Detailed Guide on Handling Notices Under the MSMED Act, 2006

Posted On - 6 August, 2024 • By - Abhishek Bagga

Introduction

The Micro, Small, and Medium Enterprises Development Act, 2006 (“MSMED Act”) provides a comprehensive framework for addressing issues related to delayed payments to MSMEs. This guide covers the procedures to follow when a notice is received, objections and restrictions on jurisdiction, timelines before the council, handling disputed invoices, liabilities of officers and directors, potential criminal penalties, interest on delayed payments, what constitutes delayed payment, processes and requirements for depositing the disputed amount at the time of filing an appeal.

MSMED Act, shall in respect of the vendors qualifying as MSME, be presumed to be lex specialis and shall in most scenarios have an overriding effect in the event of a conflict with the more generic legal principles (lex generalis). This is in line with Section 24 of the MSMED Act, which provides that: “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.

Why is it crucial to verify the status of a vendor or supplier registered under MSME? Here are some reasons why it is important to do MSME/Udyam verification check.

1. Risk Mitigation:

Verification of MSME registration of an entity at the time of onboarding to reduce the risk of fraudulent or financially unstable suppliers which ensures that the MSME is operational, financially healthy, and has a proven track record.

2. Compliance:

MSME verification helps in ensuring regulatory compliance. When onboarding new suppliers, there are several regulatory mandates that are to be adhered to in order to avoid any legal complications or penalties. Performing a comprehensive MSME verification process ensures a company that the suppliers they engage with have met all the necessary legal and regulatory requirements to avoid issues like fraud, money laundering, or violation of any labor laws.

3. Supply Chain Stability:

Companies can ensure greater stability in their supply chain by verifying that an MSME is reliable and capable of delivering as promised. This can help prevent disruptions in the supply chain that might occur if an unverified supplier fails to deliver as per expectations.

4. Quality Assurance:

MSME verification can help companies determine if the supplier meets their quality standards. This is especially important in industries where the quality of the raw material can significantly impact the final product.

5. Sustainability and Ethical Sourcing:

Many companies today are committed to ethical sourcing and sustainability that leads to better compliance with the environmental, social and governance standards “ESG standards”. MSME verification helps to confirm whether suppliers align with these values, such as by checking whether they adhere to environmental regulations, fair labor practices, and other related issues.

6. Building Trust:

Finally, onboarding a MSME verified entity can help build trust between the company and the supplier. By ensuring that the supplier is reputable and reliable, the company can enter into a business relationship with greater confidence.

However, it is important to note that, the MSMED Act is completely silent on the fact as to whether it is on the vendor or supplier to inform the buyer that it is an MSME before-hand or at any point of time entering into an agreement. The onus is not on the MSME vendor/ supplier to inform that it is an MSME and the companies dealing with the suppliers are required to be more vigilant and active and should expressly ask whether it is an MSME or not before entering into an agreement as there is no penalty levied by the Act on the MSMEs in case of suppression of the fact. The only mandatory requirement comes up at the time of filing the claim before MSME-FC.

It is always advisable to conduct a half-yearly MSME check on their vendors base to ascertain the latest position of the vendor for accurate MSME returns compliance at the end of the Financial Year.

By following the above an organisation will be aware of their duties and liabilities and will not be misrepresented at any situation.

Jurisdiction and Applicability

1. Jurisdiction of MSEFC:

– The Micro and Small Enterprises Facilitation Council (MSEFC) has jurisdiction to entertain complaints regarding delayed payments to MSMEs.

– Jurisdiction is typically determined by the location where the supplier (MSME) is registered.

 – Objections can be raised regarding the jurisdiction if the MSME is not properly registered or if the claim does not pertain to delayed payments as defined under the MSMED Act.

 2. Applicability:

– The MSMED Act applies to micro, small, and medium enterprises engaged in the manufacturing or production of goods, as well as those providing services.

Thus, eligibility /pre-requisite to file the claim /complaint under the MSMED Act is that the complainant or claimant should either be a micro, small or medium enterprise (MSE) as per the definition provided in the MSMED Act.

Note: Medium Enterprises are excluded from the definition of a supplier, as defined in Section 2 (n) of the Act. Therefore, a Medium Enterprise cannot take benefits of the provisions outlined in Section 15-25 under Chapter V(Delayed payments to micro and small enterprises) of the Act.

Pecuniary Jurisdiction

 1. Pecuniary Jurisdiction of MSEFC:

   – The MSMED Act does not specify a monetary limit for the pecuniary jurisdiction of the MSEFC. Therefore, the MSEFC can entertain claims of any value, as long as they pertain to delayed payments to MSMEs.

