“Salvation of India lies in cottage and small-scale
industries.”
- Mahatma Gandhi
Small-scale industries, or Micro, Small and Medium Enterprises (“MSME”) were the key components of the Gandhian Vision of economy.1 Their vital role in the attainment of global Sustainable Development Goals (SDGs) is also recognised by the United Nations2, while declaring June 27 as MSME day. MSME connotes enterprises within a restricted monetary bracket of investment and turnover. The Union Budget of 2025 has revised3 the investment and turnover limit to help MSMEs scale operations and access better resources. Now, an enterprise with investment of upto Rs.2.5 crore and an annual turnover of upto Rs.10 crores will be Micro Enterprise; one where the investment does not exceed Rs.25 crores, and the annual turnover is upto Rs.100 crores will be Small Enterprise; and an enterprise with an investment of upto Rs.125 crores and an annual turnover of up to Rs.500 crores, will be Medium Enterprise.
MSME Act, 20064 was enacted for the conducive growth of MSME. A significant aspect of MSME Act is timely payment to the MSME by penalising delayed invoices. However, in the complex commercial scenarios, the dispute of payment to MSME often presents questions regarding the applicability of various mandatory provisions of the MSME Act vis a vis Arbitration and Conciliation Act, 1996 (A&C Act). The interplay between the MSME Act and A&C Act is examined herein to understand the legal landscape for resolving payment disputes and securing rightful interest for delayed payments to MSME.
The earlier legislation
Prior to the enactment of the MSME Act, the landscape was governed by the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act, 1993 (“1993 Act”). Though the 1993 Act introduced provisions for the recovery of amounts and computation of compound interest on delayed payments, it lacked a dedicated dispute resolution mechanism. The enterprises had to resort to filing cumbersome suits or adhering to contractual arbitration clauses for recovery.
Facilitation Council
MSME Act provided a dedicated legal framework to address the specific vulnerabilities faced by small-scale industries by means of reference to Micro and Small Enterprises Facilitation Council (“MSEFC”) for dispute resolution.5 As per Section 18 of MSME Act, the MSEFC is empowered to conduct conciliation, and if unsuccessful, it shall either itself take up the dispute for arbitration or refer it to an institution for arbitration, following the provisions of A&C Act.
Timelines and Mandatory Interest
The MSME Act stipulates6 that a buyer must make payment for goods supplied or services rendered by a MSME registered under the Act on or before the date agreed upon in writing, which in no case shall exceed forty-five days from the day of acceptance or deemed acceptance of goods or services. In a residuary situation, where there is no written agreement, payment is due before the “appointed day” defined as the day immediately following the expiry of fifteen days from the day of acceptance or deemed acceptance7.
Section 16 of the MSME Act attempts to ensure compliance of the above timeline by mandating that the buyer shall be liable to pay compound interest on the due amount from the appointed day or the date immediately following the agreed-upon date, at three times the bank rate notified by the Reserve Bank of India. This liability arises “notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force.” Section 24 of the MSME Act further reinforces the overriding effect, stating the provisions “shall have effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”
Arbitration Outside the MSME Act
In present business ecosystem, commercial agreements often incorporate arbitration clauses, stipulating that disputes arising from the contract will be resolved through arbitration under the A&C Act. When a payment dispute involving MSME is channelled through such a contractual arbitration clause, rather than a reference to the MSEFC under Section 18 of the MSME Act, the question arises - Whether the arbitrator is still bound to award interest at the penal rate and compounding method prescribed by Section 16 of the MSME Act?
Contention
It has been contended that if the arbitration is not initiated under Section 18 of the MSME Act, the penal interest rate stipulated under Section 16 of the MSME Act is not automatically applicable. Hence, the Arbitrator's power to award interest is governed by Section 31(7) of A&C Act, which allows an arbitral tribunal to include interest “at such rate as it deems reasonable” - leading to a rate lower than that mandated by MSME Act.
Judicial Clarification: Rate of Interest in Arbitration Proceedings
The Hon'ble Supreme Court and High Court have clarified that the special provisions of the MSME Act, have an overriding effect even in arbitrations conducted under the A&C Act, irrespective of whether the arbitration was initiated through the MSEFC.
