HOW TO RECOVER DELAYED PAYMENT BY UNDER MSME ACT
In this blog, we will learn about how to recover delayed payment under MSME Act and rules made therein. All the provisions contains under the Act
INTRODUCTION
MSMEs are a crucial part of the Indian economy and have made significant contributions to the country’s socio-economic growth. It not only creates employment opportunities, but it also accounts for over 8% of the country’s GDP, around 45 percent of manufacturing production, and over 40% of the country’s exports. The sector has also made significant contributions to entrepreneurship growth, particularly in India’s semi-urban and rural areas. The Ministry of MSME is a department of the Indian government that is in charge of formulating and enforcing rules, regulations, and laws governing micro, small, and medium-sized businesses in the country. MSMEs are often seen as a source of economic growth and a means of achieving more equitable development. They are recognized for having the highest rate of economic growth.
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Micro, Small and Medium Enterprises (MSME) are divided into two categories under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006: Manufacturing Enterprises, i.e., any industry engaged in the manufacturing or production of goods and Service Enterprises, i.e., any industry engaged in rendering and providing services. There are almost 6.3 crore MSMEs in India. From 21.21 lakh units in 2019, the number of registered MSMEs increased by 18.5 percent to 25.13 lakh units in 2020. Micro enterprises account for the majority of registered MSME units, which increased from 18.70 lakh in 2019 to 22.06 lakh in 2020, while small business units increased from 2.41 lakh units to 2.41 lakh units. The MSMED Act was enacted in 2006 to safeguard MSMEs and to guarantee a maximum profit in a short period of time. It is a comprehensive piece of legislation aimed at promoting and regulating small businesses.
Registration as an MSME is not required by law. The MSME registration process in India, on the other hand, has been designed to help all types of businesses. After registration, any business is eligible to take advantage of the MSMED Act’s benefits, which include easier bank loan approval (priority sector lending), lower interest rates, an excise exemption scheme, and exemption from certain taxes.
WHAT IS A MSME?
| Manufacturing Sector | Service Sector | |
| MICRO ENTERPRISE | Enterprises engaged in the manufacture, production, processing, or preservation of commodities with a plant and machinery investment of less than ₹1 Crore and Turnover less than ₹ 5 Crore. | Enterprises that provide or render services and invest in equipment (original cost excluding land and building, furniture, furnishings, and other items not directly relevant to the service supplied or as may be notified under the MSMED Act, 2006) of less than₹1 Crore and Turnover less than ₹ 5 Crore. |
| SMALL ENTERPRISE | Enterprises engaged in the manufacture, production, processing, or preservation of commodities with a plant and machinery investment of less than ₹10 Crore and Turnover less than ₹ 50 Crore. | Enterprises that provide or render services and invest in equipment (original cost excluding land and building, furniture, furnishings, and other items not directly relevant to the service supplied or as may be notified under the MSMED Act, 2006) of less than₹10 Crore and Turnover less than ₹ 50 Crore. |
| MEDIUM ENTERPRISE | Enterprises engaged in the manufacture, production, processing, or preservation of commodities with a plant and machinery investment of less than ₹50 Crore and Turnover less than ₹250 Crore. | Enterprises that provide or render services and invest in equipment (original cost excluding land and building, furniture, furnishings, and other items not directly relevant to the service supplied or as may be notified under the MSMED Act, 2006) of less than ₹50 Crore and Turnover less than ₹ 250 Crore. |
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ABOUT RECOVERY PROCESS
The MSME has the right to receive a payment within 45 days of the buyer’s acceptance of the products or services. If the buyer fails to pay the supplier the agreed-upon amount, the buyer will be liable to pay compound interest on the amount from the day of acceptance of goods or services or deemed acceptance of goods or services, to the date immediately following the agreed-upon date, at three times the Reserve Bank’s bank rate. In the event failure of such payment occurs, a complaint can be filed with the Micro and Small Enterprise Facilitation Council (MSEFC), and the issue must be resolved within 90 days of the complaint being filed. In the event failure of such payment occurs, a complaint can be filed with the Micro and Small Enterprise Facilitation Council (MSEFC), and the issue must be resolved within 90 days of the complaint being filed.
