Unpaid Invoices and the 45-Day Rule: What Small Suppliers Should Know

For a small manufacturer, a printer or a freelance service firm, a delayed invoice is not a minor irritation. It can mean missed salaries, borrowed working capital and stalled orders. Parliament addressed this problem in Chapter V of the Micro, Small and Medium Enterprises Development Act, 2006 (the MSMED Act), which puts a legal clock on how long a buyer may hold back payment from a registered micro or small supplier.¹

Who is protected

The protection belongs to a "supplier", which the Act defines as a micro or small enterprise that has filed the memorandum required by Section 8 (today, this is done through Udyam Registration).² Medium enterprises are not covered by this payment chapter. The "buyer" can be anyone who buys goods or receives services from such a supplier for consideration, whether a large company, a government body or another business.²

Timing of registration matters. The Supreme Court has said that an enterprise which was not a "supplier" when the contract was signed cannot claim these benefits for that contract, and a later registration helps only with supplies made after it.⁵

The 45-day ceiling

Under Section 15, the buyer must pay on or before the date agreed in writing. If no date was agreed, payment is due before the "appointed day", which is the day after fifteen days from acceptance of the goods or services. Even a written agreement cannot stretch the credit period beyond forty-five days from acceptance or deemed acceptance.³

"Deemed acceptance" is a useful idea. If the buyer does not raise a written objection within fifteen days of delivery, the goods or services are treated as accepted on the day of delivery itself.² A silent buyer therefore cannot later claim that the clock never started.

The cost of paying late

Section 16 is the sharpest part of the scheme. A buyer who misses the deadline must pay compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. This applies even if the contract says otherwise.⁴ Section 17 makes the buyer liable for the principal along with this interest.⁴ Section 23 adds that such interest is not allowed as a deduction when the buyer computes taxable income.¹

Where disputes go

Section 18 lets either party refer a dispute about the amount due to the Micro and Small Enterprises Facilitation Council of the state. The Council first tries conciliation. If that fails, the Council itself arbitrates the dispute or sends it to an arbitration institution, and the Act expects the reference to be decided within ninety days.¹ In Gujarat State Civil Supplies Corporation v. Mahakali Foods (31 October 2022), the Supreme Court held that this route is available even where the contract contains its own arbitration clause.⁵

Two further points deserve attention. A buyer who wants to challenge the Council's award in court must first deposit seventy-five per cent of the awarded amount under Section 19.⁷ And in Silpi Industries v. Kerala SRTC (29 June 2021), the Court held that the Limitation Act applies to these arbitrations, so old claims can become time-barred.⁶

Practical points for small suppliers

• Complete Udyam Registration before signing supply contracts, and keep the certificate on file.
• Write the credit period into the purchase order or contract, and keep it within forty-five days.
• Keep delivery challans, acceptance emails and any written objections; they fix the starting date.
• Mention your Udyam number on invoices so the buyer knows the Act applies.
• Track unpaid invoices by date and do not let claims drift towards the limitation period.
• Applications to the Facilitation Council can be filed online through the MSME Samadhaan portal.⁸

Buyers, too, benefit from knowing these rules: buyers whose accounts must be audited are required to disclose unpaid amounts and interest owed to such suppliers in their annual accounts under Section 22.¹