MSME Delayed Payment: Facilitation Council Claims Under the MSMED Act

What can an MSME supplier do when a buyer does not pay within 45 days?

You can make a reference to the Micro and Small Enterprises Facilitation Council of your state under section 18 of the MSMED Act, claiming the unpaid amount and statutory interest. The Council is a body set up by the state government, usually run from the Department of Industries or the Commissionerate of Industries. In Delhi it sits under the Government of NCT of Delhi; Uttar Pradesh and Haryana run regional councils, so a supplier in Noida or Ghaziabad files before the council that covers its district.

The reference is not a suit. You do not pay ad valorem court fee, you do not need a decree to start enforcement talks, and the buyer cannot escape to its own arbitration clause. The Council calls both sides, tries to bring about a settlement, and if that does not work, either arbitrates the dispute itself or sends it to an arbitration institution. Its award is enforceable like a court decree.

The remedy is strong because of three features that ordinary contract law does not give a supplier. Interest runs at a statutory rate that overrides whatever the purchase order says. The buyer cannot challenge the award without first depositing 75% of it. And the supplier chooses the forum near its own place of business, wherever the buyer is located.

Who can file before the MSE Facilitation Council?

Only a 'supplier' as defined in section 2(n) of the Act: a micro or small enterprise that has filed its memorandum under section 8, which today means Udyam registration. Medium enterprises are not suppliers for Chapter V, even though they are MSMEs for other purposes. The classification thresholds were raised from 1 April 2025: a micro enterprise has investment in plant and machinery or equipment up to ₹2.5 crore and turnover up to ₹10 crore, and a small enterprise up to ₹25 crore and ₹100 crore. Check your Udyam certificate, because the category shown there is what the Council will look at.

The timing of registration is the most argued point in these cases. In Silpi Industries v Kerala State Road Transport Corporation (2021) and Gujarat State Civil Supplies Corporation v Mahakali Foods (2022), the Supreme Court held that a supplier must be registered on the date of the contract, and that registering later does not cover earlier supplies. In NBCC (India) Ltd v State of West Bengal (January 2025), a two-judge bench doubted that view and referred the question to a larger bench. Until the larger bench decides, buyers will rely on Silpi and Mahakali, so a supplier that registered after the purchase order should expect this objection and get advice before filing.

Traders are a second grey area. Retail and wholesale traders were allowed to take Udyam registration in 2021 for priority sector lending, and buyers routinely argue that a trader cannot use section 18. Works contracts raise a similar fight, since buyers say a works contract is neither a supply of goods nor a service. These objections do not always succeed, but they add a round of hearings, and you should know about them before you choose the Council over a suit.

The buyer can be anyone who buys goods or receives services from the supplier for consideration: a private company, a partnership, a government department, a public sector undertaking, even another MSME. The buyer does not have to be in your state.

Does your claim fit the MSMED Act route?

General guidance. The documents and the facts of each case decide the outcome.

The provisions that decide a delayed payment claim

How are the 45 days counted?

From the day of acceptance, not from the invoice date. Acceptance is ordinarily the day the goods were delivered or the service was rendered. If the buyer objected in writing within 15 days of delivery, acceptance is the day the supplier removed the objection, for example by replacing the defective lot. If the buyer said nothing in writing within 15 days, acceptance is deemed to be the delivery date itself.

So the first thing to establish is the delivery date for each invoice. Signed delivery challans, lorry receipts, gate entry records, e-way bills, goods receipt notes generated by the buyer's ERP, service completion reports and acknowledgment emails all help. Where the order is a running supply, you will usually have dozens of invoices, each with its own due date, and interest is worked out invoice by invoice.

If there is a written agreement fixing a shorter credit period, say 30 days, payment is due on day 30. If the agreement gives more than 45 days, the agreed period is cut down to 45. If there is no written agreement on credit at all, the buyer must pay before the appointed day, which is the day after 15 days from acceptance. Many suppliers lose interest by assuming the 45 days always apply; where nothing was agreed in writing, the deadline is shorter.

