MSME Samadhaan and Delayed Payments: Filing with Facilitation Councils

This statutory recovery framework covers:

• Enterprises registered as Micro or Small under the Udyam Registration portal at the time of entering the supply contract or delivering the goods and services.
• Buyers including private limited companies, public limited companies, sole proprietorships, partnership firms, limited liability partnerships, central and state public sector enterprises, and government departments.

It does not cover:

• Medium enterprises (the statutory delayed payment benefits under Sections 15 to 24 apply exclusively to micro and small enterprises).
• Traders and retail distributors, whose Udyam registration is restricted to priority sector lending benefits and does not extend to Chapter V recovery rights.
• Contracts executed before the enterprise obtained valid Udyam registration.

Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) establishes strict statutory obligations on buyers [1]:

• Section 15 (Payment Period): The buyer must make payment on or before the agreed date. In no case shall the agreed period between the buyer and the supplier exceed forty-five calendar days from the day of acceptance or the day of deemed acceptance. If there is no agreed date, payment is due within fifteen days.
• Section 16 (Compound Interest): If the buyer fails to pay within the Section 15 period, the buyer is liable to pay compound interest with monthly rests to the supplier at three times the Bank Rate notified by the Reserve Bank of India.
• Section 17 (Buyer's Liability): The buyer is legally bound to pay the principal amount along with statutory interest.
• Section 18 (Facilitation Council): Any party may refer a payment dispute to the Micro and Small Enterprises Facilitation Council (MSEFC). The Council conducts conciliation. If conciliation fails, the Council takes up arbitration itself or refers it to an alternative dispute resolution center under the Arbitration and Conciliation Act, 1996.
• Section 19 (75% Pre-Deposit): No court or appellate tribunal can entertain any application or appeal to set aside any decree or award passed by the MSEFC unless the appellant buyer deposits seventy-five percent of the awarded amount with the court.
• Section 24 (Overriding Effect): Sections 15 to 23 hold legal effect notwithstanding anything inconsistent contained in any other law for the time being in force.

The recovery procedure operates through the online Samadhaan portal managed by the Ministry of MSME.

1. Digital Application: The micro or small supplier visits samadhaan.msme.gov.in, logs in using their Udyam registration number, and enters buyer details, purchase order numbers, invoice dates, and unpaid amounts.
2. Automated Notice: Upon submission, the portal generates an automated intimation to the buyer, giving them fifteen calendar days to respond, settle dues, or raise objections.
3. Council Case Number: If the buyer does not pay, the application converts into a formal case before the state or district MSEFC having territorial jurisdiction over the supplier.
4. Conciliation Hearing: The Council summons both parties. If the buyer admits the debt, a mutually agreed payment schedule is recorded.
5. Arbitration and Award: If the buyer disputes the debt or fails to appear, the conciliation terminates. The Council initiates formal arbitration proceedings under Section 18(3), examines proof of delivery, and issues an enforceable arbitral Award covering principal plus 3x compound interest.

The fatal error made by many suppliers is obtaining Udyam registration after executing the work order or dispatching the goods. The Supreme Court in Silpi Industries established that an enterprise must hold an active Udyam registration on the date the contract was entered into to claim protection under the MSMED Act. Registration obtained retrospectively does not grant access to the MSEFC.

A second common issue is failing to maintain rigorous proof of delivery. If a buyer claims non-receipt of goods or defects in service, and the supplier cannot produce signed delivery challans, lorry receipts, or inspection acceptance emails, the Council cannot calculate the deemed acceptance date under Section 2(b).

A third pitfall is confusing the Facilitation Council with a regular civil court. The Council cannot pass a final money decree at the conciliation stage without formally converting the proceeding into arbitration under Section 18(3). Rushing the Council to pass summary orders without recording the termination of conciliation results in the order being set aside by High Courts.

Follow these numbered steps to recover unpaid business dues:

1. Verify that your Udyam Registration Certificate was active and listed the relevant manufacturing or service activity code prior to the invoice dates.
2. Send a formal payment demand notice to the buyer referring to Section 15 of the MSMED Act, stating that thirty-fold interest calculations under Section 16 will apply if payment is not remitted within seven days.
3. Collate all documentation: Udyam certificate, written purchase order, delivery challan or proof of dispatch, tax invoice, and bank account statement showing non-receipt.
4. Log into samadhaan.msme.gov.in and file an online delayed-payment application. Upload the invoice and delivery proof in PDF format.
5. Attend the conciliation hearing scheduled by the MSEFC. If the buyer fails to attend or refuses to pay, formally request the Council to terminate conciliation and enter reference for arbitration under Section 18(3).
6. Upon receipt of the final Arbitral Award, wait thirty days. If the buyer does not pay, file an execution petition before the Principal District Court or High Court under Section 36 of the Arbitration and Conciliation Act, 1996.

In Gujarat State Civil Supplies Corporation v. Mahakali Foods, a two-judge bench held that the statutory dispute resolution mechanism under Section 18 of the MSMED Act, 2006 has overriding effect over any independent arbitration agreement between the parties under the Arbitration and Conciliation Act, 1996 [2]. In Silpi Industries, the Court firmly closed the door on post-facto registrations, holding that benefits under Chapter V are unavailable if registration was absent on the contract date [3]. In Jharkhand Urja Vikas Nigam, the Court emphasized that conciliation and arbitration are distinct statutory phases that cannot be merged [4].

Can a medium enterprise file an application on MSME Samadhaan?

No. Chapter V of the MSMED Act, 2006 restricts the delayed payment remedy under Sections 15 to 24 strictly to micro and small enterprises [1]. Medium enterprises must pursue recovery through commercial suits or civil arbitration.

What is the current interest rate for delayed payments to MSMEs?

Under Section 16, interest is calculated at three times the RBI Bank Rate, compounded monthly [1]. With the current RBI Bank Rate at 6.75%, the statutory penal interest stands at 20.25% per annum, compounded monthly.

Can a buyer deduct the penal interest paid to an MSME as a business expense for tax?

No. Section 23 of the MSMED Act explicitly provides that interest paid or payable by a buyer under Section 16 cannot be deducted as an expense while calculating taxable income under the Income-tax Act [1].

Does MSME Samadhaan apply if there was no written contract?

Yes. If there is no written contract fixing a credit period, Section 15 provides that the statutory payment deadline is fifteen calendar days from the date the goods or services were delivered and accepted.

What happens if the buyer goes into insolvency under the IBC?

If the corporate buyer is admitted into Corporate Insolvency Resolution Process (CIRP) under the Insolvency and Bankruptcy Code, 2016, a statutory moratorium under Section 14 takes effect, pausing MSEFC proceedings. The MSME supplier must then submit their claim to the Interim Resolution Professional (IRP) as an operational creditor using Form B.

• Business, MSME and Working Capital Loans
• Tax: Section 43B(h) and MSME Deductions
• The Step-by-Step Complaint Ladder
• How to File on the RBI CMS Portal