Supplier Dues Recovery: Section 16, Important Cases, and Key Update

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Payment delays harm small businesses by disrupting cash flow and overall operations. These businesses often may have to resort to legal action for supplier dues recovery, which can involve lengthy and complex litigation. This is where Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 offers a solution. The Act focuses on resolving payment delays for MSMEs, streamlining the process and making it more effective.

Section 16 of the MSME Act: Supplier Dues Recovery

Section 16 of the MSME Act specifies when supplier dues recovery interest must be paid. The Act states that compounding interest is payable on the outstanding amount starting either from the appointed day or, if applicable, from the date agreed upon.

According to Section 2(b), the “appointed day” is the day following the expiration of a 15-day period from the day of acceptance or deemed acceptance of goods or services by the buyer from the supplier. Additionally, Section 15 establishes that the agreed payment period between the supplier and the buyer in writing should not exceed 45 days from the day of acceptance or deemed acceptance.

Section 16 of the MSME Act states that the interest rate is three times the bank rate notified by the Reserve Bank and is compounded monthly if the buyer fails to make the required payment to the supplier, regardless of any existing agreements or laws.

Important Note

It’s important to highlight that Section 6 of the Interest Act previously stipulated that suppliers could seek to recover the amounts owed by the buyer, including interest, through legal action or other proceedings as allowed by existing laws. However, it’s noteworthy that this provision has been eliminated from the MSMED Act.

Some Important Cases Related to Supplier Dues Recovery

The following are some of the case laws that has significantly influenced the supplier dues recovery process.

In a ruling dated December 21, 2021, in the case of Indian Highways Management Co. Ltd. v. Sowil Ltd, it was determined that Sections 15, 16, and 17 of the MSMED Act establish the buyer’s responsibility to pay the owed amount to the supplier within the specified timeframe and to provide interest if this obligation is not met. Importantly, this obligation exists independently of the provisions in Section 18 of the MSMED Act. The Court also emphasised that Sections 15 and 16 confer substantive rights and obligations that do not rely on any dispute resolution mechanism. There is no indication in Section 15 or Section 16 that restricts the recoverable amount under these provisions based on a reference to Section 18(1) of the MSMED Act.

In the case of Silpi Industries v. Kerala SRTC17 case, the Supreme Court of India clarified that the MSMED Act takes precedence over the Arbitration and Conciliation Act, which is a general law. The MSMED Act was regarded as special legislation concerning interest payments, and its provisions would override those of the A&C Act in cases of inconsistency.

MSME Supplier Due Recovery Key Update

The 2023 Budget proposal aims to encompass the payments made to Micro, Small, and Medium Enterprises (MSMEs) under the provisions of Section 43B of the Income Tax Act, 1961. The primary objective behind this move is to encourage the prompt and timely settlement of dues to MSMEs. The deductions for the payments will be recognised on an accrual basis only if the payment is executed within the timeframe specified by the Micro, Small and Medium Enterprises Development Act.

Conclusion

It is really important for small suppliers, especially in the context of small businesses, to get the money they are owed. There are rules in a law called the MSME Act that say when the buyer has to pay interest on the money they owe to suppliers. These rules also say when the supplier dues recovery payment should be done.

There have been important court cases that make it clear that buyers must follow the payment rules in the MSME Act, no matter if there’s a dispute or not. These rules are about the rights and duties of both the supplier and the buyer when it comes to payment.

Omar Borkan