Micro, Small and Medium Enterprises play a significant role in the economic growth of the country, and the Central Government has recognised this contribution in the Union Budget presented for 2025-2026, wherein the Government has introduced a series of measures to strengthen the Micro, Small and Medium Enterprises (MSME) Sector.^[1]

Despite contributing significantly to the economic growth and showing unparalleled resilience in the face of challenges posed by situations like the Covid-19 pandemic^[2], the lack of access to credit and the issue of delayed payments are serious issues that the MSME Sector faces and account for the majority of the annual delayed payments.^[3]

With a view to strengthen the MSME sector and to ensure timely payments to MSMEs, the Parliament passed the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”).

MSMED Act provides two-step remedies for the resolution of disputes related to delayed payment to Micro and Small Enterprises, i.e., Conciliation and Arbitration. To ensure that Micro and Small Enterprises benefits of the MSMED Act are not further delayed, stringent provisions are incorporated regarding the challenge to the award passed with respect to delayed payments.

In this article, remedies available to Micro and Small Enterprises and its procedural aspect is discussed in light of the various judgements of the Hon’ble Supreme Court.

CONDITIONS PRECEDING THE ENACTMENT OF MSMED ACT:

Before the enactment of the MSMED Act, the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993, was in force. The Delayed Payments Act provided for the payment of interest on delayed payment; however, it lacked a dispute resolution mechanism to avail the remedies. Therefore, the only remedy available was to file a suit for recovery or pursue the Alternate Dispute Resolution remedies provided in the contract.

Keeping the above challenges in mind, the Government constituted an expert committee on small enterprises to reform the then-existing policies and to design new policies for the development of small and medium enterprises, vide the order dated 29-12-1995.

The said committee recommended for inclusion of stringent provisions for non-payment of dues to the small-scale industries. Central Government, following the recommendations of the committee, introduced the Small and Medium Enterprises Development Bill, 2005, which was then referred to the Parliamentary Standing Committee. Ultimately, the MSMED Act was passed in parliament and received the assent of the president 16.06.2006^[4].

CLASSIFICATION OF THE ENTERPRISES AS PER THE MSMED ACT:

The central government has classified the Micro, Small and Medium Enterprises on the basis of the following criteria^[5]:

Micro: Investment in Plant and Machinery or Equipment does not exceed Rs. 1 crore and Annual Turnover does not exceed more than Rs. 5 crores.

Small: Investment in Plant and Machinery or Equipment does not exceed Rs. 10 crore and Annual Turnover does not exceed Rs. 50 crores.

Medium: Investment in Plant and Machinery or Equipment does not exceed Rs. 50 crore and Annual Turnover does not exceed Rs. 250 crores.

SIGNIFICANCE OF THE MSMED ACT REGARDING DELAYED PAYMENTS:

Chapter V of the MSMED Act deals with delayed payments to micro and small enterprises. A bare reading of Chapter V of the MSMED Act would reveal that it applies to the relationship of buyer and supplier, where the buyer^[6] buys any goods or receives any services from the supplier for a consideration and the supplier^[7] is a micro or small enterprise, which has filed a memorandum referred to in sub-section (1) of Section 8, i.e., registered itself at the Udhyam Portal as either enterprises per the specified criteria.

MSMED Act provides a statutory right to the supplier and imposes a duty^[8] on the buyer to make the payment for the supply of goods or rendering of services on or before the date agreed upon between them in writing, or, in the absence of such an agreement, before the appointed day, i.e., the day^[9] immediately after the expiry of 15 days from the acceptance of, or the day of deemed acceptance of, goods or any services by a buyer from a supplier. It also imposes a maximum period of 45 days for such payment from the buyer to the supplier.

In case of failure of the buyer in making the payment to the supplier, despite any agreement between the parties, the buyer shall be liable to pay compound interest at three times the bank rate notified by the Reserve Bank of India and that too with monthly rests to the supplier on the due amount from the appointed day or as the case may be from the date immediately following the date agreed upon^[10].

PREREQUISITE FOR AVAILING THE BENEFITS UNDER THE MSMED ACT

As per section 8 of the MSMED Act, though the submission of a memorandum has been made discretionary for Micro and Small Enterprises, and therefore, the Hon’ble Supreme Court in Silpi Industries v. Kerala SRTC^[11] had held that if the entity or person who supplied the goods or rendered services was not registered at the Udyam Portal at the time of entering into contract or when the goods were supplied or services were rendered, then reference under Section 18 is not maintainable.