How much interest can an MSME claim on delayed payment?

Compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, from the due date until payment. The bank rate moves with the RBI's policy rates, so take the rate in force for each period from the RBI's notifications and apply it month by month. Your claim statement should show the working for every invoice: amount, delivery date, due date, payments received and the interest for each month.

Part payments are usually adjusted first against interest and then against principal, but Councils differ on this where the buyer's payments were made against specific invoices. Keep the buyer's remittance advices, because they show which invoices it claimed to be paying. Where the buyer deducted TDS or debited you for shortages, show those adjustments openly rather than leaving the Council to discover them.

Statutory interest is often larger than suppliers expect, and buyers know it. That is why many Council cases settle at the first or second hearing, with the buyer paying the principal and a negotiated part of the interest. Whether to accept such an offer is a commercial decision: a settlement now against a full award later, followed by a section 34 challenge and enforcement.

What changed with the MSMED (Amendment) Act 2026?

Parliament passed the MSMED (Amendment) Bill in August 2026, and the amending Act has been reported as brought into force on 13 August 2026. For delayed payment claims, the main changes are these: timelines inside section 18 (the settlement stage to finish within 90 days, the matter to go to arbitration within 30 days after that, and the award within 90 days of completion of pleadings); jurisdiction tied to the supplier's address recorded in its registration; recovery of awards as arrears of land revenue under new section 18A; and release of at least half the award to the supplier if a challenge is pending for more than six months.

Registration under section 8 becomes free and voluntary, and the old penalties for not registering go. But access to the Facilitation Council still depends on being a registered supplier, so registration remains the gateway to this remedy. Buyers that fail to disclose MSE dues in their accounts now face a warning, then a penalty, then a fine for repeat defaults.

The settlement stage itself is moving from conciliation by the Council to mediation under the Mediation Act 2023. How far that change is operational depends on notifications, and Councils may still be running the older procedure for some references. When your reference is registered, check which procedure the Council is applying and diarise its timelines accordingly. We describe the amendment here in general terms; for a live case, read the current text of section 18 and the Council's notice together.

Filing a delayed payment claim on the MSME ODR portal, step by step

Delayed payment references are now filed online. The MSME ODR portal went live in June 2025 and, from October 2025, new delayed payment cases are filed there rather than on the older Samadhaan system.

1. Confirm your status and dates

   Download your Udyam certificate and check the category and the date of registration against the dates of the purchase orders. List every unpaid invoice with its delivery date and the date payment fell due. This list becomes the spine of the claim.

2. Send a demand to the buyer

   A short legal notice or demand letter listing the invoices, the principal and the statutory interest is not compulsory, but it often produces payment and it fixes the buyer's stand. Ask the buyer to state in writing if it disputes any invoice and why.

3. Register on the portal and file the reference

   Create a login with your Udyam number, enter the buyer's details (name, address, GSTIN, contact person), and upload the invoices, purchase orders, delivery proof and a statement of account. State the principal and the interest claimed, with the calculation attached.

4. Serve and attend the settlement stage

   The Council issues notice to the buyer and fixes a hearing, often by video. Attend with someone who knows the account, because the first questions are usually about specific invoices, deductions and debit notes. Many cases settle here.

5. Arbitration if settlement fails

   If the settlement attempt fails, the Council takes up arbitration itself or refers the case to an institution. You file a statement of claim with documents, the buyer files a reply and any counter-claim, and the Council hears arguments and may take evidence.

6. Award, deposit and recovery

   The Council passes an award for principal and interest. If the buyer does not pay and does not challenge it with the 75% deposit, you enforce it as a decree under section 36 of the Arbitration Act or through the land revenue route under section 18A.

Keep a copy of every document exactly as uploaded, with page numbers. When the matter reaches arbitration or a section 34 court, everyone will refer to those pages.

