Wednesday, September 2, 2020

Legal Tools Available to MSMEs for Recovery of Dues

Briefly examining a few sections of the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, to provide highlights on the legal tools available to MSMEs for recovery of long outstanding dues from its customers.

No Delay in Payment Beyond 45 Days

As per Section 15 of the MSMED Act, a person buying goods or services from an MSME shall make the payment for such purchase on or before the agreed on date (appointed date). Further, such agreed date of payment should not extend beyond 45 days from the day of acceptance or the day of deemed acceptance.

Interest Payable @ 3 Times the Bank Rate

As per Section 16 of the Act, where the buyer fails to make such payment to the supplier within the time period specified above, the buyer shall, regardless of any terms agreed on between the buyer and the seller, be liable to pay compound interest with monthly rests to the MSME supplier on the pending amount payable from the appointed day at the rate being three times the bank rate notified by the Reserve Bank.

The prevailing bank rate can be checked on the RBI's website under Policy Rates.

The Bank Rate at the time of writing of this piece is 4.25%. Thus, the prevailing rate as on 02-Sep-2020 for delay in payment to MSME is 12.75% p.a. compounded monthly.

MSME Samadhaan - Delayed Payment Monitoring System

Any application against delayed payment can be filed online on the Samadhaan Portal by the MSME supplier: 

Arbitration Mechanism - Decided within 90 Days

As per Section 18 of the Act, in case of dispute regarding any amount due as above, a reference shall be made to the Micro and Small Enterprises Facilitation Council (MSME-FC) constituted by the respective State Government. Every such reference made shall be decided within a period of 90 days.

The dispute resolution mechanism under the Act would override the arbitration clause incorporated in any contract between such MSME and its customer. This overriding effect comes from Section 24 of the Act.

Pre-Deposit of 75% Amount in Case of Appeal

As per Section 19, any request to set aside the arbitration award shall not be entertained by the Court until the applicant has deposited 75 % of the amount awarded by the Council.

Penalty for Non Disclosure in Annual Accounts or in Form MSME-1

The buyer must mention amount overdue for payment to MSMEs in its annual audited financial statements, and shall also file details of such overdues in MCA Form MSME-1 for outstanding balances as on 31-Mar and 30-Sep of each year.

Any such contravention to disclose such amounts shall further attract penalty of not less than Rs. 10,000 under the MSMED Act. This is in addition to any non-compliance penalty imposed by the ROC (MCA) under Section 405(4) of the Companies Act, in the case of the buyer being a company.

Disallowance of Such Interest for Income Tax

Any such amount of interest paid or payable shall also not be allowed as deduction for computation of taxable profits under the provisions of the Income Tax Act, 1961.