However, recently in NBCC (India) Ltd. v. State of W.B.^[12], the Hon’ble Supreme Court rejected the notion that an enterprise not registered under Section cannot refer the dispute to Micro and Small Enterprises Facilitation Council (“Council”). Hon’ble Supreme Court analysed the Section 8 of the MSMED, where the filing of memorandum has been made discretionary and mandatory, and under Section 18 where any party to the dispute can refer the dispute to the Council. Further, the Hon’ble Supreme Court distinguished the ruling in Silpi Industries v Kerala SRTC (Supra) on the ground that issue of registration was not framed before the Hon’ble Supreme Court in that case, and also that the Court did not examine any provision or their implication on the right to seek a reference under the Section 18 of the MSMED Act.

After arriving at a categorical finding that submission of memorandum under Section 8 of the MSMED is not a pre-condition for referring a dispute under Section 18 of the MSMED Act, for the sake of clarity, in light of various previous judgements of the Hon’ble Supreme Court^[13], referred the issue to a larger bench.

DISPUTE RESOLUTION MECHANISM UNDER THE MSMED ACT

If the buyer failed to make the payment for the goods delivered or the services received, then Section 17 imposes a liability to make the payment along with the interest specified in Section 16. If there arises a dispute with respect to the delayed payment, the MSMED Act gives a right to any party to refer the dispute to the Council^[14]. It is relevant to mention here that the jurisdiction of the council is to be determined on the basis of the location or residence of the supplier, i.e., a supplier can refer the dispute to a council having jurisdiction over his place of residence or business, irrespective of the location of the buyer.

Section 18 provides for settlement of dispute by two methods of alternate dispute resolution, i.e., conciliation and arbitration, in the following order:

SETTLEMENT THROUGH CONCILIATION

When a party makes a reference for the settlement of dispute, the Council may itself, or through the assistance of any institution or centre providing alternate dispute resolution services, conduct the conciliation^[15]. It is germane to mention here that conciliation so conducted shall be governed by the provisions of Section 65 to 81 of the Arbitration and Conciliation Act, 1996.

During the conciliation proceedings, the Council or the Institution or Centre to which the conciliation has been referred, shall assist the parties in an independent and impartial manner in their attempt to reach an amicable settlement of their dispute, in accordance with the principles of objectivity, fairness, and justice^[16].

After the conduct of the conciliation proceedings, if the parties have reached an agreement and a settlement agreement has been signed, such a settlement shall be final and binding on the parties and persons claiming under them, respectively, and shall be enforceable as if it were a decree of the court under the provisions of the Code of Civil Procedure, 1908^[17].

REFERENCE TO ARBITRATION

If the conciliation between the parties does not succeed and they fail to reach a settlement agreement, then 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 be applicable to the dispute^[18].

It is of significant importance to note here that, though arbitration conducted in pursuant to Section 18 of the MSMED Act shall be govern by the provisions of the Arbitration and Conciliation Act, 1996, however, if there is a contradiction in provisions of the two disputes, then provisions of the MSMED shall prevail.

The Hon’ble Supreme Court in Silpi Industries v. Kerala SRTC (Supra) has held that the MSMED Act is a special legislation in the arena of arbitration, and the Arbitration and Conciliation Act is general legislation. Further, as the MSMED Act is a beneficial legislation, its provisions will prevail over the Arbitration and Conciliation Act. Relying on the forgoing principle, the Hon’ble Supreme Court rules that even if there is a separate arbitration agreement between the parties, but the supplier is covered by the MSMED Act, then the arbitration agreement is to be ignored in light of the statutory obligations and mechanism provided under the MSMED Act.

The MSMED act also prescribes a time limit of 90 days for deciding the reference from the date of making such reference.

After the conclusion of the arbitration proceedings, an award shall be drawn in accordance with the provisions of the Arbitration and Conciliation Act, 1996 and shall be enforceable as a decree of the court under the provisions of the Code of Civil Procedure, 1908^[19].

RECOURSE AGAINST THE AWARD

In furtherance of its objective to provide stringent provisions for the delayed payment to Micro and Small enterprises, the MSMED Act also makes it almost impossible to challenge the arbitration award passed under the reference in Section 18 of the MSMED Act.