Documents the Facilitation Council will ask for

What happens at the settlement hearing?

The Council, or a mediator, sits with both sides and goes through the account. The buyer's representative usually arrives with three points: some invoices were never received, some supplies were defective or short, and interest was never agreed. The supplier's job at this stage is to answer each point with paper. A goods receipt note signed by the buyer's stores answers the first point; the absence of any written objection within 15 days answers much of the second; section 16 answers the third.

A settlement here is recorded in writing and signed by both parties. It is binding and, after the 2026 amendment, can be recovered like an award. Make sure the settlement states the amount, the dates of payment, what happens on default (for example, that the full claim revives with interest) and that it settles only the invoices listed. Vague settlements that 'close all disputes' have cost suppliers claims they never meant to give up.

A point Advocate B.K. Singh often makes to supplier clients at this stage is that the settlement hearing is where the buyer's real defence first appears. Note it down carefully, because a buyer that says nothing about defects at conciliation and then produces a quality report in arbitration has a credibility problem the supplier can use.

When the Council becomes the arbitrator

If settlement fails, the Council can act as arbitrator itself, even though it attempted conciliation. The Supreme Court settled this in Mahakali Foods, which also held that Chapter V of the MSMED Act overrides an arbitration clause in the contract. So a buyer cannot insist on its own named arbitrator or its own seat once a valid section 18 reference is made. The Arbitration and Conciliation Act 1996 applies to the proceedings, including its rules on pleadings, evidence and interim measures.

The buyer can file a counter-claim, for example for liquidated damages for late delivery or for the cost of replacing defective goods, and the Council can decide it in the same proceedings. Suppliers should therefore check their own performance record before filing: late deliveries, rejected lots and pending warranty claims will all come up.

Arbitration before a Council is usually less formal than a private arbitration, but it is still a hearing on evidence. Affidavits of the person who handled the account, a clean statement of account and an interest calculation that the Council can check line by line make the difference. The award must give reasons. A bare award for 'the amount claimed' invites a challenge.

Is there a time limit for an MSME delayed payment claim?

For the arbitration stage, yes: the Limitation Act 1963 applies, which for a money claim on invoices generally means three years from the date payment fell due. In Sonali Power Equipments v Maharashtra State Electricity Board (2025), the Supreme Court held that the Limitation Act does not apply to the conciliation stage, so a time-barred claim can still be referred for settlement, but if settlement fails, the time bar will apply in arbitration.

Acknowledgments in writing extend limitation. A balance confirmation signed by the buyer, a letter admitting the dues, or an email asking for time to pay can each give you a fresh three years from its date, if made before the original period ran out. Whether the buyer's disclosure of MSE dues in its annual accounts under section 22 counts as an acknowledgment is decided case by case.

In practice, do not wait. Old claims are harder to prove because the buyer's staff change, delivery records go missing, and the buyer argues that silence for years shows the supplier accepted deductions. Our post on limitation periods for civil suits explains how acknowledgments and part payments work.

Defences buyers raise, and how they usually fare

• 'The supplier was not registered when the order was placed.' A serious objection under Silpi and Mahakali, now under reference to a larger bench. Address it in the claim itself instead of waiting for the reply.
• 'The goods were defective.' Weak if the buyer raised no written objection within 15 days and kept using the goods. Stronger where there are inspection reports, rejection notes and return challans from the time.
• 'Payment was due only after our customer paid us.' Back-to-back payment clauses do not override section 15. The 45-day ceiling still applies.
• 'Interest was never agreed, or was waived.' Section 16 applies notwithstanding any agreement, so a waiver clause in the purchase order does not bar statutory interest.
• 'We have an arbitration clause.' Chapter V overrides it once a valid reference is made, as held in Mahakali Foods.
• 'The claim is time-barred.' Fatal at the arbitration stage unless there is a written acknowledgment or part payment within time.
• 'The supplier is a medium enterprise or a trader.' A medium enterprise is outside Chapter V; the trader point is contested and depends on what was supplied.

