Delayed Payments to MSME - Case filing before MSEFC Council

SMEs are backbone of India economy. Earlier, the large organizations were only considered potential economy boosters but now the scenario has changed. Small and medium-sized enterprises (SMEs) are seen as the growth engine of the Indian economy. There are over 5.5 crore small enterprises that drive our Indian economy through manufacturing, exporting, importing, trading, etc. Along with this, the SME sector has been successful in providing employment opportunities in formal and informal sectors. The number of employment opportunities is bound to grow, considering the rising achievements by this sector. The SME contributes 45% to total manufacturing output and 40% to the exports from the nation. It is the largest sector also the training sector for many unemployed and unskilled people.

Micro, Small and Medium Enterprises Development Act, 2006

The Micro, Small and Medium Enterprises Development Act 2006 is a single comprehensive act for development and regulation of micro and small enterprises. The broad objective of the Act is to facilitate the promotion, development and enhance competitiveness of micro, small and medium enterprises and for matters connected incidental thereto.

Registration as Micro, Small and Medium Enterprise (MSME) under the Act

The following slabs have been prescribed for classification of enterprises into micro, small and medium under the Act:

New Proposed Definition of MSME - Turnover based

Currently, the Act classifies micro, small and medium enterprises (MSMEs) on the basis of investment in Plant and Machinery or in Equipments. However, Govt. introduced The Micro, Small and Medium Enterprises Development (Amendment) Bill, 2018 in Lok Sabha on July 23, 2018. The Bill introduces a uniform classification for all MSMEs whether they are manufacturing or service-providing enterprises. All MSMEs will be classified on the basis of their annual turnover instead of present criteria of investment. This bill is still not being passed by the Parliament. So at present we have to consider old definition of Micro and Small enterprises till the bill passed in Parliament.

Payment Protection to MSME under the Act

Section 15 of the Act states that where the supplier supplies goods or renders any services to any buyer, then the buyer shall make payment on or before the date mentioned in the agreement and, if there is no agreement, then before the appointed date. The proviso to this Section states that the period of credit given by the seller shall not exceed 45 days from the day of acceptance or from the date of 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.

• "the 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;

• "the day of deemed acceptance" means where no 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 of the actual delivery of goods or the rendering of services;

Whether MSME registration is compulsory to avail benefits?

Where the micro, small and medium enterprises (MSMEs), that are unregistered under the MSMED Act at the time of execution of the contract, can be treated as supplier or not? A bench of Delhi High Court in case of 'M/S Ramky Infrastructure Private Limited vs. Micro and Small Facilitation Council & Anr' held that registration of MSMEs under MSMED Act is not mandatory to avail benefits under the Act. An entity which falls within the definition of the micro, small and medium enterprise will be treated as a ‘supplier’ under Section 2(n) of the MSMED Act even if it has not filed a Memorandum as required under Section 8(1) of the MSMED Act.

Penal Interest on Delayed Payment to MSME Enterprise

In case of failure by the buyer to make payment on time, the buyer is required to pay compound interest with monthly interest rests to the supplier on that amount from the agreed date of payment or fifteen days of acceptance of goods or service. The penal interest chargeable for delayed payment to a MSME enterprise is three times of the bank rate notified by the Reserve Bank of India. The penal interest paid by the buyer or payable by the buyer is not allowed as a deduction under the Income Tax Act, making the burden, even higher.

Reference to council in case dispute regarding payment

In case of any dispute regarding the payment of principal or interest between the supplier and the borrower, reference shall have to be made to the jurisdictional Micro and Small Enterprises Facilitation Council (MSEFC), popularly known as ‘MSME Court’ constituted by the respective state governments. MSEFC of the State after examining the case filed by MSME unit will issue directions to the buyer unit for payment of due amount along with interest as per the provisions of the Act. Every reference made to MSEFC shall be decided within a period of 90 days from the date of making such a reference as per provisions laid in the Act.

How to file case before MSEFC?

Office of Development Commissioner, MSME has taken an initiative for filing online application by the supplier MSME unit against the buyer of goods/services before the concerned MSEFC. The government has launched an online delayed payment monitoring system called the MSME Samadhaan for filing an application. Any MSME, having a valid Udyog Aadhaar Memorandum (UAM) can make an application via this portal. After an application is made by the MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of the due amount along with the interest.

Working of MSEFC

From the date of launch of the MSME Samadhaan portal in October 2017, around 3000 applications related to delayed payments is being filled involving an amount of around Rs.750 Crore. This portal has also helped in getting the delayed payments settled mutually between seller and buyer.

Disclosure Requirements

Section 22 of the Act states that the buyer, who buys goods or avails services from the MSMEs, and is required to get his annual accounts audited, has to mandatorily disclose the following additional information in its annual statement of accounts with respect to the amount due to the MSMEs:

• The principal amount and the interest due thereon remaining unpaid to the supplier till the appointed date;
• The amount of interest paid by the buyer on account of delayed payments;
• The principal amount and interest due beyond the appointed date for the period of delay;
• The amount of interest accrued and remained unpaid at the end of each year;
• The amount of further interests remaining due and payable even in succeeding years, until such date when the interest due is actually paid to the MSMEs.

Half-yearly Reporting Requirements to Companies

Central Government made it compulsory to file MSME return with the Registrar of Companies w.r.t outstanding payments to MSMEs beyond 45 days. Every Company who get supplies of goods or services from micro and small enterprises, and payment to them are pending for more than 45 days from the date of acceptance or deemed acceptance of goods or services, has to file half-yearly ‘MSME Form I’ within 31st October and 30th April respectively every year. By this step, Govt. wants to get defaulting companies details in advance so that corrective actions can be done on initial stage without any delay.