Filing of return for delayed payment to MSMEs- Effective or frittering?

By Simran Jalan (simran@vinodkothari.com)

The Government of India enacted the Micro, Small and Medium Enterprises Development Act, 2006 (“the Act”)[1] 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 November 2, 2018, issued a notification[2] (the Notification) with respect to delayed payments to the MSMEs. Before delving into the notification, let us 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 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 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[3] for the ease of filing application under the MSEFC. Any MSME, having a valid Udyog Aadhaar (UAM) can make an application in this portal. After an application is made by MSME, 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. 30th October 2017, MSMEs have filed 2927 applications related to delayed payments. These cases involve an amount of Rs. 744.65 Crore. This portal has also helped in getting the delayed payments getting settled mutually between seller and buyer. 105 mutual settlements have been done amounting to Rs. 8.87 Crore. Applications are getting converted to cases by MSE-Facilitation Councils in respective states. 264 applications have been converted to cases as on 31.1.2018. This has empowered the MSMEs to file their delayed payments cases directly. This is being monitored by respective Ministries/ CPSEs and State governments.[4]

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 his 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 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

The Government issued the Notification on November 2, 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, the Notification did not prescribe any form for filing such return. It was expected that MCA would come up with a notification in this regard.

Here, the question that arose was that who will have the power to monitor this and in case of non-filing of 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, MCA issued a notification on 22nd January, 2019[5] for such companies whose payment cycle, while dealing with MSMEs, exceeds forty-five days from the date of acceptance or the date of deemed acceptance (‘Specified Companies’). As per the notification, MCA has instructed Specified Companies to file half yearly return to the MCA in Form MSME I (Form). The initial reporting of all outstanding dues is to be done within 30 days from the date the said e-form is deployed on MCA 21 portal. For the purpose of initial reporting, the Specified Company is required to report the dues outstanding to MSMEs for a period exceeding 45 days as on the date of this Notification i.e., as on January 22, 2019.

The Specified Companies are required to file the Form by 31st October for the half year beginning from April to September and by 30th April for the half year beginning from October to March. However, other companies whose outstanding dues does not exceed forty-five days from the date of acceptance or from the date of deemed acceptance are not covered under this notification. There is also no requirement of filing a NIL return by such companies, since the notification is applicable only on Specified Companies. That is to say, the reporting requirement shall be attracted only when an entity become a Specified Company and not otherwise. Also, the classification as a Specified company shall be determined for every half year and accordingly the reporting shall be done.

Further, there is no fine/penalty imposed on the Specified Companies for non-filing of the Form. However, if the information filed in the Form is incorrect or incomplete, in any material respect, then the Specified Company shall be penalized under section 405 (4) of the Companies Act, 2013.

Another important question is that in case the amount outstanding for a period exceeding 45 days in a particular half year is settled in that particular half year itself, will that require reporting to the MCA? The answer to this question lies in the intent of the notification, which requires reporting of all delays beyond a period of 45 days. Hence, even in case a default has been made good, the fact that there was a default at any point of time during the half year, must be reported.

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 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 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.

Conclusion

The issuance of this Notification provides the MSMEs 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 shall make the payments on time. This Notification strengthens the legislative framework for delayed payments to MSMEs.

Although the government is taking out initiatives for the growth of the MSME sector, the question that arises is whether such notifications will actually foster the growth of the MSME sector when there are other prevailing laws to curb its growth.


[1] https://indiacode.nic.in/bitstream/123456789/2013/3/A2006-27.pdf#search=null%20Micro,%20Small%20and%20Medium%20Enterprises

[2] http://egazette.nic.in/WriteReadData/2018/191730.pdf

[3] https://samadhaan.msme.gov.in/MyMsme/MSEFC/MSEFC_Welcome.aspx

[4] All the data has been taken from: https://msme.gov.in/sites/default/files/MSME-AR-2017-18-Eng.pdf

[5] http://www.mca.gov.in/Ministry/pdf/MSMESpecifiedCompanies_22012019.pdf

You can also read our articles on: Snapshot of the initiatives for MSMEs

Big step for small industry finances

Slew of measures for MSME sector

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