MSME

This page explains MSME legal issues: delayed payments, facilitation council claims and MSME disputes in plain terms: the law, the forum, the documents and the usual steps. Legals365 is the legal platform of Advocate B.K. Singh and associates, based in Delhi NCR.

In short. A micro or small enterprise that is not paid within the agreed period (never more than 45 days from acceptance) can claim the principal plus compound interest at three times the RBI bank rate under the MSMED Act 2006. The claim is filed online through MSME Samadhaan before the Micro and Small Enterprises Facilitation Council, which conciliates and then arbitrates.

Most MSME disputes begin the same way: goods or services delivered, invoices raised, and a buyer who keeps saying the payment is in process. The Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) gives small suppliers a stronger hand than an ordinary creditor. It fixes an outer limit of 45 days for payment, adds interest at a punishing rate, sends the dispute to a state body called the Micro and Small Enterprises Facilitation Council (MSEFC), and makes a buyer who wants to challenge the award deposit 75% of it first.

That is the supplier's side. MSME law also touches enterprises in other ways: as borrowers facing a bank's SARFAESI notice, as operational creditors or corporate debtors under the Insolvency and Bankruptcy Code, as parties to a wrong charge registered on CERSAI, and as businesses that simply need their purchase orders and supply contracts written so that payment disputes do not happen. This page explains each of these, how the law works in practice before the councils in Delhi, Uttar Pradesh and Haryana, what documents you need, what goes wrong, and what to do first.

Law

Micro, Small and Medium Enterprises Development Act 2006, Chapter V (ss.15 to 24); Arbitration and Conciliation Act 1996; Udyam registration notification of 26 June 2020 as revised from 1 April 2025

Forum

Micro and Small Enterprises Facilitation Council of the state where the supplier is located, through the MSME Samadhaan portal; then the court for challenge or execution of the award

Payment deadline

As agreed in writing, but never more than 45 days from the day of acceptance or deemed acceptance; 15 days where there is no written agreement

Interest

Compound interest with monthly rests at three times the bank rate notified by the RBI, from the date payment fell due

Time limit

Limitation Act applies to the arbitration stage (generally 3 years from the due date); it does not bar conciliation, as held in Sonali Power Equipments (2025)

Who can claim

Micro and small enterprises registered on the Udyam portal that supply goods or services; medium enterprises and traders registered only for priority sector lending cannot use s.18

Challenge to award

Petition under s.34 of the Arbitration Act, with deposit of 75% of the awarded amount under s.19 MSMED Act

Documents

Udyam certificate, purchase order or contract, invoices, delivery proof, ledger, correspondence, GST returns showing the supply

What the MSMED Act gives an unpaid supplier

The MSMED Act gives a micro or small supplier three things an ordinary creditor does not have: a statutory payment deadline, a high statutory rate of interest, and a dedicated forum that the buyer cannot contract out of. Section 15 says the buyer must pay on or before the date agreed in writing, and that agreed period cannot exceed 45 days from the day the goods or services were accepted or deemed accepted. If there is no written agreement, the buyer must pay within 15 days.

Section 16 adds compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India, running from the date the payment should have been made. Section 17 makes the buyer liable for the amount and that interest. Section 18 lets either party refer the dispute to the Facilitation Council, which first tries conciliation and, if that fails, arbitrates the dispute itself or sends it to an arbitration institution. Section 24 says these provisions override anything inconsistent in any other law.

The practical effect is that interest often grows faster than the principal. A buyer who holds back a few lakh rupees for two or three years can face an award several times larger than the original invoice. That is why many buyers settle once a well-prepared reference is filed, and why a buyer who receives a council notice should take it seriously from the first date.