After the passing of the award, if a buyer dissatisfied with the award and he intends to file an application for setting aside the decree, award, or other order made therein, then then the MSMED Act imposes a condition to deposit 75% of the amount in terms of the decree, award, or the order, in the manner directed by such court, and without complying with such a condition no challenge to the award can be made^[20].

It is significance to mention here that providing a conditional right to challenge the award passed under the MSMED Act has been an issue of consideration before the Hon’ble Supreme Court and various High Courts. Prima Facie, the Supreme Court has pronounced contradictory opinions regarding the appropriate procedure to challenge the award or order passed by the Council.

In Jharkhand Urja Vikas Nigam Ltd. v. State of Rajasthan^[21], the Council concerned had passed an order in favour of the supplier, when the buyer failed to appear before the said council. They buyer, file a writ petition challenging the said order without complying with the provisions of Section 19 of the MSMED Act. The Hon’ble Supreme Court held the writ petition maintainable as there was no arbitration award, and such compliance of Section 19 of the MSMED Act was not required.

Subsequently, in India Glycols Ltd. v. Micro & Small Enterprises Facilitation Council^[22], the Hon’ble Supreme Cout rules that if the Facilitation Council has passed an award, the appropriate remedy against such an award would be to file an application under Section 34 of the Arbitration and Conciliation Act, 1996, and additionally such an application should be accompanied with the deposition of 75% of the awarded amount in accordance with Section 19 of the MSMED Act, and upheld the rejection of the writ petition filed by the buyer against the award of the Facilitation Council.

Recently, Hon’ble Supreme Court in T.N. Cements Corpn. Ltd. v. Micro & Small Enterprises Facilitation Council^[23], noting the significance of the remedy available under Article 226 of the Constitution and plea of alternate to be discretionary and not compulsory, and the ruling of the Hon’ble Supreme Court in India Glycols Ltd. v. Micro & Small Enterprises Facilitation Council (Supra), referred the issue to a larger bench to decide as to when and under what circumstances a writ petition can be filed against the award or award passed by the MSEFC acting as an arbitrator or conciliator.

CONCLUSION

The MSMED Act has been proved to be a significant step towards ensuring the early resolution of disputes related to delayed payment of Micro and Small Enterprises. The conciliation mechanism provides an opportunity for the parties to sit together and try to settle the dispute under the guidance of a trained conciliator, and if the conciliation fails, then a mechanism to settle the dispute through arbitration has been provided. However, the stringent provisions under Section 19 of the MSMED to challenge the award have brought forth a new set of challenges, leading to contradictions in various judgements. While deciding this contradiction, it is to be noted that the MSMED Act was passed with an objective to provide an early resolution to disputes related to delayed payments, and enforcing the stringent provisions as it is, or providing a relaxation in certain circumstances, should be guided by the objective of the statute; otherwise, it will dilute the very objective for which it was enacted.

^[1] https://pib.gov.in/PressReleasePage.aspx?PRID=2099687

^[2] https://pib.gov.in/PressReleasePage.aspx?PRID=2087361

^[3] https://indianexpress.com/article/opinion/columns/msmes-are-not-paid-on-time-they-need-to-be-9312221/

^[4] Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., (2023) 6 SCC 401

^[5] The Gazette of India: Extraordinary [Part II—Sec. 3(ii)], S.O. 1702(E)

^[6] Section 2(d), MSMED Act.

^[7] Sectoin 2(n), MSMED Act.

^[8] Section 15, MSMED Act

^[9] Section 2(b), MSMED Act

^[10] Section 16, MSMED Act

^[11] (2021) 18 SCC 790

^[12] 2025 SCC OnLine SC 73

^[13] Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., (2023) 6 SCC 401, Vaishno Enterprises v. Hamilton Medical AG, 2022 SCC OnLine SC 355 and Nitesh Estates Ltd. v. Micro and Small Enterprises Facilitation Council of Haryana C.A. No. 5276/2022@ SLP (C) No. 26682/2018

^[14] Section 18, MSMED Act

^[15] Id.

^[16] Section 67, Arbitration and Conciliation Act, 1996.

^[17] Section 73 & 36 of the Arbitration and Conciliation Act, 1996.

^[18] Supra xiii.

^[19] Supra xiii.

^[20] Section 19, MSMED Act.

^[21] (2021) 19 SCC 206

^[22] 2023 SCC OnLine SC 1852

^[23] 2025 SCC OnLine SC 127