On 2 November 2018, the Union government issued a notification under the Micro, Small and Medium Enterprises (MSMEs) Development Act, 2006 ostensibly to ensure timely and smooth flow of credit to MSMEs and minimise sickness among them.
New Delhi, the 2nd November, 2018
S.O. 5622(E).—In exercise of powers conferred by Section 9 of the Micro, Small and Medium Enterprises Development Act, the Central Government hereby directs that all companies who get supplies of goods or services from micro and small enterprises and whose payments to micro and small enterprise suppliers exceed forty five days from the date of acceptance or the date of deemed acceptance of the goods or services as per the provisions of the Act, shall submit a half yearly return to the Ministry of Corporate Affairs stating the following:
(a) The amount of payments due; and
(b) The reasons of the delay.
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. If there is a delay in payment, companies will have to mention the reason for such delay in the statement of accounts.
The question is whether such notifications will actually foster the growth of the MSME sector when there are other prevailing laws to curb its growth. Let us understand the current provisions relating to delayed payments in
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 shall not exceed 45 days from the day of acceptance or from the date of deemed acceptance. To understand the provision 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 a 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/services.
Further, as per 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 RBI. However, in case of any dispute regarding the payment of principal/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 the ease of filing an application under the MSEFC. Any MSME, having a valid Udyog Aadhaar Memorandum (UAM) can make an application via this portal. After an application is made by the MSME, the MSEFC shall examine the case and then issue directions to the buyer unit for payment of the due amount along with the interest.
From the date of launch of the MSME Samadhaan portal, i.e., 30 October 2017, MSMEs have filed 2,927 applications related to delayed payments. These cases involve an amount of Rs744.65 crore. This portal has also helped in getting the delayed payments settled mutually between seller and buyer.
About 105 mutual settlements have been made, involving Rs8.87 crore.
Applications are getting converted to cases by MSE-Facilitation Councils in the respective states. Some 264 applications have been converted to cases as on 31 January 2018. This has empowered the MSMEs to file their delayed payment cases directly. This is being monitored by the respective ministries/ central public sector enterprises (CPSEs) and state governments. (All the data have been taken from https://msme.gov.in/sites/default/files/MSME-AR-2017-18-Eng.pdf)
Section 22 of the Act states that the buyer, who buys goods or avails services from the MSMEs, and is required to get his annual accounts audited, has to mandatorily disclose the following additional information in its annual statement of accounts with respect to the amount due to the MSMEs:
The principal amount and the interest due thereon remaining unpaid to the supplier till 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;
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
Following the notification mentioned in the beginning, all companies who buy goods or avail services from micro and small enterprises and whose payments 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 a return. It is expected that MCA will come up with a notification in this regard.
The question is: who will have the power to monitor this and in case of non-filing of the return, what shall be the penalty/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 (IBC). The government has made it mandatory for all the companies to file a half-yearly return in case a 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 a 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 cares for 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 are using this prevailing mindset to the hilt.