MSME classification and who gets delayed payment protection

The provisions that decide an MSME payment dispute

Who counts as a supplier, and the registration question

Only a micro or small enterprise registered on the Udyam portal can bring a reference under s.18. Registration is free and online, and it is based on PAN and GST data, so most manufacturers and service providers can register in a day. Medium enterprises are outside the delayed payment chapter altogether, even though they are MSMEs for other purposes. Retail and wholesale traders were allowed Udyam registration in 2021, but only for priority sector lending, so a pure trader usually cannot use the council.

The harder question is timing. In Silpi Industries v Kerala SRTC (2021) and Gujarat State Civil Supplies Corporation v Mahakali Foods (2022), the Supreme Court held that a supplier must have been registered when the contract was made, and that later registration works only for later contracts. In NBCC (India) Ltd v State of West Bengal (January 2025), a two-judge bench took a different view and referred the question to a larger bench, which had not decided it at the time of writing. Until that is settled, a supplier registered after the contract should expect the buyer to raise the point, and should look closely at when each purchase order was issued, because a running supply relationship often has fresh orders after the registration date.

When Advocate B.K. Singh takes up a council claim, the first thing he lines up is the Udyam certificate against the dates of the purchase orders and invoices. If some supplies fall before registration and some after, it is usually better to claim the later ones cleanly through the council and pursue the earlier ones separately than to put the whole claim at risk.

How the 45-day clock runs

The clock starts on the day of acceptance, not the day of the invoice. Under the explanation to s.2(b), acceptance means actual acceptance, or, where the buyer raises no written objection within 15 days of delivery, the day of delivery. That second rule, deemed acceptance, is what usually helps a supplier: if the buyer used the goods, signed the delivery challan and raised no complaint in writing within 15 days, it will struggle to argue later that the goods were defective.

Where the parties agreed in writing on a payment date, the buyer must pay by then, but the agreement cannot stretch beyond 45 days from acceptance. Clauses that allow 90 days, payment after the buyer's own customer pays, or payment after a third-party inspection certificate do not stop s.16 interest from running after day 45. They may still matter as evidence of when acceptance happened, so read them carefully.

For services, acceptance is usually the date the work is completed and accepted, often shown by a completion certificate, a sign-off email or the buyer's use of the work. For staged contracts, each running bill is normally treated as a separate supply with its own date of acceptance. Keep the proof of each stage, because that is what the council will ask for when it calculates interest.

Interest on delayed payment: how it is calculated

Interest under s.16 is compound, with monthly rests, at three times the bank rate notified by the RBI, and the rate is applied as it stood over the period of delay. The bank rate moves with RBI policy, so a careful claim shows the rate for each period rather than a single figure. The council applies the statute, so a contract clause providing a lower rate, or no interest at all, does not reduce the supplier's entitlement.

Part payments are usually adjusted first against interest and then against principal, unless the parties agreed otherwise or the payment was clearly made against a particular invoice. A supplier who accepts a part payment marked full and final should be careful: depending on the facts, it can weaken the claim for the balance.

Interest is the main reason MSME awards are large, and also the main reason buyers fight them. Present the calculation as a simple invoice-wise table with acceptance date, due date, payments received and interest to date. Councils deal with many references and a clear table shortens the hearing.

How to file an MSME Samadhaan claim before the Facilitation Council

The procedure is broadly the same across states, although councils differ in how quickly they list matters and how strictly they run conciliation.

1. Check eligibility and limitation

   Confirm the Udyam registration date, the category (micro or small), the dates of each purchase order and supply, and whether the oldest invoices are close to the three-year limitation for arbitration. Claims near the limit should be filed first and argued later.

2. Build the invoice-wise statement

   Prepare a ledger extract and a table of invoices with acceptance date, due date, amount paid and amount outstanding. Add the s.16 interest calculation. Reconcile it with the buyer's GST data (GSTR-2B) where you can, because buyers who claimed input tax credit find it hard to deny the supply.

3. Send a demand notice

   A legal notice is not mandatory before a s.18 reference, but a short notice citing the MSMED Act, the invoices and the interest often produces payment or an admission. It also fixes the record if the buyer later says it never received the invoices. Do not give a long deadline; 15 days is common.

