RECOVERIES UNDER MSMED ACT 2006

1. Brief Overview of the MSMED Act 2006

• The Micro small and Medium Enterprises Development Act 2006 (MSMED Act) was enacted as a special law for facilitating the promotion and development micro, small and medium enterprises (MSME’s) and contains detailed provisions for the benefit of such enterprises

• The aim behind the enactment of the Act was to establish a mechanism for expeditious adjudication of the claims of the MSME’s and to accordingly ensure the financial viability of MSME’s through timely recovery of pending dues

2. Applicability of MSMED Act

• MSMED Act is applicable to manufacturing enterprises engaged in production of goods and provision of services

• Recently in 2021, the MSME Policy division issued an office memorandum covering Wholesale and Retail traders (for NIC codes 45-47) also under the MSME scheme

• Enterprise under the MSMED Act has been defined as

• Investment in plant and machinery linked to Income Tax returns filed for previous years. For new enterprises investment based on self-declaration 

• Turnover of an enterprise to be taken from linked GST Portal

3. Procedure to be followed for Re-claiming outstanding dues

• The Seller who is a supplier registered under MSMED Act (with Udyam Registration) can file its claim for recovery of the outstanding dues along with interest

• Interest rate: As per the provisions of the Act, the supplier is mandatorily eligible to interest at 3 times the bank rate as per the provisions of the act. Interest is also compounding.. This provision at times leads to a situation where generally the Interest is more than the principal amount, and has to be paid as per the provisions of the Act

• MESFC Council: Claim first gets filed before the Micro and Small Enterprise Facilitation Council (MSEFC Council) with Claim petition, outstanding invoices, work orders and agreement (if any)

• Territorial jurisdiction – Claim is required to be filedin the jurisdiction of the seller irrespective of the cause of action, or where the buyer resides as is generally the process followed by Civil Courts

• Conciliation proceedings: Notice is issued by the Council to the buyer for appearance and settling the disputes. Generally two-three short dates are given to settle the disputes

• Arbitration proceedings: In case Conciliation fails, matter is referred to Arbitration centre and Arbitration proceedings are commenced. The Council in some states even takes Arbitration proceedings itself. However, in Delhi it is before Delhi International Arbitration centre (DIAC) in Delhi High Court

• Time Duration: Generally, the process before the Arbitratoris completed within one, one and half years

• Arbitral award: On passing of a favourable arbitral award,and the buyers if challenges the same, it is important to note that he has to first deposit 75% of the award amount under the law. This generally does not happen in civil proceedings challenging a favourable order

4. Costs

• Very nominal fee is required to be filed before the MSEFC council for filing a claim by the seller.

• Court fees for arbitration before the Arbitration centre is to be equally shared by the buyer and not completely borne by the seller itself

Remarks: For recovery of outstanding dues, it is advisable to file a claim under  the MSMED Act, for faster recovery of outstanding dues, reducing debts and increasing cash flows for the business