There is always some default risk associated with doing goods and services supply business in the market. If the dues from the defaulting customers get so huge that it has become a burden on the supplier’s financial capacity, then the enterprise should seek out legal ways to recover the default amount. The MSME (Micro, Small, and Medium Enterprises) suppliers often have to experience severe financial challenges when their buyers do not make payments on time. Thus, small companies get adversely affected by unpaid invoices from their customers. To avoid a closedown or liquidation or to prevent their future investment and expansion plans from getting severely hampered, many MSMEs resort to legal actions against the defaulters.
There are several legal routes for resolving the non-payment issue and recovering the due amount.
Provisions Under the Law to Recover Default Payments
Supplier dues recovery methods include choosing any of the following legal ways to fight against the defaulters:
- Chapter V of the Micro, Small, and Medium Enterprises Development Act of 2006 (MSMED)
Suppliers can utilise the provisions of Chapter V of the Micro, Small, and Medium Enterprises Development Act of 2006 (MSMED) that offer solutions to the issue of delayed payments. This is accessible to businesses that are registered under the Act. The MSMED Act was created particularly to address and settle the issue of payment dues to suppliers from their customers. The sections under this act that are effective tools to deal with the issue of delayed payments are:
- Section 15:This section states that the buyer shall make the payment to the supplier on or before the date agreed between the two parties in a written agreement. In the absence of such a writing, payment should be made before the appointed date. The appointed date is the day immediately following the expiry period of 15 days, counted from the exact date of acceptance of goods or services by the buyer. The section also says that the period agreed upon by the supplier and the buyer in the agreement shall not exceed 45 days from the date of acceptance of goods or rendering of services. In any case, if the buyer raises an objection to the agreement within 15 days from the date of dispatch of goods or delivery of services, then the day of removal of such a disagreement will be considered the day of acceptance.
- Section 16: If a buyer is unable to pay the due amount to the supplier, he or she will be liable for paying interest at the rate specified in the contract they made or according to the law in force. If the buyer fails to comply with this provision, then he or she will also have to pay compound interest and this will be 3 times the bank rate determined by RBI. Any disputes regarding the due amount should be raised to the Micro and Small Enterprises Facilitation Council (MSEFC) in the respective state.
- Section 17: This section directs the buyer to make the default payment along with the interest of the amount. The interest rate is the one agreed in the contract.
- Section 18: According to this section, the MSME can approach the MSEFC with the supplier dues recovery grievance. The council will take the necessary action.
- MSME SAMADHAAN:Delayed Payment Monitoring System Under the Ministry of Micro Small and Medium Enterprises
Even though there are several provisions in place to help the suppliers recover the default payments, the MSMEs often find it difficult to get back the pending amount, especially from large businesses. To address this issue, the Government of India has launched the MSME SAMADHAAN portal, where enterprises can file their complaint. After the application is successfully submitted, the MSEFC will forward this to the concerned respondent. The proceedings through MAME SAMADHAAN move faster than that of the court.
- The Insolvency and Bankruptcy Code (IBC), 2016
Any supplier having an outstanding due of more than INR 1 crore can initiate an insolvency resolution petition at the National Company Law Tribunal against the default buyer to recover the default amount. Home buyer claims against the builder can also be made under this code.
Conclusion
The MSME suppliers play a vital role and make significant contributions to India’s economic growth and development. They act as catalysts for a thriving economy. MSMEs form the backbone of the export industry and promote inclusive growth, along with raising employment opportunities significantly. If they face monetary hardships due to payment dues from their customers, they may even get pushed into debt traps, face liquidity crunch as the cash flow gets hindered, and face closure threats. The downfall of several MSMEs can negatively impact the economy of a country.