4. File on the MSME Samadhaan portal

   The application is filed online with the Udyam number, buyer details, invoice particulars and supporting documents. The portal forwards it to the council of the state where the supplier is located. Keep the application number and watch the portal and your email for the first date.

5. Attend conciliation

   The council or a conciliator it appoints calls both sides. Many cases settle here, often by payment of the principal with a part of the interest. Any settlement should be written, signed and recorded, with a clear payment schedule and a default clause.

6. Arbitration and award

   If conciliation fails, the council arbitrates or refers the case to an institution. Pleadings, documents and arguments follow the Arbitration Act. The award states the principal, interest and costs. Section 18(5) sets 90 days for the whole process, though in practice references often take longer.

7. Enforce or defend the award

   An award is enforced like a court decree under s.36 of the Arbitration Act through the court with jurisdiction. If the buyer challenges it under s.34, it must deposit 75% of the award under s.19, and the supplier can ask the court to release part of that deposit.

If you are the buyer, the same steps apply in reverse: track the notice, reply on merits and on jurisdiction, prepare your own documents, and decide early whether a negotiated settlement is cheaper than a contested award.

Inside the Facilitation Council: conciliation, arbitration and jurisdiction

The council is a state body set up under s.20 and s.21, usually chaired by the Director or Commissioner of Industries, with members from industry associations and banks. Delhi has a council under the Department of Industries; Uttar Pradesh and Haryana run regional or divisional councils, so the right council in those states depends on where the supplier's unit is registered. The council where the supplier is located has jurisdiction under s.18(4), which is why a Noida or Faridabad supplier can make a Mumbai or Bengaluru buyer appear before its local council.

An arbitration clause in the supply contract does not take the dispute away from the council. In Mahakali Foods, the Supreme Court held that s.18 overrides a private arbitration agreement and that the council members who conducted conciliation may also act as arbitrators. The same line of judgments allows the buyer to raise a counter-claim and set-off in the council arbitration, so a supplier should be ready to meet complaints about quality, short supply or delay.

Hearings are less formal than in court but the record still matters. Councils decide on documents: purchase orders, invoices, delivery challans, e-way bills, ledgers and emails. Oral explanations without paper rarely move the arbitrators.

Limitation: the time limit for an MSME claim

The Limitation Act applies to the arbitration stage of a s.18 reference, but not to conciliation. That is the effect of the Supreme Court's decision in Sonali Power Equipments Pvt Ltd v Chairman, Maharashtra State Electricity Board (2025). For a money claim the period is generally three years from the date each payment fell due, so the oldest invoices drop out first.

A time-barred claim can still go to conciliation and can be recovered if the buyer agrees to settle there. But if conciliation fails, the arbitrators will not award a time-barred claim. A written acknowledgment of debt signed by the buyer before the period runs out (s.18 of the Limitation Act), or a part payment made within time (s.19), starts a fresh period. Whether a buyer's disclosure of the dues in its own balance sheet under s.22 of the MSMED Act extends limitation is decided on the facts of each case.

So the practical rule is simple: if any invoice is more than two and a half years old, file now. Collect every confirmation of balance, signed ledger, email admitting the dues and part payment receipt, because these are what keep older invoices alive.

For buyers: defending an MSME council claim

A buyer facing a council notice has real defences, and they work best when raised early and backed by documents. The common ones are that the supplier was not a registered micro or small enterprise on the contract date, that it is a trader or medium enterprise, that the goods were rejected in writing within 15 days, that the claim is time-barred for arbitration, that the amount was already paid or adjusted, and that the buyer has a counter-claim for defects, delay or liquidated damages under the contract.

Jurisdiction objections should be raised at the first hearing and pleaded in the statement of defence, because a buyer who participates without objection may find it harder to raise the point later under s.16 of the Arbitration Act. A buyer who ignores the notice altogether gives up its defences: councils proceed ex parte and the 75% deposit then applies to a larger, unchallenged award.