 2. Implications:

   – The broad pecuniary jurisdiction ensures that MSMEs can seek redressal for delayed payments regardless of the amount involved.

   – Both small claims and substantial disputes can be brought before the MSEFC.

Dispute Resolution Mechanism

1. Section 18(1) of the MSMED Act:

   – As per the above section, a reference regarding delayed payments can be made to the MSEFC by the supplier.

   – Objections can be raised if the reference is not made within the statutory period or if procedural lapses are identified.

   – The MSMED Act establishes a statutory framework for the resolution of disputes concerning delayed payments to MSMEs.

   – The MSEFC typically first attempts to resolve the dispute through conciliation(section 18(2)). If conciliation fails, it proceeds to arbitration(section 18(3)).

Procedural Steps Upon Receiving a Notice

1. Receipt of Notice:

   – Acknowledge the receipt of the notice promptly.

   – Review the notice carefully to understand the claims and the basis of the complaint.

2. Initial Assessment:

   – Verify whether the entity issuing the notice is registered as MSME.

   – Assess the validity of the claims made in the notice in terms of due payments, interest on delayed payments, etc.

 3. Preparation of Response:

 Gather all relevant information and documents, such as contracts, invoices, payment records, correspondence, and any other document supporting your position and thereafter, prepare a detailed response addressing and rebutting each point raised in the notice.

 4. Engage with the MSEFC:

   – If the dispute proceeds to the MSEFC, prepare for the conciliation and arbitration process.

   – Attend the hearings scheduled by the MSEFC.

   – Present your case, including all documentary evidence and legal arguments.

   – Consider engaging legal counsel to represent your interests effectively.

 5. Compliance with MSEFC Decision:

   – Once the MSEFC issues a decision, comply with it promptly.

   – If you are not satisfied with the decision, you have an option to challenge it in the appropriate court. However, the MSMED Act places a high emphasis on the finality of MSEFC decisions to ensure timely resolution.

Additional Pointers:

1. Technical Arguments:

   – Verify the procedural compliance by the MSME in issuing the notice.

   – Check for any lapses in statutory requirements, such as registration status and proper documentation.

 2. Factual Arguments:

   – Provide evidence of any payments made or reasons for non-payment.

   – Highlight any contractual terms that may affect the claims, such as clauses related to delivery, quality, or performance.

Timelines Before the Council

 The limitation for a vendor or supplier to claim outstanding amounts is governed by Article 113 of the Limitation Act, 1963 and commences from the 46th day after the date of acceptance or deemed acceptance, as the case may be.[1]

The Hon’ble Supreme Court of India in Silpi Industries vs. Kerala State Road Transport Corporation & Anr. clarified the timeline for the seller/ supplier/ vendor in filing of a claim before the MSEFC related to delayed payments and interests on delayed payments. Thus, the Limitation Act applies to MSMED Act and a claim before MSEFC must be filed within a period of 3 years from the date the right to sue arise. Further, The Hon’ble Supreme Court held that the Limitation Act, 1963 is applicable in the Arbitration under the MSMED Act, and further opined:

“the express provision applying the provisions of the Limitation Act, 1963 to arbitrations as per Section 43 of the Arbitration and Conciliation, 1996, we are of the view that the High Court has rightly relied on the judgment in the case of Andhra Pradesh Power Coordination Committee and held that Limitation Act, 1963 is applicable to the arbitration proceedings under Section 18(3) of the 2006 Act. Thus, we are of the view that no further elaboration is necessary on this issue and we hold that the provisions of Limitation Act, 1963 will apply to the arbitrations covered by Section 18(3) of the 2006 Act.”

2. Resolution by MSEFC:

   – The MSEFC will examine the validity of the disputed invoice and the reasons for non-payment.

   – Both parties will be given an opportunity to present their case and evidence and after carefully analysing the evidence filed and submissions made, the MSEFC will pronounce the judgement.

Liabilities of Officers and Directors

 1. Corporate Liabilities:

   – Directors and officers of a company can be held personally liable if it is found that the delay in payment was due to their negligence or intentional misconduct.

  • Section 27 of MSMED Act provides for a penalty for contravention of the relevant Section 22 and Section 26 for the Company.
    • Section 22 provides the requirement of the buyer to specify the principal and interest due in the annual statement of accounts.
    • Section 26 (2) provides for furnishing of information to the officers/ employees appointed by the Central Government or State Government.
    • Violation of Section 26 (2) of MSME Act shall be punishable with fine as under:
      • In case of the first conviction: Fine which may extend to Rs. 1000; and
      • In case of second or subsequent conviction: Fine of Rs. 1000 to Rs. 10,000.
    • Violation of Section 22 of MSME Act shall be punishable with Fine which shall not be less than Rs. 1000.