SECTIONS GOVERNING DELAYED PAYMENTS
TIME LIMIT FOR PAYMENT OF THE DUES
Section 15 of the MSME Act provides a time framework stating that when a supplier sells goods or performs services to a customer, the customer must pay for those products or services on or before the dates as mentioned below;
Buyers of goods or services from micro and small businesses shall make payments on or before the agreed-upon date in writing or on the appointed day if there is no agreement entered upon. In no circumstance, however, can the term agreed upon in writing by the parties exceed 45 days from the date of acceptance or presumed acceptance.
THE RATE AT WHICH INTEREST IS PAYABLE
Section 16 of the MSME Act states that if a buyer fails to make payment to a supplier within the time period specified in Section 15 of the MSME Act, the buyer would be responsible to pay compound interest (with monthly intervals) on the dues to the supplier from the date of default. The prescribed compound interest rate for such loans is three times the bank rate as notified by the Reserve Bank of India.
RECOVERY OF AMOUNT DUE
The buyer is obligated to pay the amount plus interest as stated in section 16 for any items delivered or services rendered by the supplier.
INTEREST CAN’T BE ALLOWED AS A DEDUCTION
For the purposes of computing income under the Income-tax Act, 1961, the amount of interest payable or paid by any buyer under or in compliance with the provisions of this Act must not be allowed as a deduction, notwithstanding anything contained in Income Tax Act, 1961.
REFERENCE TO MICRO AND SMALL ENTERPRISES FACILITATION COUNCIL
Under Section 20, if there is a dispute between the parties over the outstanding balance for the goods or services provided, as well as the interest charged as described above, the Micro and Small Enterprises Facilitation Council can be referred to.
UNPAID AMOUNT WITH INTEREST TO BE SPECIFIED IN THE ANNUAL STATEMENT OF ACCOUNTS
Section 22 of the MSME Act states that if a buyer is required by law to have his annual accounts audited, the buyer must provide details of the principal amount and interest owed to any supplier in its statement of annual accounts at the end of the financial year.
According to the Companies Act, a buyer (a firm) with outstanding dues to a supplier must submit Form MSME-1, which describes the outstanding dues and the reasons for the delay in payment of the dues. The buyer faces penalties if he or she fails to file Form MSME -1.
- Such a buyer must include the following additional information; in the annual statement of accounts;
- the principal amount owed to any supplier, as well as the interest owing on it (to be shown separately);
- For each accounting year, the amount of interest paid by the buyer, as well as the amounts of payments made to the supplier after the appointed date;
- at the end of each accounting year, the amount of interest that has accrued but has been unpaid;
- The amount of interest due and payable for the period of delayed payment (which has been paid but beyond the due date during the year), but without including the interest mentioned in this Act.
MSME SAMADHAN PORTAL
The Ministry of MSME has launched a programme that allows a supplier MSE unit to file an online complaint against a buyer of goods and/or services with the relevant MSEFC Council in his or her state/UT. MSEFC Council will examine these for their actions along with Concerned Central Ministries, Departments, CPSEs, State Governments, and others will be able to see these for proactive action. The Ministry of Micro, Small, and Medium Enterprises (MSME) inaugurated MSME Samadhaan on October 30, 2017. MSME Samadhan, or the MSME Delayed Payment Portal, was created specifically to help micro and small businesses across the country.
After reviewing the case submitted by the MSME unit, the State’s MSEFC will issue directions to the buyer unit for payment of the required amount plus interest in accordance with the MSMED Act 2006. According to the Act, every reference to MSEFC must be decided within ninety days of the date of the referral. The terms of the Act are carried out by the MSEFC, which is chaired by the Director of Industries of the State/UT in charge of the MSE units.
Gujarat has the greatest number of MSME delayed payment cases (2938), followed by Haryana (1680) and Rajasthan (1680). (1337 cases). Tamil Nadu has the most cases filed in South India (909), with over half of them previously disposed of. This statistical data shows that a significant number of cases have been heard and resolved.
- The supplier MSE unit can file a complaint with his or her state’s or union territory’s Micro & Small Enterprises Facilitation Council (MSEFC) against the buyer of products or services. MSMEs can use the platform to submit online applications for delayed payments. They can use the portal to check the status of their applications.
