Abstract
The Micro, Small and Medium Enterprises Development (MSMED) Act, 2006, serves as a critical piece of social welfare legislation designed to protect MSMEs by ensuring timely payments and addressing credit constraints. However, ambiguities in the statutory framework have led to confusion regarding the recovery of time-barred debts and the accrual of interest. This paper critically examines the intersection of the MSMED Act with the Limitation Act and the Indian Contract Act to address these legislative overlooks.
This paper analyzes the implications of the non-obstante clause in Section 18 of the MSMED Act. Drawing on judicial precedents such as Silpi Industries v. Kerala State Road Transport Corporation and Shanti Conductors (P) Ltd. v. Assam State Electricity Board, the paper argues that the MSMED Act does not create an independent right to recover stale or time-barred debts. Consequently, the standard limitation periods apply to references made to the MSME Facilitation Council.
Furthermore, the paper highlights the predicament faced by buyers under Section 22, which mandates maintaining debts and penal interest on books of accounts, potentially damaging credit ratings, even when an MSME refuses to accept payment. By invoking Section 38 of the Indian Contract Act, the author contends that a “valid tender of payment” by a buyer should discharge the obligation to pay the statutory interest if the supplier refuses acceptance. The paper concludes by advocating for legislative clarity and guidelines that allow buyers to write off interest liabilities following a valid tender, thereby striking a balance that protects MSMEs without imposing onerous pecuniary burdens on compliant buyers.
Keywords: MSMED Act 2006, Time Barred Debts, Limitation Period, Tender of Payment, Interest on Delayed Payments.
INTRODUCTION
The MSMEAct was intended to be a social welfare legislation aimed at fostering conducive environment for growth and protection of MSME industry. The aim was to foster policy support for the MSME industry, provide for growth of MSME by empowering Government to formulate policies and address the issue of credit crunch by enabling timely payments of the services or goods rendered by the MSMEs. While the earlier Actof 1993[1]was only related to the payments of the amounts owed to the MSMEs, the Act of 2006[2] was a comprehensive legislation that provided for establishment of a National Board for MSMEs to examine and review the policies for MSMEs, aimed at facilitating and enhancing the competitiveness of the MSMEs by providing them the necessary support and advise the Central Government on issues related to MSMEs. Additionally, the affirmative provisions that relate to extension of progressive credit facilities to MSMEs, promotion policies, classification among various types of MSMEs on basis of investment made,provisions related to information memorandum for facilitating establishment of MSMEs and establishment of funds for facilitating payments to MSMEs were made in the Act of 2006.
Chapter V of the Act essentially retains the provisions of Interest on delayed payments to small scale and ancillary Industrial Undertakings Act, 1993 with revised timelines for the purposes of ensuring timely payment of credit due to MSMEs. The provisions provide that the maximum agreed period for payment for goods or services rendered by MSMEs cannot be extended for more than 45 days from the day of acceptance or deemed date of acceptance by means of an agreement between the parties. The maximum period with respect to the date of acceptance is also provided in the Act. Any objection with respect to the supply made by the MSME must be made within 15 days and the date of acceptance would be the date when such objection is removed by the supplier.In case of absence of any communication by the buyer, on the expiry of 15 days from the date of delivery, the day of Actual delivery would be the date of delivery. The significance of such deeming provision is important as the calculation of date of interest is to be from the ‘appointed day’ which is the day immediately following the expiry of 15 days from the date of deemed acceptance or date of acceptance. The calculation of rate of interest essentially depends on this day of deemed acceptance, which would be the date of original delivery of the goods. Considering the amount of interest to be the three times the bank rate, the deemed date of original delivery of goods could add substantial pecuniary burden on buyer.
For instance, if a supplier supplies the goods on 1st December and no date of payment is agreed upon. If the buyer does not raise any objection by 16th December, 1st December would be the deemed date of acceptance and thereby the appointed day would be 17th December. This implies the interest would be calculated from 17th December itself at three times the bank rate. In this example, the parties cannot extend the agreed period for delivery beyond 14th January as the mandate under proviso to section 15 provides. Further, the period agreed on by the parties can be valid beyond such period as the date of acceptance can vary if there is an objection with regard to the supply made. The underlying point is that the period of payment under the contract is subject to the timelines provided for under the Act.
Section 18 of the MSME Act[3] contains a non obstante clause that generates legitimate confusion with respect to the recovery of time barred debts by the MSME pursuant to an application made to MSME facilitation council. Another pertinent issue arises due to the applicability of section 22 that mandates maintaining the debts and interest requisite payable to the MSMEs on the books of accounts of the MSMEs.[4] This provision has the potential to negatively affect the credit rating of the buyers dealing with the MSMEs in light of the fact that there could be legitimate situations where a MSME refuses to accept debt or cannot be located pursuant to which the buyer cannot discharge his obligations with the effect that the interest payable on such debts is put at three times the bank rate notified by RBI. Therefore, the paper aims to address the potential treatment of time barred and legally irrecoverable debts under MSME Act and the need for legislative clarity in cases where subsequent to a valid tender of payment has been refused by the MSME and its potential implications in light of section 22. The paper also argues that a balanced approach is required that fosters the ease of doing business while protecting the rights of the MSMEs.
[1]Interest on delayed payments to small scale and ancillary Industrial Undertakings Act, 1993 (32 of 1993).
[2]The Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006).
[3]The Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) s 18.
[4]The Micro, Small and Medium Enterprises Development Act, 2006 (27 of 2006) s 22.