Recovering MSME Dues Through the MSEFC

The problem: invoices that are never paid on time

For micro and small manufacturers and service providers, a few large unpaid invoices can strain working capital and payroll. The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) gives such suppliers a special recovery route that is often faster and stronger than an ordinary civil suit. This guide explains how it works from a legal point of view.

What the MSMED Act says about payment

• A buyer must pay a micro or small supplier on or before the agreed date, and the agreed period cannot exceed 45 days from the day of acceptance or deemed acceptance of the goods or services.
• Where there is no written agreement on the payment date, payment is due within 15 days of acceptance.
• If the buyer delays, it is liable to pay compound interest with monthly rests at three times the bank rate notified by the Reserve Bank of India, from the due date, notwithstanding any contrary agreement.

For the business side of the 45-day rule and the government's Samadhaan portal, see this explainer on the 45-day payment rule and MSME Samadhaan from our consultancy team.

Who can use the Facilitation Council

The route under Section 18 of the MSMED Act is available to a supplier that is a micro or small enterprise. Medium enterprises are not covered by these delayed payment provisions. The supplier should hold a valid Udyam registration, and courts have treated the supplier's registration status at the time of the contract as relevant, so check dates early.

The claim is filed before the Micro and Small Enterprises Facilitation Council (MSEFC) of the state where the supplier is located. Rajasthan has its own council under the state industries department, and references can be filed online through the MSME Samadhaan portal.

How the MSEFC process works

• Reference: the supplier files a reference with the invoices, purchase orders, delivery and acceptance proof, ledger statements and Udyam certificate.
• Conciliation: the council first attempts conciliation, either itself or through an institution, to reach a settlement.
• Arbitration: if conciliation fails, the council takes up the dispute for arbitration or refers it to an institution, and the Arbitration and Conciliation Act, 1996 applies.
• Award: the Act provides that a reference should be decided within 90 days, though actual timelines vary.
• Challenge: a buyer that wants to set aside the award must first deposit 75 per cent of the awarded amount, which is a strong protection for suppliers.

The Supreme Court has held that this statutory route applies even where the contract contains its own arbitration clause, so a buyer generally cannot avoid the council by pointing to a private arbitration agreement.

Preparing a strong claim

• Keep signed purchase orders or contracts and note any agreed payment period.
• Preserve delivery challans, e-way bills, acknowledgements and emails showing acceptance without complaint.
• Reconcile your ledger with the buyer's and record part-payments and debit notes.
• Calculate interest correctly from the due date at the statutory rate.
• Send a clear demand or legal notice before filing; many disputes settle at this stage.

Watch limitation. Claims that are too old can be rejected, so do not let unpaid invoices sit for years.

Other recovery options

The MSEFC is not the only route. Depending on the facts, a supplier may also send a legal notice and file a commercial suit, start private arbitration if the MSMED route is unavailable, or, where a cheque has been dishonoured, proceed under Section 138 of the Negotiable Instruments Act. Choosing the right forum early saves time and cost.

Buyers also have reasons to pay on time. Certain companies must report dues outstanding to micro and small suppliers for more than 45 days in returns filed with the Registrar of Companies, and delayed payment can carry tax consequences for the buyer. Raising these points politely in a demand letter often moves a stuck invoice faster than threats of litigation.

How ATTPL Legal can help

Our MSME legal services team helps manufacturers, traders and service providers in Jaipur and across Rajasthan review eligibility, draft demand notices, prepare MSEFC references, appear in conciliation and arbitration, and enforce awards. We also review supply contracts so that payment terms protect you from the start. ATTPL Legal is part of ATTPL (ऐट्प्ल) HOLDCO - GROUP. To recover pending dues, contact ATTPL Legal.

Frequently asked questions

Sources and further reading

• MSME Samadhaan portal, Ministry of MSME
• Udyam Registration portal