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An Overview on MSME Samadhaan to Recover Unsettled Debt

calendar03 Jan, 2021
timeReading Time: 7 Minutes
MSME Samadhaan to Recover Unsettled Debt

The central Government enrolled the respective initiatives (MSME Samadhaan) to safeguard the payments of registered MSMEs (Micro, Small or Medium Enterprises). The topical growth in the contemplation given to the Micro, Small, and Medium Enterprises (MSME) sector ensures an influential economic growth from the initial stage. The assimilated accountability of the MSMEs sector requires to be covered potentially to acquire their unrecovered dues.

The Ministry of finance, under the Government of India’s guardianship, dated 24th March 2020, issued a Press declaration which specified various advantages by arranging the MSMEs sector as the utmost priority. The prospect and possibility in the termination of Sec 7, 9, and 10 of the Insolvency and Bankruptcy Code, 2016 (IBC) have also been anticipated through the Press release and various media articles.

In this state of affairs of the IBC, the MSMEs generally participate as Operational Creditors and have limited participation and involvement in the corporate insolvency resolution process of Corporate Debtors. With the fresh situation and the changes put together in IBC, while this sector will benefit as a corporate debtor; there is limited relief that MSMEs may receive through Debt Recovery through Civil Suits and hence we look into an uninvolved and an uncomplicated fascinated ways through MSMED Act, 2006

MSME Samadhaan to Safeguard the Payments of Registered MSMEs

A company or any other entity/establishment who all enrolled themselves under MSME and facing trouble to recover long unresolved dues from their clients may approach the MSME Samadhaan department to take steps and measures against them.

The Following listed process shall be approached by above said MSMEs entity before the MSME Samadhaan body, those are given below:-

  1. Mandatory to have registration of company/LLP/Partnership etc. as an MSME and obtain an MSME certificate [Udyog Aadhaar Number (UAN)].
  2. Mandates to record all formal purchase orders from their clients and procure the delivery proofs for all such orders.
  3. In each invoice, mention, “your entity/establishment name and UAN” described with a note that “Delayed payments beyond 45 days attract a rate of interest at a current rate three times of the bank rate as per notified by RBI, compounded with a Monthly interest”.
  4. In case  any clients delay your payments unreasonably and malafidely  beyond the specified time period of  45 days, directly inform them that you shall be approaching the MSME Samadhaan for such pending payments if they do not make the ‘X’ days payment.
  5. If still they do not release or liberate the payment, file a complaint at www.samadhaan.msme.gov.in
  6. The liable client would receive a notice from the Micro and Small Enterprise Facilitation Council (MSEFC) asking them to respond with compliance in a specified time period (usually 15~30 days)

Read our article:An Overview on Digital Lending Under MSMEs

MSME SAMADHAAN- Delay Dues to Micro & Small Enterprises under MSMED Act, 2006

The below discussed are the provisions provided under the MSMED Act, 2006 (Micro, Small and Medium Enterprise Development) related to delay dues. Those are as follows:-

Related Provision

As per the section 15 of the MSMED Act, 2006, it will be the buyer duty to make payment to the supplier for any goods or services provided by them. Buyer has to make the payment on the date supplier & buyer agreed upon in writing. In case there is no period agreed upon between the supplier and the buyer in writing then period of payment can exceed forty-five days from the day of acceptance.

According to the section 20 of the Act State Government can establish one or more Micro and Small by releasing notification. The government shall specify the area of MSME in notification. Section 21 of the Act talks about the composition of MSME facilitation council, where the MSME council will not consist less than 3 and more than 5 members.

Nature of Assistance

MSEFC of the State, after properly scrutinization of the case lodged by the MSME unit, will issue directions to the buyer unit to release the payment unsettled along with the rate of interest accordingly to the provisions deliberated by the MSMED Act 2006[1].

Who can apply

Any Micro or small enterprise that holds a valid Udyog Aadhar (UAM) is eligible to  apply.

Salient Features

The purchaser is liable and responsible to pay the compound interest with the monthly rate of interest to the retailer or dealer on the sum of amount multiplied at the three times of the bank rate of interest as per notified by RBI. 

In case he does not make such dues to the retailer for his circulated goods or services within the specified period of 45 days on the acceptance of the goods/service rendered, said under Section 16. The State Governments shall notify:-

(i) The Authority for filing Entrepreneur Memorandum

(ii) Rules of MSEFC, and

(iii) Rules and Regulations of MSEFC.

All States/UTs mandates to notify the Authority for Filing Entrepreneur’s Memorandum, 33 States/UTs (i.e. except Arunachal Pradesh, Assam, and Manipur) have Notified rules of MSEFC and all the 36 States/UTs have constituted MSEFCs, as per provisions embedded under MSMED Act 2006.

Every reference made to MSEFC shall be at an opinion and executed within a stipulated period of ninety days from the date of making such a reference as per provisions laid in the Act.

Under Section 19 of the Act, if the Appellant (not being the retailer) wants to file an appeal, no application for setting aside any decree or award by the MSEFC shall be entertained by any court unless the appellant (not being supplier) has deposited with it, the 75% of the award amount.

Implementation

The provisions under the Act are administered and executed by MSEFC holds by the Director of Industries of the State /UT bears administrative control of the MSEM units.