Challenging or enforcing a Facilitation Council award

A buyer who wants to set aside the award must file a petition under section 34 of the Arbitration and Conciliation Act within three months of receiving it, extendable by 30 days for sufficient cause, and must first deposit 75% of the awarded amount under section 19 of the MSMED Act. Courts have treated the deposit as mandatory, though they can allow it in instalments. The grounds are the narrow section 34 grounds: lack of jurisdiction, denial of a fair hearing, conflict with the fundamental policy of Indian law, patent illegality. A buyer cannot reargue the facts. Writ petitions against Council awards are generally not entertained when section 34 is available.

If the buyer neither pays nor challenges in time, the award is enforced as a decree under section 36. The supplier files an execution petition in the court with jurisdiction, asking for attachment of bank accounts, receivables or property. The new section 18A adds a faster route: recovery as arrears of land revenue through the Collector where the buyer's assets are located. For details on execution, see our post on enforcing an arbitral award as a decree.

Because the award amount is now treated as a debt under the IBC, an unpaid award against a company may also support an insolvency petition, subject to the IBC's minimum default threshold of ₹1 crore for companies. That is a serious step with consequences for every creditor, and it is not a collection tool for small amounts. Our post on section 9 petitions by operational creditors covers when it makes sense.

Council claim, commercial suit or IBC: which route fits?

A rough comparison for an unpaid supplier. Most suppliers who qualify start with the Council.

The commercial suit route is explained in our post on pre-institution mediation in commercial suits, and the courts themselves on our commercial courts in Delhi page.

If you are the buyer: limiting your exposure

Buyers who receive a Council notice should first check whether the claimant is really a supplier: the Udyam category, the date of registration against the contract dates, and the nature of the supply. If the objection is good, raise it at the start and in writing. Then reconcile the account honestly. Councils lose patience with buyers who dispute invoices their own ERP shows as received.

Going forward, a buyer can reduce exposure by recording quality objections in writing within 15 days of delivery, paying MSE invoices within 45 days, and disclosing MSE dues in its accounts as section 22 requires. Companies with MSE dues outstanding beyond 45 days also file the half-yearly MSME Form I return with the Registrar of Companies.

Tax adds another reason to pay on time. Since 2023 the income tax law has allowed a buyer to deduct sums owed to micro and small suppliers only in the year of actual payment if they are paid beyond the section 15 deadline. That rule began as section 43B(h) of the Income-tax Act 1961; check the corresponding provision of the Income-tax Act 2025 with your chartered accountant. And interest paid under section 16 is never deductible, under section 23 of the MSMED Act.

What to do this week if a buyer owes you money

• Download your Udyam certificate and note the category and registration date.
• List every unpaid invoice with its delivery date, due date and amount outstanding.
• Collect proof of delivery and acceptance for each invoice: GRNs, challans, e-way bills, emails.
• Pull the buyer's ledger, bank receipts, TDS certificates and any debit notes.
• Check whether any invoice is close to three years old, and look for written acknowledgments.
• Send a written demand listing principal and statutory interest, and ask the buyer to put any dispute in writing.
• Prepare the interest working invoice by invoice, month by month.
• Decide between the Council, a commercial suit and other routes before limitation becomes an issue.

Before you file

Most Council claims are won or lost on paper prepared before the reference is filed: the registration dates, the proof of acceptance and a clean interest calculation. When Advocate B.K. Singh looks at a supplier's file, the first thing he lines up is the Udyam registration date against the purchase order dates, because that decides whether the buyer's strongest objection is available at all. Everything else follows from the account.

If you would like an advocate to read your purchase orders and invoices and tell you whether the Council route is open, the team of Advocate B.K. Singh at B.K. Singh & Associates can review the papers and explain the options. You can write to us through the online enquiry form, and for agreements that will avoid these disputes next time, see our page on commercial contracts and agreements.