The Micro, Small and Medium Enterprises Development Act, 2006 (“Act”) came into force with effect from 2nd Oct 2006. Long Title of the Act reads that it is an Act for facilitating the promotion and development and enhancing the competitiveness of micro, small and medium enterprises and for matters connected therewith or incidental thereto.
The Act provides strict provisions in relation to the following matters concerning small and micro (SME) enterprises:
- To provide for expeditious and time bound resolution of supply and payment related disputes;
- To legally bind the buyer to make payment to small and micro (SME) enterprises within the defined timelines;
- To provide for stringent provisions for interest payment in case payment is not made within the defined timelines;
- To provide for, in case appeal against the award in preferred in court by the buyer, recovery of at least 75% of the due amount along with interest for disbursal of finance to the SME supplier.
- To provide a single legal framework for prompt dispute resolution.
Liquidity is the lifeline of any business. Hence, dues of small and micro enterprises (SMEs) getting paid in time is one of the most important priorities of the Act.
To understand the scheme of the Act as regards timely recovery of dues of SMEs, we have to first understand a couple of definitions/classifications as per the Act.
Basis of classification of Micro, Small and Medium Enterprises (MSME)
The Central Government, in exercise of the powers conferred under section 7 of the Act, vide notification dated 1st June, 2020 notified the following criteria for classification of micro, small and medium enterprises (MSME), namely:-
(i) 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;
(ii) 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;
(iii) 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.
This notification comes into effect from 01.07.2020.
New Frontiers of MSME can be summarized in a tabular form as follows:
| New Classification applicable w.e.f 1st July 2020 | |||
| Composite Criteria: Investment in Plant and Machinery/Equipment: Not more than ‘A’ and Annual Turnover ; not more than ‘B’ | |||
| Classification | Micro | Small | Medium |
| Manufacturing & Services rendering Enterprises | A = Rs.1 crore B= Rs.5 crore | A= Rs.10 crore B= Rs. 50 crore | A= Rs.50 crore B= Rs.250 crore |
Therefore, with effect from 01.07.2020, many new entities will be eligible for classification as MSME and, therefore, lot of opportunities will be created for professionals in MSME space.
One very prominent area in this realm is resolution of disputes arising out of delay in payments to micro and small enterprises, through Micro and Small Enterprise Facilitation Councils (MSEFCs) which we will discuss in in this Article in detail.
Supplier under the Act
Another very important definition is that of supplier defined under section 2(n) of the Act. Accordingly, “supplier” means a micro or small enterprise, which has filed a memorandum with the authority referred to in sub-section (1) of section 8, and includes,—
- the National Small Industries Corporation, being a company, registered under the Companies Act;
- the Small Industries Development Corporation of a State or a Union territory, by whatever name called, being a company registered under the Companies Act;
- any company, co-operative society, trust or a body, by whatever name called, registered or constituted under any law for the time being in force and engaged in selling goods produced by micro or small enterprises and rendering services which are provided by such enterprises.
As can be seen in the above definition, filing of memorandum under section 8 of the Act seems to be a pre-condition for being regarded as a supplier in terms of section 2(n) of the Act.
However, a question arises as to what if the memorandum was not filed at the time when the relevant supply was made, but was filed only later?
The question of non-filing of memorandum under section 8 and its effect on the status of the supplier under the Act has been examined by the Hon’ble Delhi High Court in Ramky Infrastructure Private Limited Vs Micro And Small Enterprises Facilitation Council & Anr,
In this case, Hon’ble Delhi High Court examined a very important question as to what if the supplier had not filed the memorandum at the time of execution of the contract but only subsequently filed the memorandum just before making reference to the Council under section 18 of the Act.
The Hon’ble High Court held that if the supplier falls within the definition of supplier as per section 2(n) of the Act, then notwithstanding non-filing of memorandum, it will be considered as supplier within the meaning of the Act.
Having understood the terms, let us move ahead to understand the scheme of the Act in relation to credit period and realization of dues of SMEs as dealt with by chapter V of the Act.
