MSME Legal Safeguards and Provisions
The Micro, Small and Medium Enterprises (“MSMEs”) Sector plays an essential role in strengthening the Indian economy. In last five decades, MSMEs have contributed immensely in economic and social development of the country by generating employment opportunities, mobilization of resources and by industrializing the rural and backward areas. The equitable distribution of national income and wealth would be assured only when the small and medium enterprises are strengthened.
With the aim to develop the MSMEs, the Micro, Small and Medium Enterprises Development Act, 2006 (“MSMED Act”) was enacted by the legislature. The Act aims at facilitating the promotion and development of MSMEs as well seeks to enhance their competitiveness.
It is the first legislation which gave legislative recognition to the term “enterprise” in India. Section 7 of MSMED Act classifies ‘enterprises’ in two categories; the Manufacturing Enterprises and Service Enterprise, and further categories them in three categories; namely, Micro, Small and Medium Enterprises.
1. Manufacturing Enterprises
Section 7 of the MSMED Act provides that the manufacturing enterprises are those enterprises which are engaged in manufacturing or production of goods pertaining to any industry specified in the First Schedule of the Industries (Development and Regulation) Act, 1951. These enterprises are defined as per the terms of Investment in Plant & Machinery.
- A manufacturing enterprise is called “Micro Enterprise” when its investment in plant and machinery does not exceed Twenty-Five Lakh Rupees.
- A manufacturing enterprise is called “Small Enterprise” when its investment in plant and machinery is more than twenty-five lakh rupees but does not exceed Five Crore Rupees.
- A manufacturing enterprise Is called “Medium Enterprise” when its investment in plant and machinery is more than five crores but does not exceed Ten Crore Rupees.
2. Service Enterprises
Section 7 of the MSMED Act provides that service enterprises are those enterprises which are engaged in providing or rendering of services. These enterprises are defined as per the terms of investment in equipment.
- A service enterprise is called “Micro Enterprise” when its investment in equipment does not exceed Ten Lakh Rupees.
- A service enterprise is called “Small Enterprise” when its investment in equipment is more than Ten Lakh Rupees but does not exceed Two Crore Rupees.
- A service enterprise is called “Medium Enterprise” when its investment in equipment is more than Two Crore Rupees but does not exceed Five Crore Rupees.
The “financial liquidity” plays a vital role in the development, growth and sustenance of MSME Sector. However, one of the major challenges faced by the MSMEs is the recovery of payments.
PROVISION FOR RECOVERY OF PAYMENTS
MSMEs are considered as the backbone of Indian economy due to their immense contribution to the overall production and export of good or services, in domestic as well as global market. Nevertheless, MSME Sector has been facing the issue of delayed realisation of payments which led to liquidity and financial constraints in the growth of the enterprises. Due to financial hardships, the risk of them turning into non-performing assets only increases which hits the sustainability of the enterprises.
Considering the rising concerns over the liquidity issues of MSMEs, the Indian Legislature has introduced certain provisions in MSMED Act to mitigate the problem of delayed payments to the suppliers. MSMED Act provides a framework to resolve the issue of liquidity and delayed payment to the MSMEs.
Section 15 to 24 of the MSMED Act deal with the issue of delayed payments and provides a framework for the recovery of such payments.
Section 15 puts a liability on buyer and obligates him to make payment to the supplier when the goods are supplied, or services are rendered to him, on or before the date agreed by them. The Section reads as under:
“Where any supplier, supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day”
The proviso to the Section provides that such payment must be made within the period of forty-five days from the day of acceptance or deemed acceptance.
Further, Section 16 provides that if the buyer fails to make the payment to the supplier, as provided under Section 15, he will be liable pay a compound interest on the principal amount at three times of the bank rate notified by the Reserve Bank of India on the monthly basis. The Section reads as under:
“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.”
Moreover, Section 17 expressly provides that the supplier can recovery any amount due under Section 16 from the buyer for any goods supplied or services rendered. The Section reads as under:
“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.”
Even then, if any dispute arises, the concerned party can make a reference to the Micro and Small Enterprises Facilitation Council for resolution of their dispute and recovery of dues thereof.