Buyers also have internal reasons to settle. Unpaid MSME dues appear in the audited accounts and in MSME Form 1, and the income-tax deduction for late payments is postponed until actual payment. Large companies above the notified turnover threshold (currently ₹250 crore) must be onboarded on a TReDS platform, where suppliers can discount accepted invoices. In many cases the cost of contesting is higher than the interest saved.

Challenging or enforcing an MSME award

An MSEFC award can be challenged only under s.34 of the Arbitration and Conciliation Act, within three months of receiving it (extendable by 30 days for sufficient cause), and only after the buyer deposits 75% of the awarded amount under s.19 of the MSMED Act. Courts have treated the deposit as mandatory; they can allow it in instalments in a hard case, but not waive it. The grounds under s.34 are narrow: lack of jurisdiction, no proper notice, the award dealing with matters outside the reference, patent illegality, or conflict with public policy. A disagreement with the arbitrators' view of the evidence is not enough.

Where the award is for a commercial dispute of the specified value, the s.34 petition goes to the commercial court with jurisdiction, and in Delhi that may be the commercial court at the district level or the Delhi High Court depending on the value. Execution under s.36 is filed in the court where the buyer's assets are located, and it can include attachment of bank accounts, receivables and property. Appeals under s.37 are limited.

If you are the supplier and the buyer has filed a s.34 petition, apply early for release of part of the deposit against security. If you are the buyer, check the grounds carefully before depositing 75%: an unsuccessful challenge adds costs and delays nothing that interest will not make up for.

Other routes: notice, suit, cheque bounce and insolvency

The council is not the only route, and sometimes not the best one. If the buyer issued cheques that bounced, a complaint under s.138 of the Negotiable Instruments Act runs in parallel with the money claim; see filing a cheque bounce complaint. A carefully drafted legal notice is often enough with a solvent buyer who has simply been slow. Medium enterprises, traders and unregistered suppliers who cannot use s.18 can file a summary suit under Order 37 of the CPC or a commercial suit, after pre-institution mediation under s.12A of the Commercial Courts Act; see commercial court suits.

Where the buyer is a company that owes at least ₹1 crore and has no genuine pre-existing dispute, an operational creditor's application under s.9 of the IBC before the NCLT is possible after a demand notice under s.8. It is a serious step: once admitted, every creditor joins the queue and an operational creditor usually recovers less than a council award would give. Read more on insolvency under the IBC before choosing this.

If the contract itself has a general arbitration clause and the supplier is not eligible for the council, the clause governs; see arbitration: appointment, interim relief and award challenges. Settlement-minded parties can also use court-annexed mediation, conciliation and Lok Adalat, whose settlements are final.

When the MSME is the borrower: banks, SARFAESI and revival

An MSME that has borrowed from a bank and fallen behind has some protections that general borrowers do not. Under the Framework for Revival and Rehabilitation of MSMEs notified by the MSME Ministry in 2016, and the RBI directions built on it, banks must identify stress early and place the account before a committee that can consider restructuring, a rectification plan or recovery. In Pro Knits v Board of Directors of Canara Bank (2024), the Supreme Court held that banks are bound to follow this framework, but also that the MSME must bring its status to the bank's notice with proof such as the Udyam certificate, and cannot use the framework to stall honest recovery.

If the bank has already issued a SARFAESI notice under s.13(2), the borrower can raise the framework in its objection under s.13(3A) and, if possession is taken, in an application under s.17 before the DRT within 45 days; see Section 17 SARFAESI application in the DRT. For settlement routes, see loan settlement and one-time settlement.

Under the IBC, the promoter of an MSME corporate debtor is not barred from bidding for its own company by the ineligibility clauses in s.29A(c) and (h) (s.240A), and the pre-packaged insolvency process under s.54A is open to MSME corporate debtors at a default threshold of ₹10 lakh. Both are useful when a sound business is carrying an unsustainable loan.