- The Ministry of MSME was responsible for the creation of the platform. It does not, however, take necessary action on applications submitted through the MSME Samadhaan portal. It only transmits these applications to the MSEFC in question. In this case, the MSEFC is the one who takes action. Physical applications will be considered by the MSEFC as well, and a portal is simply one alternative.
- The website will detail the outstanding payments owed to MSMEs by specific CPSEs/Central Ministries, State Governments, and other entities. The CEOs of PSEs and the Secretaries of the Ministries in question will be able to keep track of incidents of late payment under their jurisdiction and issue the required directives to rectify the difficulties.
- A Udyog Aadhar Memorandum is required for businesses to file on the MSME Samadhaan portal. All official purchase orders from clients, as well as delivery proofs for all orders, should be preserved by the company.
- MSME Samadhaan has a percentage value of 25% to recover undetermined dues from these ministries and departments that have been disposed of with the help of MSME Samadhaan.
- If the appellant (who is not the supplier) wishes to initiate an appeal, he must pay 75% of the award amount as a deposit. Unless the appellant deposits the above-mentioned amount, the court will not entertain any action for setting aside any decree, award, or order rendered by the council or any institution to which a reference is made to the council.
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PROCEDURE OF RECOVERY FOR MSMEs
Who can apply for Recovery of dues under MSME?
Any micro or small business with a valid UdyogAadhar/Udhyam Registration (UAM) can file an application for debt recovery. MSME registration can be done using the udyamregistration.gov.in government portal. MSMEs can be registered on the site under one of two categories: for new entrepreneurs who have not yet been registered as MSME and for those who have already been registered as EM-II or UAM through Assisted Filing.
Bank loans become cheaper as a result of MSME registration because the interest rate is relatively low, at 1 to 1.5 percent. Interest rates are far lower than those charged on traditional loans.
It also permitted minimum alternative tax (MAT) credits to be carried forward for up to 15 years rather than the previous 10 years.
Once registered, the cost of obtaining a patent or establishing an industry is reduced by as many rebates and concessions as possible.
STEPS INVOLVED IN FILING ONLINE APPLICATION FOR RECOVERY
- Micro and Small enterprises are required to go to https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx and select “Case filing for Entrepreneur / MSE units” from the MSMED Samadhaan portal. It redirects users to a website called “Entrepreneur Validation.”
- The Udyog Aadhar Phone and the mobile number registered on Udyog Aadhar must be put in after the Entrepreneur validation page opens.
Udyog Aadhar is a business-specific version of the Aadhar identification system. Under the MSME Act of 2006, micro, small, and medium-sized firms in India are issued a certificate known as Udyog Aadhar or MSME registration. Previously, Udyog Aadhar was known as MSME registration.
Steps to attain Udyog Aadhar are;
- To finalize the verification process, log onto the Udyog Aadhar website and enter the applicant’s 12-digit Aadhar number.
- Provide the approved signatory or owner’s name as it appears on the Aadhar Card. The application would be refused if the name does not match the Aadhar number.
- Provide information on the applicant’s caste. If the applicant is from a SC/ST/OBC group, proof must be provided, as the appropriate authorities may request it if and when necessary.
- Fill in the name of the company specifying that is known and is a legal entity from which the business is run.
- If the applicant has more than one firm, he or she can obtain several Udyog Aadhar registrations. The type of legal entity should be chosen, and the business’s location should be entered.
- The primary address, the corporate office address, as well as the phone number and email address must all be entered. It is necessary to input the previous MSME’s address.
- The commencing date of the business must be entered.
- The bank account information for the Company (IFSC code and Bank Account Number). The business’s major or activity should be chosen.
- The proper NIC code must be chosen from the National Industrial Classification Handbook.
- A new page would be directed to where the Udyog Aadhar number has to be entered. Then, as in Udyog Aadhaar, insert the Aadhaar Number or Mobile Number (Only for Assisted filing cases).
- All of the above-mentioned documents must be double-checked, with all details filled in, before clicking the submit button. Verify the OTP number generated by the registered phone number by entering the Captcha code. The applicant will be emailed an acknowledgment number, which will be used for future references.
