[Simran Jalan is an Executive at Vinod Kothari & Co]
The Government of India enacted the Micro, Small and Medium Enterprises Development Act, 2006 (the “Act”) to ensure timely and smooth flow of credit to micro, small, and medium enterprises (“MSMEs”) and minimize sickness among them. The Act strengthens the provisions relating to delayed payments to the MSMEs by specifying the maximum credit period and higher penal interest if delayed beyond that period.
The Government, on 2 November 2018, issued a notification (the “Notification”) with respect to delayed payments to the MSMEs. Before delving into the notification, it would be useful to first understand the extant provisions relating to delayed payments in the Act.
Liability of buyer to make payment
Section 15 of the Act states that where the supplier supplies goods or renders any services to any buyer, then the buyer shall make payment on or before the date mentioned in the agreement and, if there is no agreement, then before the appointed date. The proviso to this section states that the period of credit given by the seller, as mentioned in the agreement, shall not exceed 45 days from the day of acceptance or from the date of deemed acceptance.
To understand the provisions of this section, one must take note of the following definitions:
- “supplier” means a micro or small enterprise, which has filed a memorandum with the specified authority and has obtained the Unique identification Number (“UIN”) for MSMEs.
- “buyer” means any person who buys any goods or receives any services from the suppliers for consideration.
- “appointed date” means the day following immediately after the expiry of the period of fifteen days from the day of acceptance or the day of deemed acceptance of any goods or any services by a buyer from a supplier.
Explanation.—For the purposes of this clause,—
(i) “the day of acceptance” means,—
(a) the day of the actual delivery of goods or the rendering of services; or
(b) where any objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day on which such objection is removed by the supplier;
(ii) “the day of deemed acceptance” means, where no objection is made in writing by the buyer regarding acceptance of goods or services within fifteen days from the day of the delivery of goods or the rendering of services, the day of the actual delivery of goods or the rendering of services;
Therefore, section 15 of the Act clearly states that the payment to the suppliers shall be made within the date specified in the agreement, and in case there is no agreement then before the appointed date. However, a maximum period that is allowed under the Act is a period of 45 days from the date of delivery of goods or services.
Further, according to section 16 of the Act, if a buyer fails to make the payment within the stipulated date, it will be liable to pay compound interest with monthly rests on the outstanding amount additionally. The interest shall be calculated from the appointed date at three times of the bank rate notified by the Reserve Bank of India (“RBI”). However, in case of any dispute regarding the payment of principal or interest between the supplier and the borrower, reference shall have to be made to the Micro and Small Enterprises Facilitation Council (“MSEFC”) constituted by the respective state governments.
The Government has also launched an online delayed payment monitoring system called the MSME Samadhaan for the ease of filing an application to the MSEFC. Any MSME, having a valid Udyog Aadhaar (“UAM”) can make an application in this portal. After an application is made by an MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of due amount along with the interest.
From the date of launch of MSME Samadhaan portal, i.e. 30 October 2017, MSMEs have filed 2927 applications related to delayed payments. These cases involve an amount of Rs. 744.65 crores. This portal has also helped get the delayed payments getting settled mutually between seller and buyer. 105 mutual settlements have been carried out amounting to a total of Rs. 8.87 crores. Applications are getting converted to cases by MSE-Facilitation Councils in respective states. 264 applications have been converted to cases as on 31 January 2018. This has empowered the MSMEs to file their delayed payments cases directly. This is being monitored by respective Ministries/ central public sector enterprises and state governments.[1]
Disclosure requirements
Section 22 of the Act states that the buyer, who buys goods or avails services from the MSMEs, and is required to get its annual accounts audited, has to mandatorily disclose the following additional information in its annual statement of accounts with respect to amount due to the MSMEs:
- the principal amount and the interest due thereon remaining unpaid to the supplier until the appointed date;
- the amount of interest paid by the buyer on account of delayed payments;
- the principal amount and interest due beyond the appointed date for the period of delay;
- the amount of interest accrued and remained unpaid at the end of each year; and
- the amount of further interests remaining due and payable even in succeeding years, until such date when the interest due is actually paid to the MSMEs.
Half-yearly reporting requirements
The Government issued the Notification on 2 November 2018 as an initiative to support the MSMEs. Pursuant to the Notification, all companies who buy goods or avail services from micro and small enterprises and whose payment to such suppliers have exceeded 45 days shall submit a half yearly return to the Ministry of Corporate affairs (“MCA”) stating the outstanding amount and the reasons for delay. However, it is important to note that the Notification has not prescribed any form for filing such return. It is expected that MCA will come up with a notification in this regard.
Further, the question that arises is that who will have the power to monitor this and, in case of non-filing of return, what shall be the penalty or fine imposed on the debtors of the MSMEs. In order to ensure that this notification does not turn out to be a futile effort, the Government should soon come out with some clarification in this regard.
Challenge faced under IBC
The Government of India is taking several steps to foster the growth of MSMEs, but the biggest challenge faced by the MSME sector is the Insolvency and Bankruptcy Code, 2016 (the “IBC”). The Government has made it mandatory for all the companies to file a half yearly return in case the payment to the MSMEs is delayed beyond 45 days. But what if the company goes into liquidation?
The MSMEs are operational creditors. The IBC defines operational creditors as:
“operational creditor” means a person to whom an operational debt is owed and includes any person to whom such debt has been legally assigned or transferred.
Further, under the waterfall structure for distribution of assets, an operational creditor comes at the bottom. They have zero liquidation values and no resolution professional pays heed to the MSMEs dues, even though the resolution plan has to mandatorily comply with the applicable provisions of the Act. However, the prevailing notion seems to be that a resolution plan has to comply with no law except the IBC and promoters appear to be using this prevailing mindset to the hilt.
Conclusion
The issuance of this Notification provides the MSMEs with security against unwarranted delays. The filing of return in case of delay in payment along with the reason for such delay and presenting the same in the statement of accounts shall cause embarrassment to the directors, and henceforth the directors can be expected to make the payments on time. This Notification strengthens the legislative framework for delayed payments to MSMEs.
– Simran Jalan
[1] All the data have been taken from: https://msme.gov.in/sites/default/files/MSME-AR-2017-18-Eng.pdf.