Supplier Secrecy, Buyer Company’s Woes: The Chronicles of Delayed Payments under the MSMED Act

[By Rajan Thakkar & Manasvi Verma]

The authors are students of Gujarat National Law University, Gandhinagar.

 

Introduction

Micro, Small, and Medium Enterprises Development (MSMED) Act, 2006 imposes a liability on the buyer companies to make the payment to their suppliers within the period mentioned under Section 15[i] of the Act and upon failure of the same, according to Section 16[ii] of the Act, the buyer company is required to pay compound interest with monthly rests on the due amount at three times the bank rate notified by the Reserve Bank of India. However, certain obscurities have surfaced in cases when the buyer company is unaware of the MSME status of the seller and when the supplier fails to raise any claims for the outstanding amount leaving the buyer unaware of the outstanding dues. These ambiguities can leave companies financially drained as a result of supplier oversight. This article analyses the shortcomings of the current regime for delayed payments and presents somewhat of a rough pathway for the companies to safeguard themselves from unforeseen consequences of such situations.

Legislative Intent: Ensuring timely Payment to Suppliers

To understand the implications of these provisions in such situations, it is important to first examine the intent behind the concerned provisions. The legislative intent at the time of the passing of the act was to make improvements in the Interest Act 1993[iii] and to incorporate its provision in MSMED Act 2006; replacing and improving the then existing 1993 Act. One of the changes that was made was that the maximum period for payment by agreement was reduced (from 120 days to 45 days) in comparison to the Interest Act. It was evident that the legislature wanted to make moves to mandate the buyer companies to make timely payments for goods and services provided by micro and small enterprise suppliers.

Such additions were made in Section 15 and the penalty for the default was provided under Section 16. Section 15 mandates that in no case, the agreement for the period of payment can exceed the statutory period. It reads,“…..the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing…..in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days….”. . According to Section 16, the buyer will be liable to pay the compound interest notwithstanding any agreement or any law in force upon a failure to make the payment as mandated under Section 15 of the Act.

To simplify this, both the sections are standing glued to each other, and if section 15 falls, so will section 16, and the Hon’ble Supreme Court has also observed in the case of Silpi Industries v. Kerala SRTC[iv] that the MSMED Act is a special legislation and would have an overriding effect over any other statute in force at the time. Therefore, no forces of other statutes or any agreements between the buyer company and the supplier can save the buyer company from this strict liability. This liability often comes as a surprise to the buyer companies due to some lacunas that are left out.

No duty of the seller to raise a claim for outstanding dues.

There is no default duty of the supplier to raise any claims or send any notices before the right u/s 16 of the actuates. Against this backdrop, the buyers might want to explore avenues to restrict their liability u/s 16 by agreements by requiring the suppliers to raise claims regarding outstanding amounts. However, no such option is left open to the buyer companies under the act since the statutory mandate is to make the payment in the period mentioned under section 15 and upon failure, “notwithstanding any agreement or any other law” in the time being, the interest under section 16 will kick in.

No Duty of the seller to Notify the buyer company about the Supplier status.

The act doesn’t mandate that the seller is required to notify the buyer companies about their supplier status. Liability can be imposed u/s 15 and 16 merely if the seller company is a supplier under the definition of Section 2(n) of the MSMED Act[v]and therefore, irrespective of the disclosure made by the supplier regarding its status, the liability of the buyer company may arise.

To give a practical example of how this problem can materialize, let’s say a buyer company agrees with a vendor at a time when the vendor doesn’t have a supplier status under the MSMED Act and the period for payment for the goods/services exceeds the period described under the section 15. On a later date, the vendor acquires a supplier status under the act and keeps supplying the goods/services to the buyer company under the pre-existing contract without notifying the buyer company about the change in status. Upon default or after the lapse of the statutory period u/s 15, the buyer company might be caught with surprise for having to pay exorbitant statutory dues and finding that the existing contract has been rendered infructuous.

Accompanying Liabilities of the Buyer Company upon Non Compliance with the Disclosure Requirements

Thus far, we have explored how unforeseen financial burden can be placed on the buyer company in the form of interest rate in cases wherein the buyer company is either aloof of any outstanding dues or the supplier status of the seller. However, the repercussions of this aloofness are far reaching and not confined to the compound interest u/s 16 of the MSMED Act. The buyer company and its executives can have to bear additional penalties upon non disclosure of such unknown/undemanded outstanding payments. The repercussions of such a strict disclosure requirement can be understood by referring to the relevant provisions of the MSMED Act r/w the penalising provision of the Companies Act 2013.

Under Section 22 of the MSMED Act[vi], it is mandatory for a buyer company, who engages in the acquisition of goods or procurement of services from a supplier to undergo an annual audit of its financial accounts, to mandatorily disclose specific information in its annual statement of accounts about the outstanding financial obligations to the MSMEs.

