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MSME Act, 2006: Legal considerations in deciding disputes of delayed payment

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The MSME Act, 2006

The Micro, Small and Medium Enterprises Development Act, 2006 (in short, “the MSME Act”) is a beneficial legislation which was passed with an intent to promote and enhance the competitiveness of micro, small and medium enterprises (“the MSMEs”) and to address policy issues affecting MSMEs. The Act also classifies the enterprises as micro, small or medium on the basis of their investments in plant and machinery/equipments.

Classification of MSMEs

With effect from 01.07.2020, the government has amended the criteria for classification of MSMEs. The new criteria for classification of MSMEs also included turnover along with the investments in plant and machinery, as detailed below:

1. a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
2. a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
3. a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees

Requirement of registration under MSME Act

MSMEs get preferential treatment in various matters, however, to get the benefit of the preferential treatment, MSMEs need to mandatorily register under the MSME Act.

Following benefits, among others, can be availed by MSMEs pursuant to registration under MSME Act-

1. Time bound resolution of disputed for delayed or non-payment: The MSME Act provides faster and efficient legal remedy for MSMEs in case of delayed payments. Sections 15 to 25 covers various provisions facilitating establishment of Micro and Small Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments.
2. Collateral Free Loans: Under Scheme for ‘Credit Guarantee Fund for Micro and SmalI Enterprises’, Banks and financial institutions are provided funding assistance under this scheme so that they can in turn lend collateral free credit to MSMEs.
3. Subsidies and Exemption: MSMEs get various subsidies like subsidy in patent registration, electricity bills, ISO certification charges, etc.
4. Preference in Public Procurement: The government has notified Public Procurement Policy for Micro and Small Enterprises (MSEs) **Order, 2018 has been notified under section 11 of the MSME Act. Under this policy, every Central Ministry /Department / PSUs shall set an annual target for 25% procurement from MSE Sector.

There are various other benefits which MSMEs can avail subsequent to registration under MSME Act.

Delayed Payments to MSMEs

Any buyer who buys any good or avails any service from an MSME has to make the payment on or before the agreed date and the agreed date cannot exceed forty-five (45) days from the day of acceptance or the day of deemed acceptance. In case there is no agreed date, the payment has to be made on or before fifteen (15) days.

In case of delay, the buyer is liable to pay compound interest with monthly rests to the supplier for the period of delay, at three (3) times of the bank rate notified by the Reserve Bank of India.

LEGAL REMEDY

In case of any dispute with regard to the payment, any party can make a reference to the Micro and Small Enterprises Facilitation Council (MSEFC). Thereafter, MSEFC will conduct conciliation in the matter, to which the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 will apply.

If conciliation fails, MSEFC will arbitrate on the dispute, to which the provisions of the Arbitration and Conciliation Act, 1996 will apply. Every reference has to be decided within a period of ninety (90) days.

Jurisdiction of MSEFC

MSEFC can act as an Arbitrator or Conciliator in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India.

Applicability of Limitation Act

In M/S Silpi Industries vs. Kerala State Road Transport Corporation; C.A. Nos.1570-1578 of 2021, the Supreme Court has held that the Limitation Act, 1963 will apply to proceedings of arbitration before MSEFC.

Maintainability of counter-claims before MSEFC

In M/S Silpi Industries vs. Kerala State Road Transport Corporation; C.A. Nos.1570-1578 of 2021, the Supreme Court observed that since there is an express provision for filing counter-claim and set-off in the Arbitration and Conciliation Act, 1996, there is no reason for curtailing the right for making counter-claim or set-off in proceedings before the MSEFC.

Mandatory conciliation and arbitration proceedings

The conciliation and arbitration proceedings are separate arbitration has to mandatory follow in accordance with the procedure enunciated under Arbitration and Conciliation Act, 1996 in case conciliation fails.

In Jharkhand Urja Vikas Nigam Limited vs. The State of Rajasthan & Ors.; C.A. No.2899 of 2021, the Supreme Court set aside the order of MSEFC on the ground that the MSEFC passed the order only after conciliation failed without conducting arbitration proceedings.

Concluding Remarks

MSME Act provides fast and efficacious remedy for MSMEs for resolution of disputes in case of delayed payment. It is important that the claim/reference is filed before the MSEFC within the limitation period. It is equally important that the correct procedure is followed by the MSEFC.