The 45-Day Rule: How a Micro or Small Enterprise Recovers a Delayed Payment Under the MSMED Act

October 4, 2026

Type: Evergreen · Status: Draft — review before publication

Start with the arithmetic

A small fabricator supplies ₹20 lakh of work. The buyer pays fourteen months late, in full, with an apology.

Under Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006, that buyer still owes interest — compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India.

The bank rate stood at 5.50% as at August 2026. Three times that is 16.5% per annum, compounded monthly. On ₹20 lakh over fourteen months that is not a rounding error.

Almost nobody claims it. That is the entire subject of this piece.

⚠️ Confirm the bank rate on the date of publication and on the date of any computation. The MSMED Act pegs to the RBI-notified bank rate as it stands, and it moves. Nothing here should be published with a stale figure.

Who this applies to — and the eligibility trap

The delayed-payment code is Chapter V of the MSMED Act, comprising Sections 15 to 24.

It protects micro and small enterprises only. A medium enterprise cannot invoke Sections 15 to 19. This is the single most common misunderstanding about the Act and it is worth stating before anything else: if the supplier is classified medium, this route is unavailable and the remedy is an ordinary contractual claim.

Registration is the gateway, and its timing is decisive.

In Silpi Industries v. Kerala State Road Transport Corporation, decided 29 June 2021, the Supreme Court held that to avail the benefits of the MSMED Act the seller must be registered at the time of entering into the contract, and the supply of materials must be subsequent to that registration. Silpi Industries was denied relief precisely because it had not filed its memorandum under Section 8 on the date of supply.

The practical consequence is unforgiving: registering after the dispute arises does not retrospectively unlock Sections 15 to 19. Udyam registration is not paperwork to be attended to later. For any enterprise that expects to supply on credit, it is a precondition to the statutory remedy.

Section 15 — the appointed day

Section 15 reads:

“Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day:

Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.”

Two rules sit inside that.

Where there is a written agreement, the agreed date governs — but the agreed period cannot exceed 45 days from acceptance or deemed acceptance. A 90-day or 120-day credit term in a purchase order does not override this. It is capped by statute.
Where there is no written agreement, payment is due before the “appointed day”, defined in Section 2(b) as the day immediately following the expiry of fifteen days from the day of acceptance or deemed acceptance.

“Deemed acceptance” matters. Where the buyer raises no objection in writing within fifteen days of delivery, acceptance is deemed — which is what starts the clock in the common case where nobody signs anything.

Drafting note for the buyer side: a contractual credit period longer than 45 days is not merely unenforceable against an MSE supplier; it is the trigger for statutory compound interest from the appointed day. Procurement templates carrying 60- or 90-day terms should be reviewed against the supplier’s Udyam status rather than applied uniformly.

Section 16 — the interest, and why it bites

Section 16 fixes both the date from which and the rate at which interest runs. Where the buyer fails to make payment as required by Section 15, the buyer is liable to pay compound interest with monthly rests to the supplier on the amount, from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times the bank rate notified by the Reserve Bank.

Three features do the work:

Compounding with monthly rests, not simple interest.
Three times the bank rate, not a contractual rate. Section 16 applies notwithstanding anything contained in any agreement between the parties or in any law for the time being in force.
It runs from the appointed day, not from the date of demand, notice or reference.

Section 17 then makes the buyer liable to pay the amount together with interest under Section 16.

Two provisions turn this from a claim into a commercial pressure point:

Section 23 — interest payable or paid under the Act is not allowed as a deduction in computing income under the Income-tax Act, 1961. The interest is post-tax cost.
Section 22 — a buyer required to get its accounts audited must disclose in its annual statements the principal amount and interest due to MSE suppliers and remaining unpaid at year end, the amount of interest paid beyond the appointed day, the interest due and payable for the delay, the interest accrued and remaining unpaid, and the further interest remaining due in succeeding years. Delayed MSE payments are not a private matter between two parties; they surface in the buyer’s audited accounts.

Section 18 — the Facilitation Council

Section 18 is the forum, and it is what makes this a statutory remedy rather than a paper right.