CERSAI disputes for MSMEs

The Central Registry of Securitisation Asset Reconstruction and Security Interest of India (CERSAI) records security interests created over property, receivables and other assets under ss.20 to 26 of the SARFAESI Act, and assignments of receivables under the Factoring Regulation Act 2011. For an MSME, CERSAI problems usually come in three forms: a charge that was never satisfied after the loan was repaid, a charge registered over the wrong asset, or a factoring assignment that blocks fresh finance against receivables.

The first step is a written request to the secured creditor to file the satisfaction or correction, with the closure letter, no-dues certificate and loan account statement attached. Lenders are required to register satisfaction within the time the rules allow, and continued failure can be taken to the bank's grievance machinery, the RBI Integrated Ombudsman Scheme 2026 for service deficiency, or a writ or civil remedy where the error is causing real loss. A company should also check whether the charge appears on the MCA register under the Companies Act, because the ROC record and the CERSAI record are separate and both may need correction.

Documents for an MSME claim or defence

MSME legal documentation that prevents disputes

Most payment disputes are lost or won on paperwork created months before anyone thought of a claim. A supplier should state its Udyam number on every quotation, purchase order acceptance and invoice, and should add a line in its terms that payment is due within the period allowed by s.15 of the MSMED Act and that interest under s.16 applies to late payment. It should insist on signed delivery challans or goods received notes, and keep e-way bills and transporter receipts in one place.

A buyer should write clear inspection and rejection clauses, with a short window for written objections, because deemed acceptance after 15 days is what usually defeats a later quality complaint. Larger buyers should have a vendor master that records each supplier's MSME status and date of registration, so finance teams know which invoices carry the 45-day limit. For drafting help on supply agreements and purchase order terms, see commercial contracts: drafting, review and disputes.

GST records do a lot of work in these cases. A buyer that has taken input tax credit on an invoice will find it hard to deny receiving the goods, and a supplier whose invoices do not appear in the buyer's GSTR-2B should find out why before filing. Where GST notices are involved on either side, see GST registration, returns, notices and disputes.

Common mistakes in MSME disputes

• Registering on Udyam only after the dispute. Later registration may not help for earlier contracts while the larger bench decides the question. Register as soon as the business starts.
• Waiting too long. Conciliation can recover time-barred dues only if the buyer agrees. For arbitration, invoices older than three years are generally lost.
• Claiming as a trader or medium enterprise. These suppliers cannot use s.18, and a council reference only wastes months. Use a suit or contractual arbitration instead.
• Weak delivery proof. An invoice alone rarely proves supply. Signed challans, e-way bills and the buyer's GST credit do.
• Accepting full and final payments casually. A cheque marked full and final, encashed without protest, can be used against the balance claim.
• Buyers ignoring the council notice. Ex parte awards are common and the 75% deposit still applies when challenging them.
• Mixing eligible and ineligible invoices. One weak set of invoices can draw attention away from a strong claim on the rest.

What to do this week

• Download your Udyam certificate and note the registration date and category.
• List every unpaid invoice with its acceptance date and due date; mark any older than two and a half years.
• Collect delivery proof, ledgers, balance confirmations and emails about payment.
• Check the buyer's GST filings for your invoices where you have access.
• Send a short legal notice if one has not gone, citing ss.15 and 16 of the MSMED Act.
• If you are a buyer, list your MSME suppliers and their registration dates, and check MSME Form 1 and audit disclosures.
• If a bank notice is involved, diarise the 60-day s.13(2) period and the 45-day s.17 window.

How the answer changes by party, state and type of business

For a manufacturer the dispute is usually about delivery and quality; for a service provider it is about when the work was accepted, so sign-off emails and completion certificates matter more. When the buyer is a government department or a public sector undertaking, councils hear the claim in the same way, but payment after an award may need internal approvals, and the public procurement policy for micro and small enterprises adds a separate set of obligations for central buyers. When the buyer is a private company, its auditors and the MSME Form 1 filing often push it to settle.