Such a disclosure includes details such as the (i) principal amount and accrued interest remaining unpaid to the supplier up to the appointed date; (ii) the interest amount remitted by the buyer company due to delayed payments; (iii) the outstanding principal amount and accrued interest beyond the appointed date for the duration of the delay; (iv) the interest accrued and outstanding as of the conclusion of each fiscal year; (v) the additional interest accrued and remaining unpaid; and (vi) any outstanding amounts due and payable in subsequent fiscal years until the interest due is duly remitted to the MSMEs.

To make sure that the buyers complies with the above provision, MSME Ministry, under Section 9[vii] of the MSMED Act has directed via a notification to all the buyer companies to file a half-yearly return with the Ministry of Corporate Affairs stating the amounts due and the reasons for the delay. These buyer companies are those:

  • who get supplies of goods and services from micro and small enterprises and,
  • whose payments to micro and small enterprise suppliers exceed 45 days from the date of acceptance or deemed acceptance (in line with Section 15).

Moreover, MCA under its power under Section 405 of the Companies Act, 2013[viii] has ordered “specified companies” to furnish the information mentioned under Section 9 of the MSMED Act by filing MSME – 1 form. These “specified companies” are the same companies that are described under the above-mentioned notification released by the MSME ministry.

Furthermore, the MCA notification outlines two key filing requirements for Specified Companies. Firstly, a one-time return must be submitted within 30 days of the notification. Secondly, half-yearly returns are mandated, with deadlines set at 31st October for the period from April to September and 30th April for the period from October to March.

In case of non-compliance with the above, under Section 405 (3) of the Companies Act, 2013, the Company shall be punishable with a fine which may extend to twenty-five thousand rupees, and every officer of the company who is in default shall be punishable with imprisonment for a term which may extend to six months or with a fine which shall not be less than twenty-five thousand rupees but which may extend to three lakh rupees, or with both.

Conclusion and the way forward.

Even though the legislative intent of these provisions is for the welfare of the suppliers, in the circumstances discussed above, the buyer companies are left remediless on either mutual failure by both the parties or that of the supplier and are faced with heavy interest rates.

This is further amplified considering how under section 23 of the MSMED Act[ix], the interest paid on the outstanding dues is considered penal and no deduction on such interest paid is allowed under section 37 of the Income Tax Act.[x]

The characteristics of the act impose a two-fold responsibility on the buyer company to safeguard against the financially draining consequences of section 16 and penalising provisions under the Companies Act. Firstly, to check whether the status of the seller is that of a supplier under the MSMED Act and second, to keep track of the outstanding dues even in the absence of any claims being raised by the supplier.

Provided that the MSMED Act is a beneficial legislation, as held by the Hon’ble Supreme Court in the case of Indian Highways Management Co. Ltd. v. Sowil Ltd[xi],it is highly unlikely that the courts will interpret these sections as imposing any requirements on the supplier to raise claims before the liability kicks in or requiring the suppliers to notify the buyer company about their status. Therefore, the government should come forward and clarify these ambiguities and provide much-required relief. The logical solution to this seems that the sellers should be mandated to (i) notify the buyer companies about their MSME status and (ii) to at least raise a claim via a notice/email/etc. after the period under Section 15 lapses.  In the meantime, the buyer companies will have to be proactive and will have to keep track of their outstanding dues and will have to continuously screen the MSME status of their vendors through the official website.

 

[i]Micro, Small, and Medium Enterprises Development Act, 2006, § 15, No. 31, Acts of Parliament, 2006 (India).

[ii]Micro, Small, and Medium Enterprises Development Act, 2006, § 16, No. 31, Acts of Parliament, 2006 (India).

[iii]The Interest On Delayed Payments To Small Scale And Ancillary Industrial Undertakings Act, 1993, No. 32, Acts of Parliament, 1993 (India).

[iv]Silpi Industries v. Kerala SRTC Civil Appeal Nos.1570-1578 Of 2021.

[v]Micro, Small, and Medium Enterprises Development Act, 2006, § 2(n), No. 31, Acts of Parliament, 2006 (India).

[vi]Micro, Small, and Medium Enterprises Development Act, 2006, § 22, No. 31, Acts of Parliament, 2006 (India).

[vii]Micro, Small, and Medium Enterprises Development Act, 2006, § 9, No. 31, Acts of Parliament, 2006 (India).

[viii] The Companies Act, 2013, § 405, No. 18, Acts of Parliament, 2013 (India).

[ix]Micro, Small, and Medium Enterprises Development Act, 2006, § 23, No. 31, Acts of Parliament, 2006 (India).

[x]The Income Tax Act, 1961, § 37, No. 43, Acts of Parliament, 2006 (India).

[xi]Indian Highways Management Co. Ltd. v. Sowil Ltd2022 SCC OnLine Del 4078.

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