COVID-19 pandemic has battered all sectors of the economy, but the micro, small and medium enterprises (MSMEs) are amongst the one worst-hit.

This post is therefore devoted to those small businesses to fight back and claim their rights. We will discuss here some of the relevant provisions of MSMED Act, 2006 which may come helpful for asserting entitlements.

Majority of the MSME sector relies on day-to-day business to stay afloat, and therefore continues to be the most vulnerable owing to the lockdown and a decrease in demand. According to All India Manufacturers’ Organization (AIMO), most of the businesses were not able to pay salaries for March and April and could shut down if lockdown continues for few more weeks. It is unfathomable that a vast number of MSMEs will be choked, perhaps to the point of permanent closure.

Notwithstanding above, most of the small businesses suffers delay in release of their legitimate payments owing to their one-sided contracts and major difference in bargaining power. This further jeopardies their survival.

Micro Small Medium Enterprises are classified based on their business activity and investment in plant and machinery under Section 7 of the Act. Further as per the revised definition, any firm with investment up to Rs 1 crore and turnover under Rs 5 crore will be classified as “Micro”. A company with investment up to Rs 10 crore and turnover under Rs 50 crore will be classified as “Small” and firm with investment up to Rs 20 crore and turnover under Rs 100 crore will be classified as “Medium”.

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(MSMED Act) provides a mechanism for speedy recovery of delayed payments. Chapter V of the MSMED Act deals with delayed payments to micro and small enterprises. Moreover, micro and small enterprises must be within the meaning of “suppliers” under Section 2(n) of the MSMED Act, to utilize this remedy.

Section 15 provides that where any supplier, being a micro and small enterprise, supplies any goods or renders any services to any buyer, the buyer is under an obligation to make payment on or before the date agreed in writing. Such agreed date cannot be more than 45 days from the date of acceptance of goods or services. In absence of any agreement in writing, payment shall be made on or before 15 days from the date of acceptance of goods or services.

According to Section 16, where any buyer fails to make payment to any supplier within the time period stipulated under Section 15, notwithstanding anything contained in any agreement between the parties, the buyer is liable to pay compound interest at three times the average bank rate notified by the Reserve Bank of India (RBI) during that period. Section 17 provides that the buyer shall be liable to pay the outstanding amount to supplier with interest thereon, as prescribed under Section 16.

Section 18 starts with a non-obstante clause and provides that notwithstanding anything contained in any law in force, any party to the dispute may, with regard to any amount due under Section 17, make reference to the Micro and Small Enterprise Facilitation Council. The Council is empowered to conciliate the dispute itself, or may refer it to any institution providing ADR services. Every reference made under this provision is to be decided within 90 days. Furthermore, provisions contained in Section 65 to 81 of Arbitration and Conciliation Act, 1996 shall apply to such proceedings.

Section 18(3) provides that in case conciliation is terminated without any amicable resolution, the Council shall either itself take up the dispute for arbitration or refer it to any institution providing ADR services. Again, arbitration will be conducted in accordance with Arbitration Act.

Thus, even if the parties do not have a formal arbitration agreement, by virtue of Section 18 of the MSMED Act, a supplier can enforce arbitration upon a buyer. Moreover, Section 18(4) stipulates that a supplier can file a reference before any Council where the supplier is located. Therefore, the general rule of place of suing under Sections 15 to 21 of the Code of Civil Procedure is not applicable, and the convenience of the micro and small enterprise is given priority.

Section 19 prescribes that an application for setting aside an arbitral award shall be entertained by a court only when the appellant has deposited with it 75% of the amount of the award. Section 23 of the Act provides that interest paid by the buyer to the supplier under Chapter V of MSMED Act shall not be allowed as deduction for the purpose of Income Tax Act, 1961. Section 24 of the Act gives an overriding effect to the provisions contained in Chapter V of MSMED Act over all other laws.

Thus, for micro and small enterprises, remedy under Chapter V of the MSMED Act is swift and effective, as it carries several advantages. Naturally, this mechanism is resorted to on regular basis.

However, the issue with respect to registration under the MSMED Act is still hotly contested.
The root cause of the controversy is definition of “supplier” under Section 2(n).

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Ordinarily when a definition uses the word “and” to join two phrases, conditions stipulated under both phrases are required to be complied with. However, by virtue of Section 2(n)(i) and (ii), NSIC and Small Industries Development Corporation are considered “suppliers” even without filing a memorandum.

However, it is advisable for all the micro and small enterprises to file memoranda with the appropriate authorities to distance themselves from this debate.
In these unusual and seemingly uncertain times, it is of paramount importance for all the MSMEs to stay positive, work with a plan in place to survive and take the help that is offered by various segments in the business and most importantly work with their partners & support ecosystem to tide over this challenge! We will SURVIVE and THRIVE.

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