Reference. Notwithstanding anything contained in any other law, any party to a dispute may make a reference to the Micro and Small Enterprises Facilitation Council in respect of an amount due under Section 17.

Conciliation first. On receipt of a reference, the Council either conducts conciliation itself or refers the matter to an institution or centre providing alternative dispute resolution services. Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 apply as if the conciliation had been initiated under Part III of that Act.

Arbitration if conciliation fails. Where the conciliation is not successful and stands terminated without settlement, the Council either takes up the dispute for arbitration itself or refers it to such an institution or centre, and the Arbitration and Conciliation Act, 1996 then applies as if the arbitration were in pursuance of an arbitration agreement. This is the deeming that supplies jurisdiction where no arbitration clause exists.

Timeline. Section 18(5): every reference made under the section shall be decided within ninety days from the date of making the reference.

Jurisdiction. The Council or the centre it refers the matter to has jurisdiction to act as conciliator or arbitrator in a dispute between a supplier located within its jurisdiction and a buyer located anywhere in India.

The provision most buyers discover too late — Section 19

Section 19 provides that an application for setting aside a decree, award or other order made by the Council, or by any institution or centre providing ADR services under Section 18, shall not be entertained by any court unless the appellant (not being a supplier) has deposited 75% of the amount in terms of the decree, award or order, in the manner directed by the court.

Seventy-five per cent, deposited before the challenge is heard. That single provision changes the economics of stonewalling more than any other in the chapter.

And the reason a contractual arbitration clause is no escape

In Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (Unit 2), decided 31 October 2022, the Supreme Court held that the MSMED Act, being a special law enacted later in point of time, overrides the Arbitration and Conciliation Act, 1996. Even where an independent arbitration agreement exists between the parties, a reference to the Facilitation Council is maintainable in respect of parties governed by the MSMED Act.

A buyer cannot contract out of the Council by inserting its preferred seat and institution into the purchase order.

How the filing actually works

The portal is samadhaan.msme.gov.in, operated by the Ministry of Micro, Small and Medium Enterprises. Filing is online, and there is no requirement to be represented.

The practical sequence:

Confirm eligibility. Micro or small classification, and Udyam registration that predates the contract and the supply — the Silpi Industries point.
Assemble the paper trail. This is where references succeed or fail. Purchase order or written agreement, invoices, proof of delivery, proof of acceptance or the absence of any written objection within fifteen days, ledger and part-payment record, and any correspondence acknowledging the dues.
Compute from the appointed day. Identify acceptance or deemed acceptance, apply Section 15 to fix the due date, then run Section 16 compound interest with monthly rests at three times the prevailing bank rate.
File the reference against the buyer on the portal, with the Council having jurisdiction over the supplier’s location.
Conciliation, under Sections 65 to 81 of the 1996 Act.
Arbitration by the Council or a referred centre if conciliation terminates without settlement — Section 18(5)’s ninety days runs from the date of the reference.
Award, enforceable as an arbitral award; a challenge by the buyer attracts the Section 19 pre-deposit.

Where this route does not solve the problem

Stated plainly, because a piece that only lists advantages is not useful.

The dispute must be about payment for goods supplied or services rendered. Where the buyer raises a genuine quality, quantity or performance dispute supported by contemporaneous objection, the Council is adjudicating a real dispute, not processing an admitted debt.
Evidence of supply and acceptance decides it. Deliveries without proof of receipt, invoices never sent, and “understandings” not reduced to writing are where these references fail. No recovery is guaranteed — the outcome turns on the record.
Council capacity varies by district. Whether the Council in the relevant district is constituted and functioning is a practical question worth checking before relying on the ninety-day figure.
Section 18(5)’s ninety days has been read in practice as a target rather than a hard extinguishing deadline. Treat it as the statutory intent, not a guarantee of a decision by day ninety.
Registration timing is fatal if wrong, per Silpi Industries. There is no cure after the fact.
Section 24 gives Sections 15 to 23 effect notwithstanding anything inconsistent in any other law, which is the source of the overriding effect — but it does not create a claim where none exists on the facts.