The  State Government/UTs are requested and featured guaranteed that the MSE Facilitation Council hold meetings uninterruptedly and the Councils decide unresolved dues suits within a specified time period of 90 days as it is being described and drafted in the MSMED Act, 2006.

The MSME Samadhaan Portal – An Easy approach to Lodging Complaint under MSEFC

The Ministry of MSME provided an initiative tool to lodge an online grievance by the retailer on MSME Samadhaan against the purchaser of goods/services before the concerned MSEFC of his/her State/UT. Such grievances will be observed and adjudicated by MSEFC Council for their pro-active actions. And also transparent with the Concerned Central Ministries, Departments, CPSEs, State Government, etc for further actions.

Effect of MSMEs Samadhaan

Effect of MSMEs Samadhaan

MSME Samadhaan to Recover Undetermined Dues

The percentage value of 25% MSME samadhaan to recover undetermined dues from these ministries, departments disposed of with the help of MSME Samadhaan. Regarding the applications filed, the number of complaints from Central Ministries and Departments dealt with by the MSME Facilitation Council (MSEFC) was 33 & 46 only 6.1 per cent and 5.1 per cent respectively.

Credit and Finance Scheme for MSMEs Samadhaan

33 Ministry and 38 Departments under the supervision of Government of India, beyond which 535 to 894 applications of unsolved amount filed by Micro and Small Enterprises (MSE), for monitoring of pending claims, Ministry of Railways, Department of Defence, Telecom and the department of Health and Family Welfare received maximum complaints under MSME Samadhaan . 

Accordingly, the data obtained from the portal, the MSEs lodged 116 complaints about delayed dues against the Ministry of Railways, where the suits against the three departments ranked 303, 119, and 110, respectively. The Ministry of Electronics and Information Technology and Ministry of Atomic Energy were the other two ministries in the top three ministries’ against which the number of 58 and 53 complaints has reported respectively.

In terms of the mutual convention and deal between the MSE and the purchaser (respondent), the number of cases against the central ministry and departments was numbered 104 and 169. Overall, the share of disposed and mutually disposed cases against the request filed was 25.6 percent and 24 percent for 2 respondents.

Legal Provisions available to Recover Pending Debts

Briefly scrutinizing a few sections under the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, in order to provide highlights on the legal tools provided to MSMEs for recovery of long outstanding amount from the control of their customers/clients. Those are as follows:-

  1. According to the section  16 of the Act, where the purchaser fails to make such payment to the retailer within the specified scheduled period said above, the purchaser shall, regardless of any terms agreed on between the purchaser and the retailer, be liable responsible to pay compound interest with a monthly rate of interest to the MSME retailer on the unresolved payment payable from the appointed day at the rate of interest being multiplied the three times to the recent bank rate of interest notified by the Reserve Bank.
    1. The existing bank rate of interest can be checked on the RBI’s website under the Policy Rates.
    2. MSME Samadhaan – The unsettled  Payment Monitoring System
    3. Any application against unsettled dues  can be lodged  online on the MSME Samadhaan Portal
    4. Arbitration tools  and technique  – judgment  passed within the period of Ninety Days
  2. According to the  Section 18 of the Act, in case of a dispute regarding any claim due as above, an approach shall be made to the Micro and Small Enterprises Facilitation Council (MSME-FC) constituted by the concerned State Government. Every such request made shall be decided within the 90 days time limit.
    1. Under the Act, the dispute resolution mechanism would override the arbitration clause incorporated in any of the contracts between such MSME and its clients. This overriding effect originates from Section 24 of the Act.
    2. Pre Deposit  of 75% Amount is required in Case of Appeal
  3. According to the Section 19, any request to uphold and set aside the arbitration award shall not be entertained and framed by the Court of law until the applicant has deposited 75 % of the amount awarded by the MSME Samadhaan Council.
    1. Penalty for Non-Disclosure in Annual Accounts or in Form MSME-1 under the MSME Samadhaan council laws.
    2. The purchaser should mention the amount overdue for release payment to the MSMEs unit in its annual audited financial statements and shall also file details of such overdue in MCA Form MSME-1 for outstanding balances 31-March 30-September of each year.
    3. Any such violation to disclose such amounts shall further charged penalty, not less than Rs. 10,000 under the MSMED Act. In addition to the non-compliance penalty imposed by the ROC (MCA) under Section 405(4) of the Companies Act, in case of the purchaser is a company.

Problem of Unsettled Dues in MSME Sector

MSME supplier faces immense monetary hardships as their purchaser do not pay the sum on time. Thus blocked payments from purchaser have the below effects on the small businesses:-

  • Facing  liquidity crunch as cash flow is hindered,
  • Pushed and forced  into debt-traps,
  • Faces  failures  and closures, and
  • Future investment and growth plans are severely hampered.

 Conclusion

Focusing  the emerging  efficiency  on safeguarding the MSMEs and support  growth under the scheme of MSME samadhaan, it must be taken into consideration that the MSMED Act  provides  a progressive step towards financially stabilizing establishment during this and their tough time helping the MSMEs take recourse under the MSMED Act for sustenance and stability.

This sector has several challenges and must be protected from being pushed into unnecessary litigation. Therefore, the process set up under the Act has itself to be strengthened; made very much effective and most importantly at execution to help out such sector.

Read our article:An Overview of RBI Loan Restructuring Policy which Benefits MSMEs

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