Unpaid Invoices: Recovery Options for Businesses

What can a business do when a client does not pay an invoice?

A business owed money on invoices has six realistic tools: a negotiated settlement backed by a written acknowledgment, a reference to the MSME Facilitation Council, arbitration under the contract, a commercial suit (including a summary suit under Order 37), a section 138 complaint if a cheque bounced, and an operational creditor's application under the Insolvency and Bankruptcy Code. A criminal complaint of cheating fits only rare cases. These are not mutually exclusive, but they cannot all be used at once without care, and the order in which you use them matters.

Three questions narrow the choice quickly. First, are you a micro or small enterprise registered on Udyam, supplying to this buyer? If so, the MSMED Act gives you a fast forum and punitive interest. Second, does your contract or purchase order contain an arbitration clause? If so, the buyer can force the dispute out of court, so you might as well start there. Third, does the buyer genuinely dispute the invoices, or is it simply not paying? A real dispute rules out the IBC and makes a summary suit harder; a pure non-payment case suits both.

Is your invoice claim provable?

Before choosing a forum, check that you can prove four things: that there was an agreement, that you delivered, that the buyer accepted, and how much is still due. An invoice by itself proves only that you raised a bill. What makes it a claim is the paper around it: a signed contract or purchase order, delivery challans or e-way bills, goods receipt notes or completion certificates signed by the buyer, emails approving the work, and a ledger that shows payments received and the balance.

Two pieces of evidence are often overlooked. The first is the buyer's own GST record: if the buyer has claimed input tax credit on your invoices, which shows up in the GST system, it is hard for the buyer to say later that it never received the goods or that the invoice was not accepted. The second is the buyer's balance confirmation. Many businesses exchange ledger confirmations at the end of the financial year for audit; a signed confirmation is an acknowledgment of the debt, and it can also extend limitation.

If the paper is thin, fix it before you escalate. Ask the buyer's accounts team for a ledger reconciliation, collect the delivery proofs from your transporter, and export the emails and WhatsApp messages with dates. A claim that would fail on proof does not get better in a more expensive forum.

How long do you have to recover an unpaid invoice?

Generally three years under the Limitation Act 1963, but the start date depends on the arrangement. For goods sold and delivered with no fixed credit period, time runs from the date of delivery (Article 14). Where a fixed credit period was agreed, it runs from when that period expires (Article 15). For work done with no time fixed for payment, it runs from when the work is done (Article 18). For a running account between the parties that is open, mutual and current, it runs from the close of the year in which the last item is admitted or proved (Article 1).

Two provisions can give you more time. Under section 18, a written acknowledgment of the debt signed by the buyer before the period expires starts a fresh three years. A ledger confirmation, an email from the buyer's director saying 'we will clear your dues next month', or a reply to your notice that admits part of the amount can all qualify, if they are signed (courts have accepted emails from the buyer's official account in several cases, but a signed letter is safer). Under section 19, a part payment made before expiry also restarts the clock, if it is acknowledged in writing.

Mediation and arbitration have their own effect on limitation: time spent in pre-institution mediation under section 12A is excluded, and an arbitration commences, stopping limitation, when the buyer receives the notice invoking it. Our post on limitation periods for civil suits covers the general rules. The practical lesson is simpler: work out the last date on day one, write it down, and act well before it.

What to do in the first 30 days after an invoice goes unpaid

Thirty days of organised effort usually tells you whether the buyer will pay, settle or fight, and sets up whichever route comes next.

1. Stop extending credit

   If the buyer is behind, think hard before supplying more on credit. Continuing to deliver while unpaid invoices pile up increases your exposure and can be read as accepting the buyer's delays.

2. Reconcile the account

   Send the buyer a statement of account listing each invoice, its due date and payments received, and ask for confirmation or for specific objections. Many disputes turn out to be about a debit note, a short shipment or TDS, and get resolved here.

3. Put the dispute in writing

   Ask the buyer to state in writing, by a date, which invoices it disputes and why. A buyer that gives no reasons now will find it harder to invent them later; one that gives reasons tells you what you will have to answer.

4. Get an acknowledgment

   If the buyer promises to pay, ask for the promise on email or letterhead, with amounts and dates. This is evidence, and it may extend limitation.

5. Send a formal demand

   If payment still does not come, send a legal notice setting out the facts, the amount, interest claimed and the next step you will take. A notice from an advocate changes the tone of the conversation inside the buyer's company.

6. Choose the route

   By about day thirty you know the buyer's stand. Decide the forum based on the questions in this post, and do not let further promises push you past your limitation date.

Should you send a legal notice for an unpaid invoice?

