Delayed payments are one of the most common commercial disputes small and mid-sized vendors face, and one of the least understood. The Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) gives registered enterprises a faster, more favourable route to recovery than an ordinary civil suit - but only if you use it correctly from the start.
The payment timeline the Act sets
Section 15 requires a buyer to pay a registered micro or small enterprise within the period agreed in writing, and in any case not later than 45 days from the date of acceptance of goods or services. If there is no written agreement, the same 45-day outer limit applies by default.
What happens when payment is late
Section 16 is where the Act becomes genuinely useful: once a payment is overdue, the buyer is liable to pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. This interest accrues automatically under the statute - it does not need to be separately negotiated into the contract, and it is often far higher than what a general commercial agreement would provide for.
The Section 18 mechanism
Section 18 lets a registered enterprise refer a payment dispute to the Micro and Small Enterprises Facilitation Council rather than filing an ordinary civil suit. The Council first attempts conciliation; if that fails, the reference is treated as an arbitration under the Arbitration and Conciliation Act, 1996, and the Council's award carries the same enforceability as an arbitral award. This is generally faster than civil litigation and comes with a built-in statutory interest calculation, which removes one of the more contested issues in a typical recovery dispute.
Before you file
- Confirm your Udyam registration is current - the protections under the Act are only available to enterprises registered under it, and registration has to predate the transaction in dispute in most Council interpretations.
- Keep your documentation in order - purchase orders, delivery acknowledgements, and any written communication acknowledging the debt materially strengthen a Section 18 reference.
- Calculate the interest claim correctly - Council awards are frequently contested on the interest computation, so getting the compounding and rate right at the outset avoids delay later.
This is a general overview of how the mechanism works, not a substitute for advice on a specific claim - the right approach depends heavily on your registration status, the underlying contract, and the buyer's likely defences. If you are a vendor considering a recovery claim, our litigation team can walk you through the options.