Chapter V (section 15 to 25) of the Act deals with Delayed Payments to Micro and Small Enterprises. Let us have a look at the provisions.
Section 15. Liability of buyer to make payment — As per section 15, where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment either as per agreement or, where there is no agreement in this behalf, before the appointed day.
As per proviso to section 15, in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
Appointed day is a defined term under the Act. In terms of section 2(b) of the Act –
“appointed day’ means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Explanation.–For the purposes of this clause,–
(i) “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 fifteen 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;
(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen 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”
Therefore, Section 2(b) of the Act defines “appointed day “as 16th day from actual delivery or rendering of services, or where within fifteen days from the day of the delivery of goods or the rendering of services any objection is made in writing by the buyer regarding acceptance of goods or services, the 16th day from the day on which such objection is removed by the supplier.
Proviso to section 15 says that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
Deemed acceptance date as per explanation to section 2(b) means the date of actual delivery of goods or rendering of services, where no objection is raised by the buyer within 15 days thereof in writing regarding acceptance of goods or services.
Therefore, as per section 15, payment shall be made within the following timelines:
Case I: Where there is an agreement to the effect – Payment shall be made as per the timeline agreed upon under the Agreement, but such period cannot exceed 45 days from the date of acceptance or deemed acceptance;
Case II: Where there is no agreement to that effect – Payment shall be made before;
- the 16th day from actual delivery or rendering of services, or
- where within fifteen days from the day of the delivery of goods or the rendering of services any objection is made in writing by the buyer regarding acceptance of goods or services, the 16th day from the day on which such objection is removed by the supplier.
In any case, therefore, maximum within 45 days, the payment has to be made.
To this end, to ensure strict compliance with the payment provisions, the Central Government
vide Ministry of Micro Small and Medium Enterprises notification number S.O. 5622(E), dated the 2nd November, 2018, issued in exercise of the powers conferred vide section 9 of the Act, has directed that all companies, who get supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed forty five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of the Act (hereafter referred to as “Specified Companies”), shall submit a half yearly return to the Ministry of Corporate Affairs stating the following:
(a) the amount of payment due; and
(b) the reasons of the delay;
Then, vide notification dated 22nd January 2019, the Specified Companies (Furnishing of information about payment to micro and small enterprise suppliers) Order, 2019 was promulgated by the Ministry of Corporate Affairs.
As per this order, every specified company shall file half yearly return as per Form MSME I as prescribed by this Order, by 31st October for the period from April to September and by 30th April for the period from October to March.
Payment of interest on delayed payment:
If the payment is not made as per section 15, interest under section 16 of the Act shall become payable. Section 16 states that – where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
As per section 17 of the Act, for any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.
Section18 of the Act deals with the most important provision under the Act – which is reference to Micro and Small Enterprises Facilitation Council. (MSEFC). Accordingly,
- Any party to a dispute may, with regard to any amount due under section 17, make a reference to the Micro and Small Enterprises Facilitation Council (Council).
- On receipt of a reference, the Council shall either itself conduct conciliation in the matter or seek the assistance of any institution or centre providing alternate dispute resolution services by making a reference to such an institution or centre, for conducting conciliation and the provisions of sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall apply to such a dispute as if the conciliation was initiated under Part III of that Act. If conciliation is successful, It is called award by mutual consent and is final.
- Where the conciliation initiated under (2) above is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section(1) of section 7 of that Act;
- Notwithstanding anything contained in any other law for the time being in force, the Council or the centre providing alternate dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator under this section in a dispute between the supplier located within its jurisdiction and a buyer located anywhere in India;
- Every reference made under this section shall be decided within a period of ninety days from the date of making such a reference.
Section 19 of the Act deals with application for setting aside decree, award or order. Accordingly, no application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court.
Proviso to section 19 lays down that pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case, subject to such conditions as it deems necessary to impose.
