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Recovery of dues by MSME Enterprises under MSME Development Act

Micro, Small and Medium Enterprises (MSMEs) are vital for the economic growth and development of India. They contribute significantly to the GDP, employment, exports and innovation of the country. However, one of the major challenges faced by MSMEs is the delay or non-payment of their dues by their buyers, which affects their cash flow, working capital and profitability.

To address this issue, the MSME Development Act, 2006 (the Act) provides a legal framework for the protection and promotion of MSMEs, and also lays down certain provisions for the recovery of dues by MSMEs from their buyers. In this blog post, we will discuss the salient features of these provisions and how they can help MSMEs recover their dues effectively and efficiently.

Who can claim benefits under the Act?

The Act applies to two categories of enterprises: manufacturing enterprises and service enterprises. Manufacturing enterprises are those that are engaged in the manufacturing or production of goods in any industry, while service enterprises are those that provide or render services. The Act further classifies these enterprises into micro, small and medium based on their investment in plant and machinery (for manufacturing enterprises) or equipment (for service enterprises).

However, it is important to note that only micro and small enterprises (MSEs) can claim benefits under the Act for recovery of dues, as medium enterprises are excluded from this scope. Moreover, only those MSEs that have filed a memorandum (also known as Udyog Aadhaar) with the concerned authority are eligible to claim benefits under the Act.

What are the benefits available under the Act?

The Act provides the following benefits to MSEs for recovery of dues:

- Time limit for payment: The Act stipulates that a buyer has to make payment to an MSE within a specified time limit, depending on whether there is an agreement between them or not. If there is no agreement, the payment must be made within 15 days from the date of acceptance or deemed acceptance of goods or services by the buyer. If there is an agreement, the payment must be made on or before the agreed date, provided that such date does not exceed 45 days from the date of acceptance or deemed acceptance of goods or services by the buyer.
- Interest liability: The Act provides that if a buyer fails to make payment to an MSE within the specified time limit, then he has to pay interest to the MSE at a rate that is three times the bank rate notified by the Reserve Bank of India (RBI). The interest is compounded monthly and accrues from the date of default till the date of actual payment.
- Recovery mechanism: The Act provides a simple and speedy mechanism for recovery of dues by MSEs through conciliation and arbitration. The MSE can file an application with the Micro and Small Enterprises Facilitation Council (MSEFC), a statutory body established by each state government under the Act. The MSEFC has to either conduct conciliation proceedings between the parties or refer them to any institution or center providing alternative dispute resolution services for conciliation. If conciliation fails or is not opted for by either party, then the MSEFC has to refer the dispute to arbitration under the Arbitration and Conciliation Act, 1996. The award passed by the arbitrator is final and binding on both parties and can be enforced as a decree of a civil court.
- Other benefits: The Act also provides some other benefits to MSEs for recovery of dues, such as:

    - The buyer cannot deduct any amount from the payment due to an MSE without the prior written consent of the MSE.
    - The amount due to an MSE along with interest is recoverable as arrears of land revenue by any officer authorized by MSEFC.
    - The amount of interest paid or payable by a buyer to an MSE under the Act is not allowed as a deduction for computation of income tax under the Income Tax Act, 1961.

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