An application for payment recovery must be filed with the MSEFC. The application must be referred to the council according to its jurisdiction in this phase. Important facts such as the petitioner’s PAN or GSTIN number, as well as the buyers’ information against whom the complaint is to be filed, must be followed to the letter.
Following that, the buyer’s work orders and invoice information must be uploaded. For each buyer or party, a maximum of 5 work orders and invoices can be uploaded.
Following the final evaluation, the application is submitted. Both parties would receive an online intimation once a matter is referred to the MSEFC of the respective state, as per Section 18 of the Act. An opportunity would be granted through conciliation for mutual settlement.
If the conciliation fails or ends without a resolution, the council may either arbitrate the matter itself or send it to any institution or center that offers alternative dispute resolution services. The MSEFC makes a final, irrevocable decision. During the insolvency process, the award must be communicated to the Interim Resolution Professional and the Honourable National Company Law Tribunal (NCLT). The Arbitration and Conciliation Act of 1996 governs the execution of such an award. Only the date of receipt of the award copy is the effective date. If an amount is claimed in civil court, it cannot be claimed in front of the MSEFC. The Award Holder is considered to be a secured creditor.
If the buyer refuses to participate, the buyers’ silence establishes their liability. The Metropolitan Magistrate or Magistrate of First Class, or courts of higher rank, will examine the buyer’s offences. The State Council’s jurisdiction can be extended to a district that does not have a council.
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IBC 2016 &MSMED ACT
The MSMED Act was enacted in 2006 to safeguard MSMEs and to guarantee a maximum profit in a short period of time in the event a liability occurs. It is a comprehensive piece of legislation aimed at promoting and regulating small businesses. MSMEs were treated the same as other Operational Creditors with the Insolvency and Bankruptcy Code was implemented in 2016.
People who are disqualified to be Resolution Applicant(s) are listed in Section 29A of the Code, and this is a crucial condition for submitting a Resolution Plan. The committee decided that corporate debtors that are MSME(s) should be granted exemptions by allowing a promoter who is not a wilful defaulter or covered by any other specified disqualification as stated under Section 29A to bid for an MSME’s Resolution Plan. As a result, the Ministry of Law and Justice included Section 240A in the Insolvency and Bankruptcy Code (Second Amendment) Act, 2018. Clauses (c) and (h) of Section 29A do not apply to the resolution applicant in respect of CIRP of any MSME, according to Section 240A.
As per Section 29A, the following classes of person are exempted, and hence, they are eligible to submit a resolution plan in case of MSME;
- Clause (c) – A person who, at the time of submission of the resolution plan, has an account or an account of a corporate debtor under his or her management or control, or of whom he or she is a promoter, that has been classified as a non-performing asset by the RBI for at least a year from the date of such classification until the start of the Corporate Debtor CIRP.
- Clause (h) – A person who has executed a guarantee in favour of a creditor in respect of a corporate debtor against which the creditor’s action for bankruptcy resolution has been admitted under the Code, and the guarantee has been invoked by the creditor and remains unpaid in full or in part.
The liquidation value of a resolution plan can be zero at times. As a result, the MSME may be forced to undergo extensive restructuring, which will have a significant influence on the capital value held by the MSME, as well as the MSMEs’ ability to operate. As a result of the changes to the IBC requirements, MSMEs might look into a simpler and targeted manner under the MSMED Act. As a result, in order to protect MSMEs, the time frame for payment and case disposition is short under this Act. There is also a mechanism for MSMEs to receive the guaranteed principal amount plus interest.
CONCLUSION
The MSMED legislation ensures that the dues and compound interest owed to the MSME by the buyer are recovered promptly, preventing the loss of operations and reduced capital while the MSME’s claim is pending. The matter will be resolved in 90 days, which ensures that the matter will be resolved quickly. The global recession, which will limit the revival of export demand for MSMEs, a lack of technical expertise, the difficulty for the government to identify unregistered micro-units that remain below the GST threshold limit, costs for maintaining required hygiene levels, and changes in work processes are among the challenges that would curtail MSMEs’ recovery.
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