In Goodyear India ltd. v. Nortan Intec Rubber (P) Ltd., the Hon’ble Madras High Court has upheld the validity of the pre-condition prescribed under section 19 as deposit of 75% of the amount for filing any appeal/petition challenging the award.
It is pertinent to mention that under section 20 of the Act, the State Government shall, by notification, establish one or more Micro and Small Enterprises Facilitation Councils, at such places, exercising such jurisdiction and for such areas, as may be specified in the notification.
Section 22 of the Act deals with requirement to specify unpaid amount with interest in the annual statement of accounts. Accordingly, where any buyer is required to get his annual accounts audited under any law for the time being in force, such buyer shall furnish the following additional information in his annual statement of accounts, namely:— (i)the principal amount and the interest due thereon (to be shown separately) remaining unpaid to any supplier as at the end of each accounting year; (ii) the amount of interest paid by the buyer in terms of section 16, along with the amount of the payment made to the supplier beyond the appointed day during each accounting year; (iii) the amount of interest due and payable for the period of delay in making payment (which have been paid but beyond the appointed day during the year) but without adding the interest specified under this Act; (iv) the amount of interest accrued and remaining unpaid at the end of each accounting year; and (v) the amount of further interest remaining due and payable even in the succeeding years, until such date when the interest dues as above are actually paid to the small enterprise, for the purpose of disallowance as a deductible expenditure under section 23.
Ministry of Corporate Affairs has already issued Notification to the above effect.
Section 23 of the Act deals with – Interest not to be allowed as deduction from income.—
Notwithstanding anything contained in the Income-tax Act, 1961, the amount of interest payable or paid by any buyer, under or in accordance with the provisions of this Act, shall not, for the purposes of computation of income under the Income-tax Act, 1961, be allowed as deduction.
Ministry of Finance notification no. S.O.961(E) dated 13-04-09 has been issued to give effect to the provision of section 23.
As per section 24 of the Act, the provisions of sections 15 to 23 shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
Section 24 of the Act is the most powerful provision to the rescue of SME supplier.
Therefore, we see that Chapter V of the Act contains very important provisions as regards dues of SME suppliers.
The constitutional validity of chapter V of the Act was challenged in Eden Exports Company v. Union of India, wherein the constitutional validity of Chapter V of the Act has been upheld by the Hon’ble Madras High Court. The question that arose for consideration in this case was whether Section 15 to 24 of the Act was unconstitutional.
Government Initiatives to widen the reach of the provisions of the MSMED Act:
To facilitate micro and small enterprises to get the benefit of the provisions relating to payment of their dues, MSME samadhaan portal has been launched. (https://samadhaan.msme.gov.in) where SMEs can file their applications online regarding delayed payments. The application once filed is forwarded automatically online to the concerned Micro and Small Enterprise Facilitation Council (MSEFC). Action on the applications regarding delayed payment is taken by the concerned MSEFC.
Following important points can be kept in mind:
- Both online and offline applications can be filed.
- Udyog Aadhar Memorandum (UAM) is mandatory.
- The Activities for which Udyog Adhar has been issued are very important.
- Purchase order/work order is mandatory, otherwise an affidavit to that effect shall be filed.
- Invoices shall be required.
- Hard copy of claims duly signed and verified is also required to be submitted. Documents which are required to be filed along with the claim are Petition with Purchase Order/Work Order, Bills, delivery challans of goods and services and demand letter etc. When PO/WO is not there, acknowledgement on invoice, delivery challans or part payment, email etc. all are accepted alongwith affidavit.
Position as to Receivables due before enactment of the Act and under contracts entered into before commencement of the Act.
It may be noted that receivables due in a claim before the enactment of the Act filed before Industry Facilitation Council established under section 7-A of Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertaking Act, 1993, or civil courts filed in pursuance of Section 6 of the said Act may also be considered by MSEFC established by the State/UTs as per the provisions of MSMED Act 2006. However, to approach the MSEFC, liberty of court is to be obtained on earlier claims. The Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 has been repealed vide section 32 of the MSMED Act 2006.