What a buyer-side reader should take from this

The same statute read from the other side yields a short compliance list:

Know the Udyam status of every supplier, captured at onboarding rather than discovered at dispute.
Do not carry credit terms beyond 45 days for MSE suppliers in procurement templates. The term is capped by the proviso to Section 15 and the excess simply generates statutory interest.
Object in writing within fifteen days where there is a genuine quality or quantity issue. Silence produces deemed acceptance and starts the clock.
Reconcile MSE dues before year end, because Section 22 puts them in the audited accounts.
Price the interest correctly. Three times the bank rate, compounded monthly, and non-deductible under Section 23.
Do not assume an arbitration clause routes around the Council — Mahakali Foods.
Budget for Section 19 before deciding to contest an award. Seventy-five per cent goes in first.

FAQ

Can a buyer and supplier agree to a 90-day credit period? They can write it, but the proviso to Section 15 caps the agreed period at forty-five days from acceptance or deemed acceptance. Beyond that, Section 16 interest runs from the appointed day or the date following the agreed date.

What is the “appointed day”? Under Section 2(b), the day immediately following the expiry of fifteen days from the day of acceptance or the day of deemed acceptance of goods or services. Where the buyer raises no written objection within fifteen days of delivery, acceptance is deemed.

What interest does the Act provide? Section 16: compound interest with monthly rests at three times the bank rate notified by the Reserve Bank, notwithstanding anything in any agreement or any other law. The bank rate must be checked as at the relevant date.

Does a medium enterprise get this protection? No. Sections 15 to 19 operate for micro and small enterprises. A medium enterprise’s remedy is its ordinary contractual claim.

We have an arbitration clause naming a different forum. Does that exclude the Facilitation Council? In Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (Unit 2) (31 October 2022), the Supreme Court held the MSMED Act overrides the Arbitration and Conciliation Act, 1996, and that a reference to the Council is maintainable notwithstanding an independent arbitration agreement.

What does it cost the buyer to challenge an award? Section 19 requires an appellant other than the supplier to deposit 75% of the awarded amount before a court will entertain the application to set aside.

Does registering now help with an old unpaid invoice? On Silpi Industries (29 June 2021), no. The Court held the seller must be registered when entering into the contract, with supply subsequent to registration.

Provisions and decisions relied on

Micro, Small and Medium Enterprises Development Act, 2006 — s.2(b) (appointed day), s.8 (memorandum), Chapter V: s.15 (liability of buyer to make payment), s.16 (date from which and rate at which interest is payable), s.17 (recovery of amount due), s.18 (reference to the Micro and Small Enterprises Facilitation Council), s.19 (application for setting aside decree, award or order), s.22 (requirement to specify unpaid amount with interest in the annual statement of accounts), s.23 (interest not to be allowed as deduction from income), s.24 (overriding effect)
Arbitration and Conciliation Act, 1996 — ss. 65 to 81 (conciliation), and Part I as applied by s.18(3) MSMED Act
Income-tax Act, 1961 — as referenced by s.23 MSMED Act
Silpi Industries v. Kerala State Road Transport Corporation, decided 29 June 2021
Gujarat State Civil Supplies Corporation Ltd. v. Mahakali Foods Pvt. Ltd. (Unit 2), decided 31 October 2022
Portal: samadhaan.msme.gov.in · Udyam registration: udyamregistration.gov.in

Internal links (add at publication)

“Employment bonds and non-compete clauses under Section 27 of the Contract Act” → /employment-bonds-non-compete
“Arbitration basics for a commercial contract” → /arbitration-basics
“How to send a legal notice and how to reply” → /legal-notice-how-to-send-reply

Disclaimers

This is general legal awareness, not legal advice. Legal outcomes depend on facts, documents, law, forum, evidence, limitation and judicial discretion — no outcome is guaranteed. Consult a qualified advocate on your own facts.

Adv. Prakhar Gupta — enrolled with the Bar Council of Rajasthan, Enrolment No. R/2196/2020. This page shares legal awareness/education only; it is not advertisement or solicitation of work.

Parts of this content (images/voice/summary) were created or edited using AI tools.