2. Personal Liabilities:

If found guilty of willful default, officers and directors can be held personally liable for the payment due to the MSME, along with the interest as prescribed under the MSMED Act.

Further, non-compliance shall also result in penalties being imposed under Section 405(4) of the Companies Act, 2013 which provides as below:

“4) If any company fails to comply with an order made under sub-section (1) or subsection (3), or knowingly furnishes any information or statistics which is incorrect or incomplete in any material respect, the company shall be punishable with fine which may extend to twenty-five thousand rupees and every officer of the company who is in default, shall be punishable with imprisonment for a term which may extend to six months or with fine which shall not be less than twenty-five thousand rupees but which may extend to three lakh rupees, or with both.”

Interest on Delayed Payments

In ascertaining the timelines for limitation on an MSME’s claim for interest upon delayed payments under Section 17, the pendulum swings between the statutory mandate of Section 16 of the Act on one side and judicial applications on the other. In this regard, it is relevant to take into account the breaking point theory, the application of which means that the time which has elapsed in negotiations between the parties will be scrutinised to pin-point the breakdown of efforts to negotiate, and it will be that point from which the cause of action will be deemed to have arisen. This is in contrast to Section 16 which simply prescribes that the clock on interest be started from the appointed day, or from the date immediately after the date agreed upon:

“16. Date from which and rate at which interest is payable.—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.”

In Geo Miller & Co. (P) Ltd. v. Rajasthan Vidyut Nigam Utpadan Nigam Ltd., (2020) 14 SCC 643, the Supreme Court held that the history of negotiations and discussions between parties must be considered to ascertain “what was the breaking point at which any reasonable party would have abandoned efforts at arriving at a settlement and contemplated referral of the dispute for arbitration.” The Court held that the cause of action for purpose of computation of limitation would arise from this point. In Esteem Projects (P) Ltd. v. Lloyd Insulations India Ltd., 2022 SCC OnLine Del 4248, the Delhi High Court found that the breaking point in the facts of that case had arisen “when the Respondent had unequivocally denied the Respondent’s claim for the first time in response to its legal notice.” Further, in Fortune Builders (P) Ltd. v. Blue Star Ltd., 2022 SCC OnLine Del 975, the Delhi High Court held that “the claim as raised was negated by the revisionist when it replied to the aforesaid notice. It is this which would constitute the breaking point as was explained by the Court in Geo Miller.”

Thus, applying the breaking point theory, it would be critical to examine the history of negotiations, if any, between the parties upon the claim of interest on the delayed payment and ascertain the point at which the talks broke down, which would be the point from when the limitation period would begin.

Appeal under Section 19 of the MSMED Act

1. Mandatory Deposit:

   – According to the MSMED Act, if the buyer decides to file an application for setting aside any decree, award, or order made by the MSEFC, the Appellant (not being a supplier) is required to deposit 75% of the amount in terms of the decree, award or order.

   – This deposit must be made at the time of filing of the appeal for setting aside the award. This requirement ensures that MSMEs are not unduly deprived of their dues while the appeal or review process is underway. It acts as a safeguard to prevent frivolous challenges against MSEFC decisions.

   – Courts generally uphold this requirement to protect the financial interests of MSMEs.

 2.  Appeal Process

   – An appeal against the award, decree, or order of the MSEFC can be filed under Section 34 of the Arbitration and Conciliation Act, 1996.

   – The application must be made to the jurisdictional District Court or the High Court, depending on the monetary value and specific legal criteria.

 2. Procedure:

   – The appeal must be filed within three months from the date of receipt of the arbitral award. An additional 30 days may be granted by the court if sufficient cause for the delay is shown.

3. Interim Measures:

   – Pending the final decision on the appeal, the court may grant interim measures to protect the interests of the parties involved.

 4. Final Court of Appeal:

   – If the District Court or High Court’s decision is contested, further an appeal can be filed in the Hon’ble Supreme Court of India.

   – The Hon’ble Supreme Court is the last court of appeal in such matters, and its decision is final and binding.

 By following these guidelines and understanding the legal framework under the MSMED Act, both buyers and MSMEs can navigate the complexities of delayed payments and ensure timely and fair resolution of disputes.

[1] Shanti Conductors (P) Ltd. and Ors. Vs. Assam State Electricity Board and Ors. (2019)19SCC529

Contributed by – Simran Tandon

 King Stubb & Kasiva,
Advocates & Attorneys

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