition of "supplier" and the enterprise's registration status must be checked. In Silpi Industries, the Supreme Court held that later registration does not retrospectively confer MSMED benefits for supplies completed before registration. A page should therefore not promise the MSEFC route to every business that obtains Udyam registration after the dispute has arisen.

Section 18 process

A reference goes first to conciliation by the Council or an ADR institution. If conciliation fails, the Council may itself take up arbitration or refer the dispute to an ADR institution. The Arbitration and Conciliation Act then applies as though the parties had an arbitration agreement.

Section 18(5) states that every reference shall be decided within 90 days. This is a statutory target, not a guarantee of actual disposal within 90 days. The route should not be advertised as court-free: awards may lead to Section 34 proceedings, appeals and enforcement proceedings.

Effect of an existing arbitration agreement

The Supreme Court has held that the special Section 18 mechanism overrides an inconsistent private arbitration arrangement for a qualifying supplier. It has also recognised counterclaims and the application of limitation principles in Section 18 arbitration. These issues are fact-sensitive and should not be compressed into a promise of automatic recovery.

Challenge and pre-deposit

Section 19 requires a non-supplier appellant to deposit 75% of the relevant amount before the court entertains the setting-aside application. The court may order a reasonable part of the deposit to be paid to the supplier during the challenge, subject to conditions.

The MSEFC route is powerful, but eligibility, registration timing, limitation, jurisdiction, counterclaims, the quality of invoices and proof of acceptance all require case-specific review.

To file a claim, see the MSME ODR portal guide; if you are not an eligible supplier, see recovering money owed in India.