What if the buyer has died?
According to section 37 of the Indian Contract Act, 1872, promises bind the representatives of the promisors in case of the death of such promisors before performance, unless a contrary intention appears from the contract. Therefore in case of a deceased buyer, the legal heirs or legal representatives are liable.
How different is arbitration conducted under the MSMED Act from the arbitration conducted under an arbitration agreement?
As per section 2(4) of the Arbitration and Conciliation Act certain provisions thereof are not applicable to arbitration under any other enactment. One such excluded provision is section 43 of the Arbitration and Conciliation Act which makes the Limitation Act applicable to arbitrations as it applies to court proceedings. Therefore, where arbitration is conducted under any other enactment, Limitation Act will not apply.
Section 18(3) of the MSMED Act states that where the conciliation initiated under sub-section (2) is not successful and stands terminated without any settlement between the parties, the Council shall either itself take up the dispute for arbitration or refer it to any institution or centre providing alternate dispute resolution services for such arbitration and the provisions of the Arbitration and Conciliation Act, 1996 shall then apply to the dispute as if the arbitration was in pursuance of an arbitration agreement referred to in sub-section(1) of section 7 of that Act.
Therefore, we see that two different views emerge from section 2(4) of the Arbitration and Conciliation Act and section 18(3) of the MSMED Act.
Moreover, section 24 of the MSMED Act has a non-obstante clause. As per section 24 of the Act, the provisions of sections 15 to 23 thereof shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
Consequently, section 18(3) of the MSMED Act must prevail over section 2(4) of the Arbitration and Conciliation Act.
And therefore, as a necessary corollary, it seems that section 43 of the Arbitration and Conciliation Act, and for that matter, the Limitation Act shall apply to arbitrations conducted under the MSMED Act.
Enforcement of Award:
Award, once announced, becomes final. Enforcement of award shall be dealt with under section 36 of the Arbitration and Conciliation Act 1996.
Chapter VIII (sections 35-36) of the Arbitration and Conciliation Act 1996 deals with ‘Finality and enforcement of arbitral awards’. Whereas section 35 provides that an arbitral award shall be final subject to section 36, section 36 provides as follows:
As per section 36 (1), where the time for making an application under section 34 has expired, the award shall be enforced under Code of Civil Procedure, 1908 as a decree of a court.
It may be noted that under section 34 of the Arbitration and Conciliation Act, 1996, an award has to be challenged within 90 days of receipt of the award. The court may allow another 30 days on sufficient cause being shown, as per proviso to section 34(3).
Section 36(2) and 36(3) deal with stay on operation of award to be specifically granted. Accordingly, stay may be granted, either conditionally or unconditionally, by the court on a separate application made for such stay. In other words, there is no automatic stay on operation of an arbitral award, on award being challenged under section 34 of the Act.
Further, where the award is challenged, the condition of deposit of 75% of the amount as contemplated under section 19 of the MSMED Act shall also be applicable.
Conclusion:
The Micro, Small and Medium Enterprises Development Act, 2006 is a very potent legislation which has been positioned as a tiger with teeth and claws. The need is to spread awareness about the rights guaranteed by this very important piece of legislation amongst the SMEs.
It has many avenues where and around which professionals like Company Secretaries can develop their practice areas.
After the latest developments witnessed in insolvency regime vide insertion of section 10A of the Insolvency and Bankruptcy Code, 2016 (Code) providing for suspension of fresh initiation of corporate insolvency resolution process for six months from March 25th, 2020 with provision of further extension of six months, and increase in amount of minimum default under section 4 of the Code, lot of litigation is expected in SME Space before facilitation councils, even though the object of the Code and that of the MSMED Act are different.
Given the wide reach of SMEs, professionals can get opportunities in – employment, advisory, acting as authorized representatives before SME Facilitation Councils, preparation of statement of claims, etc.
Therefore, professionals must update their knowledge and be prepared to take up the opportunities in this focus area.