MICRO AND SMALL ENTERPRISES FACILITATION COUNCIL
Section 20 of MSMED Act mandates the State Governments to establish one or more Micro and Small Enterprises Councils (“MSEFCs”) for the settlement of disputes pertaining to delayed payments. The State Governments shall also notify the place where such Councils shall be established by notification. Section 21 of MSMED Act provides that MSEFCs shall consist of not less than three but not more than five members. The members of MSEFCs must include:
- Director of Industries of the State Government having administrative control of the small scale industries;
- One or more representatives of associations of micro or small industry or enterprise;
- One or more representatives of banks and financial institutions which provides the loans to micro or small enterprises;
- One or more persons having special knowledge in the field of industry, finance, law, trade or commerce.
Further, the Director of Industries appointed under this Section shall be known as the Chairperson of the Micro and Small Enterprises Facilitation Council.
Thus, MSEFCs are authorised by the State Governments to resolves the disputes with regard to realisation of principal and interest. Under Section 30, the State Government are empowered to make rules to carry out the provisions of the MSMED Act.
PROCEDURE TO FILE A COMPLAINT BEFORE MSEFC
A complaint may be filed or reference of a dispute may be made to the MSEFCs by any party to dispute under Section 18 of MSMED Act. Section 18 lists the steps to be taken to refer a matter before MSEFCs and provides as under:
- Reference to the Council
Firstly, a reference of dispute with regard to an amount due under Section 17 should be made to the Micro and Small Enterprises Facilitation Council by the disputing party.
- Initiation of Conciliation Proceeding
On the receipt of a reference, the MSEFC must conduct a proceeding to resolve the dispute in two ways; either by conducting a conciliation proceeding on its own or by seeking the assistance from any institution or centre providing alternative dispute resolution services by making a reference to such institution or centre, for conducting conciliation. The provisions of Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 shall be applied for resolving the dispute as if the conciliation was initiated under Part III of the Act.
- Reference of Matter to Arbitration on non-settlement
Section 18 provides that if dispute is not settled between the parties by conciliation and conciliation proceeding stands terminated without reaching any settlement, the matter shall be taken up for the arbitration proceeding; either by the MSEFC itself or MSEFC may refer it to any institution providing alternative dispute resolution services for conduction of such arbitration. Section 18, further, mandates that the provisions of the Arbitration and Conciliation Act, 1996 shall apply to resolve the dispute by arbitration as if the arbitration was in pursuance of an arbitration agreement as provided under Section 7 of Arbitration and Conciliation Act.
- Jurisdiction of the MSEFC
Under Section 18, the Micro and Small Enterprises Facilitation Council or Centre providing alternative dispute resolution services shall have jurisdiction to act as an Arbitrator or Conciliator to resolve a dispute between the supplier and the buyer, where the supplier must be located within MSEFC’s jurisdiction and buyer may be located anywhere in India.
- Time frame for resolving a dispute
Clause 5 of Section 18 expressly provides that every reference under Section 18 must be decided within a period of ninety days from the date of making such reference.
- Application before the Court to set aside the decree, award or order
Section 19 of the MSMED Act provides that an application for setting aside any decree, award or order made, either by the Council itself or by the Institution or Centre to which matter was referred under Section 18 to provide alternative dispute resolution services, shall be entertained by any Court unless the appellant, not being the supplier, deposits to the Court seventy-five percent of the amount in terms of the decree, award or, any other order made by the Court thereunder.
Further, proviso to Section 19 empowers the Court to order, during the pendency of disposal of the application filed under Section 19, to make the payment to the supplier of the amount deposited in such percentage as it considers reasonable under the circumstances of the case subject to such conditions as it deems fit.
Thus, the above procedure must be followed for resolving any dispute pertaining to recovery of dues.
The aforesaid procedure was introduced to deter the buyers who fail to make the payments on time and to mitigate the cases of delayed payment. In order to strengthen the prevalent mechanism for recovery of payment, the Ministry of MSME launched an online portal, namely, “Samadhan Portal”. This Portal was launched to enable the suppliers to file an online application against the buyers for the recovery of their dues. The said application will be reviewed by the MSEFCs, and would also be viewed by the Central Ministries, State Governments and Central Public Sector Enterprises (“CPSEs”) for pro-active actions.
The portal facilitates the entrepreneurs or micro and small enterprises:
- To file an online application for delayed payments using the portal. For filing an application, the applicant is required to have Udyog Aadhaar Number which is validated with Aadhaar for filing the application.
- To check status of their application filed for recovery of delayed payments.
- By providing information regarding the pending payment of micro and small enterprises with CPSEs, or Central Ministries, or State Government etc.