The supplier's location fixes the council: a Delhi unit goes to the Delhi council, a Noida or Ghaziabad unit to the relevant UP council, and a Gurugram or Faridabad unit to the Haryana council for its region. Execution, however, is filed where the buyer's assets are. In Advocate B.K. Singh's experience of MSME files from Delhi NCR, the cases that drag are rarely about law; they are about missing delivery records and claims filed after limitation has eaten the oldest invoices.

If you want the invoices, contracts and notices checked before you file or reply, the team of Advocate B.K. Singh at Legals365 can review them and tell you the next step. Talk to a lawyer.

Frequently asked questions

What is the time limit for payment to an MSME supplier?

The buyer must pay on the date agreed in writing, but that date cannot be more than 45 days from acceptance or deemed acceptance of the goods or services. If there is no written agreement, payment is due within 15 days. After that, compound interest at three times the RBI bank rate runs under s.16 of the MSMED Act.

How do I file a complaint on the MSME Samadhaan portal?

You file an online application with your Udyam number, the buyer's details, the invoice particulars and supporting documents. The portal forwards it to the Facilitation Council of the state where your unit is located. The council then issues notice to the buyer and lists the matter for conciliation.

Can a medium enterprise file a case before the MSME Facilitation Council?

No. The delayed payment provisions in ss.15 to 24 of the MSMED Act protect only micro and small enterprises. A medium enterprise has to use a legal notice, a commercial suit, a summary suit or contractual arbitration.

Is Udyam registration needed before the contract?

The Supreme Court in Silpi Industries and Mahakali Foods said yes, but a later bench in NBCC v State of West Bengal (2025) disagreed and referred the issue to a larger bench. Until it is decided, registration after the contract is a live objection, so register early and check the dates of each purchase order.

What is the interest rate on MSME delayed payment?

Compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India. It runs from the date payment fell due and cannot be reduced by a contract clause. The bank rate changes with RBI policy, so calculate it period by period.

What is the limitation period for an MSME claim?

For arbitration before the council, the Limitation Act applies and the period is generally three years from each due date. Conciliation is not barred by limitation, so a time-barred claim can still be settled there if the buyer agrees. A written acknowledgment or part payment within time restarts the period.

Can the buyer challenge an MSEFC award?

Yes, under s.34 of the Arbitration and Conciliation Act within three months (plus 30 days for sufficient cause). The buyer must first deposit 75% of the awarded amount under s.19 of the MSMED Act. The grounds are narrow and do not include a simple disagreement with the evidence.

Does an arbitration clause in the contract stop an MSME claim?

No. The Supreme Court has held that s.18 of the MSMED Act overrides a private arbitration agreement, so a registered micro or small supplier can go to the council anyway. The buyer can still raise its counter-claims in that arbitration.

Which council hears the case if the buyer is in another state?

The council of the state where the supplier is located, under s.18(4). A Noida supplier can bring a Chennai buyer before the UP council. The award is later executed wherever the buyer's assets are.

Can a trader registered on Udyam claim MSME interest?

Usually not. Retail and wholesale traders were allowed Udyam registration from 2021 only for priority sector lending, not for the delayed payment benefits. A trader should use a notice, suit or contractual arbitration.

Can an MSME stop a bank's SARFAESI action?

An MSME can ask the bank to follow the revival and rehabilitation framework, and the Supreme Court in Pro Knits (2024) held banks must do so if the MSME brings its status to the bank's notice. Raise it in the s.13(3A) objection and, if needed, in a s.17 application before the DRT. It does not protect a borrower acting in bad faith.

How long does an MSME council case take?

The Act sets 90 days from the reference, but most councils take longer depending on their workload and how many adjournments the parties seek. Cases often settle at conciliation within a few hearings. A challenge to the award in court adds more time, though the 75% deposit softens the wait for the supplier.