Usually yes. A legal notice is not compulsory for a civil recovery claim, but it serves three purposes: it often produces payment from buyers who were simply prioritising other creditors, it forces the buyer to commit to a defence in writing, and it creates a record that you asked before you sued, which courts take into account on costs and interest. For an IBC operational creditor application, a demand notice in the statutory form under section 8 is a legal requirement, so if that route is a possibility, plan the notice accordingly.

Keep the notice factual and specific: the contract, the invoices with dates and amounts, the deliveries, the payments received, the balance, the interest claimed and its basis (the contract rate, or the MSMED Act rate if you are a registered micro or small supplier), and the time given to pay. Avoid threatening criminal proceedings for a commercial non-payment; it rarely frightens a company and can later look like pressure. Our post on sending a legal notice before filing a suit sets out what to include and how to serve it.

When Advocate B.K. Singh drafts a recovery notice, he asks the client for the buyer's last three emails before anything else. The buyer's own words, an approval of work, a promise to pay, a complaint raised only after the invoice, often decide how the notice should be pitched and which forum to name in it.

Which recovery route fits your unpaid invoice?

Are you a micro or small supplier? Start with the Facilitation Council

If you are a micro or small enterprise registered on Udyam and the buyer has not paid within the agreed period (never more than 45 days from acceptance), the MSMED Act is usually your strongest option. The buyer owes compound interest with monthly rests at three times the RBI bank rate, any contract clause to the contrary is overridden, and the claim is filed online on the MSME ODR portal before the state Facilitation Council, which first attempts settlement and then arbitrates. A buyer that wants to challenge an award must first deposit 75% of it.

Check two details before relying on this route. Your registration must generally predate the contract with the buyer, and the protection is for suppliers only, so a medium enterprise or a buyer cannot use it. Our post on MSME delayed payment claims before the Facilitation Council covers the procedure, the 2026 amendments and the interest calculation in detail.

If the contract has an arbitration clause

If your contract or the buyer's purchase order contains an arbitration clause, the buyer can apply under section 8 of the Arbitration Act to have any suit you file referred to arbitration. So unless the clause is unworkable, start with arbitration. Send a notice under section 21 invoking the clause and proposing an arbitrator; if the buyer does not agree within 30 days, apply to the court under section 11 for an appointment.

For invoice disputes, propose the fast-track procedure under section 29B: a sole arbitrator decides on documents and written submissions, and the award must come within six months. Online hearings keep costs down when the buyer is in another city; our post on online arbitration and mediation for small business disputes explains how that works and the clause defects to watch for. Check one thing early: if the clause lets the buyer alone appoint the arbitrator, that clause is open to challenge, and you should seek a neutral appointment rather than accept the buyer's nominee.

Commercial suit: mediation first, then summary suit or regular suit

Without an arbitration clause or MSME status, the main route is a suit. A claim arising from the supply of goods or services between traders or businesses is a commercial dispute, and if it is worth ₹3 lakh or more it goes to a commercial court under the Commercial Courts Act 2015. In Delhi, claims up to ₹2 crore go to the commercial courts in the district complexes and larger claims to the commercial division of the Delhi High Court. In Noida and Ghaziabad, the district-level commercial courts hear them.

Before filing, section 12A requires pre-institution mediation unless you need urgent interim relief, and the Supreme Court in Patil Automation v Rakheja Engineers (2022) held that a suit filed without it is liable to be rejected. You apply to the District Legal Services Authority; the mediation is to finish within three months, extendable by two with consent. If the buyer does not turn up or no settlement is reached, you get a non-starter or failure report and can file. If it settles, the settlement has the status of an arbitral award. Our post on pre-institution mediation under section 12A covers the procedure.

Where your claim rests on a written contract for a fixed sum, a summary suit under Order 37 of the Code of Civil Procedure is often the best form: the buyer must seek leave to defend and show a real triable defence, and if it cannot, you get a decree without a full trial. Our post on summary suits under Order 37 explains when invoices qualify. In a regular commercial suit, you can still apply for summary judgment under Order XIIIA if the defence has no real prospect of success. Court fee is ad valorem on the claim; our post on court fee in Delhi civil suits explains how it is worked out.

When does an IBC notice make sense for an unpaid invoice?

Only when the buyer is a company or LLP, the unpaid amount is ₹1 crore or more, and the buyer has no genuine pre-existing dispute about it. A supplier of goods or services is an operational creditor. It must first serve a demand notice under section 8; if the buyer, within ten days, points to a dispute that existed before the notice (an email complaining of defects, a pending arbitration, a quality rejection), the NCLT will not admit the application under section 9. Our post on section 9 petitions by operational creditors covers the procedure.

Understand what the IBC is for. It is a process to resolve a company that cannot pay its debts, not a debt collection forum, and the NCLT says so. Many section 9 applications produce payment before admission because the buyer's management does not want to lose control of the company. But if the application is admitted and the company goes into insolvency, operational creditors often recover a small fraction under the resolution plan. Use the IBC as a pressure tactic only when you are prepared for the possibility that it works. The Code was amended in 2026, so check the current procedure before filing.