The Supreme Court in Silpi Industries v. Kerala State Road Transport Corporation8, held that the MSME Act, being a special statute, would override A&C, 1996, which is a general Act. In Gujarat State Civil Supplies Corporation Ltd. and Ors. v. Mahakali Foods Pvt. Ltd. (Unit 2) and Ors.9 the Supreme Court, while primarily addressing the issue of whether an independent arbitration agreement precludes a party from making a reference to the MSEFC, affirmed the prevalence of MSME Act over the A&C Act. The Supreme Court's broad view on the overriding effect of MSME Act supports the assertion that the interest provisions are binding even in arbitrations outside the Section 18 framework. The Supreme Court further held in Mahakali10 that existence of arbitration agreement shall not preclude the party from making a reference to MSEFC for resolution of dispute.
A Division Bench of Delhi High Court, in Indian Highways Management Company Limited v. SOWIL LIMITED11 held that the provisions of Sections 15 and 16 of the MSME Act confer substantive rights and impose obligations that are not contingent upon recourse to the dispute resolution mechanism under Section 18. The Hon'ble Division Bench emphasized that Section 18 merely provides a dispute resolution mechanism in addition to other available legal remedies; therefore, the statutory right to claim interest under Section 16 is not extinguished merely because the dispute is not raised before the MSEFC. The Hon'ble Division Bench held that non-obstante clause in Section 16 indicates that the statutory rate of interest applies regardless of any contractual terms to the contrary or provisions in other laws.
Though the dictum of Delhi High Court in SOWIL12 is presently under challenge before the Hon'ble Supreme Court,13 the same view has been consistently followed in various other judicial pronouncements.14 Incidentally, Delhi High Court in Union of India v. Chiraj Stock & Security Pvt. Ltd.15 upheld an arbitral award that granted interest at 14% per annum, which was lower than the rate permissible under the MSME Act in the peculiar facts - for the petition was preferred by the buyer. However, the Hon'ble Court also acknowledged that the MSME supplier would have been entitled to claim interest at three times the bank rate under the MSME Act.
Pre-Condition of Registration under MSME Act
The other question which arises is whether an enterprise must be registered under Section 8 of the MSME Act before entering a contract to avail the benefits of the Act, particularly reference to MSEFC? This was answered in affirmative by the Supreme Court in Silpi Industries16 and Mahakali Foods.17
However, recently the Supreme Court in NBCC (India) Ltd. v. The State of West Bengal and Ors18 distinguished its prior decisions in Silpi Industries19 and Mahakali Foods20 while considering that this issue has not been squarely addressed and analysed in those judgments. In view of the conflicts in earlier pronouncements, the Supreme Court referred this specific question to a larger bench for an authoritative determination.
Conclusion
MSME Act is a beneficial legislation, enacted to ensure socio-economic justice to the small businesses, by creating provision for timely payment with a strict penal clause. The act also created a forum for redressal of delay payment through MSEFC. While in certain cases, the disputes pertaining to payments to MSME can be redressed through a reference to MSEFC, or through a contractual arbitration clause under the A&C Act, 1996, the substantive right of MSME under the MSME Act remains unaffected. The prevailing judicial view mandates an Arbitrator to award interest for the period of delayed payment, as stipulated by the MSME Act, irrespective of the mode and manner of his reference and mandate.
Footnotes
1. Gandhi and the Twenty first century: Gandhian Approach to Rural Industrialization https://www.mkgandhi.org/articles/
2. 2024 Theme: MSME and the SDGs' (United Nations) (2024) https://www.un.org/en/observances/micro-small-medium-businesses-day.
3. Budget 2025-26: Fuelling MSME Expansion: https://www.pib.gov.in/PressReleasePage.aspx?PRID=2099687 last accessed on June 13, 2025.
4. Micro, Small, and Medium Enterprises Development Act, 2006
5. Section 18
6. Section 15
7. Section 2(b)
8. 2021 SCC OnLine SC 439
9. 2022 INSC 1140
10. Supra.
11. 2022 SCC OnLine Del 4078
12. Supra
13. SLP(C) No. 014233/ 2022
14. Shristi Infrastructure Development v. Scorpio Engineering Pvt Ltd. 2025 SCC OnLine Del 2985; BSF Commandant & Anr. v. Applied Communications 2021 SCC Online Del 3342; Telecommunications Consultants India Limited v. Vista Information Systems Pvt Ltd 2023 SCC Online Del 2212
15. 2024 DHC 1581
16. Supra
17. Supra
18. 2025 INSC 54
19. Supra
20. Supra
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