What if the buyer gave cheques for the invoices?

If the buyer handed over cheques against the invoices, including post-dated cheques, and they bounced for insufficient funds or because payment was stopped, a complaint under section 138 of the Negotiable Instruments Act may be available alongside your civil claim. The deadlines are strict: a notice within 30 days of receiving the bank's return memo, 15 days for the drawer to pay, and the complaint within one month after that. Our post on the cheque bounce notice and its 30-day deadline explains the steps.

A cheque bounce case and a civil suit or arbitration for the same debt can run together, because one is a criminal case about the cheque and the other is a claim for the debt. The cheque case covers only the cheque amount, while the civil claim can include interest and other invoices. Do not let a cheque case distract you from the limitation date for the wider claim.

Is non-payment of an invoice a criminal offence?

Usually not. Failing to pay a commercial debt is a breach of contract. It becomes cheating under section 318 of the Bharatiya Nyaya Sanhita only if the buyer intended not to pay from the start, for example by placing orders in a false name, using forged documents, or taking goods with no business capable of paying for them. Criminal breach of trust under section 316 needs entrustment of property, which a normal sale on credit does not involve.

The High Courts regularly quash FIRs and complaints filed to turn a commercial recovery into a criminal case, and the Supreme Court has repeatedly said that criminal proceedings are not a recovery tool. A criminal complaint in a straightforward unpaid invoice case usually delays recovery and may expose you to costs or a counter-complaint. Where there are real signs of fraud, such as a buyer who disappears after collecting goods from several suppliers, our post on cheating and criminal breach of trust under the BNS explains when the criminal law applies.

GST and tax rules that put pressure on a non-paying buyer

Tax law gives suppliers some pressure points. Under the second proviso to section 16(2) of the CGST Act, a buyer that has not paid the supplier the value of the supply and the tax within 180 days of the invoice date must add the input tax credit it claimed back to its own output tax liability, with interest. It can take the credit again when it pays. Mentioning this in a reconciliation email to the buyer's accounts team often gets an invoice paid faster than a legal threat, because the finance department feels the cost directly.

For micro and small suppliers, income tax law since 2024 has restricted a buyer's deduction for amounts owed to them beyond the time allowed under the MSMED Act, until payment is actually made; check how this applies under the Income-tax Act 2025 for the relevant year. The supplier side is less kind: a supplier that has paid GST on an invoice the buyer never pays generally cannot get that tax back as bad debt relief, which is one more reason to act early.

Do not issue credit notes casually in the middle of a dispute. A credit note reduces the invoice value in your own records and the GST system, and a buyer will later use it to argue that you accepted the deduction.

Documents that decide invoice recovery claims

Mistakes that weaken an unpaid invoice claim

• Waiting for the next promise. Each month of reminders without a written acknowledgment brings the limitation date closer.
• Banking a 'full and final' cheque without protest. If the buyer sends a lower amount marked as full settlement, write back at once that you accept it only as part payment.
• Suing the wrong party. Check the legal name on the purchase order and the GST registration; a brand name or a sister company is not the debtor.
• Ignoring the jurisdiction or arbitration clause. A suit filed in the wrong court, or in the face of an arbitration clause, loses months.
• Overstating the claim. Interest at a rate that the contract or statute does not support, or invoices that are genuinely disputed, invite a leave to defend in a summary suit.
• Skipping section 12A mediation in a commercial suit where no urgent relief is sought. The plaint may be rejected.

Preventing the next unpaid invoice

Most recovery problems start at the contract stage. Before the next large order, check that you have:

• A signed contract or purchase order with clear credit terms
• An interest clause for late payment
• A dispute clause naming a neutral arbitration route and a seat, or the courts of your city
• Advance or milestone payments for large or custom orders
• A right to stop supply when invoices are overdue
• Quarterly ledger confirmations from the buyer
• Udyam registration in place before contracts, if you qualify
• Credit insurance or TReDS discounting for large buyers, where available

Choosing the route for your invoices

The forum you choose decides how the buyer behaves. A buyer that ignores reminders will often pay once a Facilitation Council notice, an arbitration notice or a section 12A mediation notice arrives, because each of those has a timetable it cannot control. A buyer with a real complaint about quality will fight in any forum, and then the strength of your paperwork decides the outcome.

A point Advocate B.K. Singh often makes to business clients is that the cheapest recovery is the one prepared before the money is due: a clear contract, signed deliveries and a buyer's ledger confirmation each quarter. If invoices are already overdue, our team at B.K. Singh & Associates can read the contract, the ledger and the correspondence, work out the limitation date and suggest the route that fits. You can send the papers through our online enquiry page, or read more about our work in arbitration and commercial disputes and insolvency cases in Delhi.