Best Received an MSME Council Notice? A Defence Guide for Buyers Lawyer

Buyers who receive a notice from a Micro and Small Enterprises Facilitation Council are often surprised by the amount claimed. The supplier's principal may be modest, but the interest, compounded monthly at three times the RBI bank rate under Section 16 of the MSMED Act, can double or triple the claim over a few years. And if the council passes an award, the buyer cannot challenge it under Section 34 of the Arbitration Act without first depositing 75% of the awarded amount. The buyer's best chance is to engage early and defend properly.

This page is for companies, government bodies and other buyers served with council references. In short: check whether the supplier was a micro or small enterprise registered under the Act, and when; check the dates of supply and acceptance, because protection depends on the supplier's status at the time; check limitation for the arbitration stage; check whether the council has territorial jurisdiction; scrutinise the interest calculation; use the conciliation stage to settle where the debt is genuine; and if an award is made, plan for the 75% deposit before challenging.

Ignoring a council notice is the most expensive mistake a buyer can make. Councils proceed and pass awards against absent buyers.

Is this your situation?

Buyer's key checks

Supplier registration and its date

The delayed payment protections apply to "suppliers", meaning micro and small enterprises that have filed a memorandum or registration under Section 8. In Silpi Industries v Kerala SRTC (2021) and Gujarat State Civil Supplies Corporation v Mahakali Foods (2022), the Supreme Court indicated that a supplier must have been registered at the time of entering into the contract to claim the benefits for supplies under it. In NBCC v State of West Bengal (January 2025), a bench of the Court took a different view on whether registration is a precondition to approaching the council, and referred the question to a larger bench. The position is therefore unsettled.

For buyers, the date of the supplier's registration remains an important point to raise: if the supplier registered only after the contract and the supplies, argue that the protections do not apply, relying on Silpi and Mahakali, while noting that the question is pending before a larger bench. The MSMED (Amendment) Act, 2026, which made registration free and voluntary through a notified national platform from 15 October 2026, does not by itself resolve this question for past supplies.

How we defend council claims

Time and typical cost range

Our fees are agreed in writing at the start, stage by stage, and are not linked to the outcome.

Documents needed

Interest under Section 16: what to check

Limitation

In Sonali Power Equipments v Maharashtra State Electricity Board (July 2025), the Supreme Court held that the Limitation Act does not apply to conciliation under Section 18(2), so even time-barred dues can be the subject of conciliation, but it does apply to arbitration under Section 18(3), through Section 43 of the Arbitration Act. So, if conciliation fails, claims that were time-barred when the reference was made cannot be awarded in the arbitration.

Buyers should calculate limitation for each invoice: generally three years from the due date of payment, subject to any written acknowledgment of liability, such as a balance confirmation, before the period expired. Raise limitation clearly in the arbitration, invoice by invoice, with the dates.

Jurisdiction of the council

Under Section 18(4), the council of the state where the supplier is located has jurisdiction to act as arbitrator or conciliator, notwithstanding anything in any other law. So a Delhi buyer may face a reference before the Uttar Pradesh or Haryana council if the supplier is located there. Buyers sometimes argue that the contract's arbitration clause or exclusive jurisdiction clause should prevail, but Mahakali Foods (2022) held that the MSMED Act overrides the arbitration agreement.

Jurisdiction objections may still be available where the supplier is not really located where it claims, where the claim is not for goods or services supplied, or where the buyer is outside the Act's scope. Raise any such objection at the start of the arbitration, under Section 16 of the Arbitration Act.

Laws that apply

How we work

We are a litigation and advisory practice led by Advocate BK Singh, with offices in Dwarka (New Delhi) and Vaishali (Ghaziabad). This is what you can expect:

• Fast engagement: no notice left unanswered.
• Threshold checks: registration, limitation, jurisdiction and status.
• Interest recalculation: from the correct dates and rates.
• Settlement focus: using conciliation when the debt is genuine.
• Written fee terms: agreed stage by stage, never linked to the outcome.

Mistakes buyers make

The 75% deposit rule

Section 19 of the MSMED Act provides that no application to set aside an award made by the council or an institution to which it referred the dispute shall be entertained by any court unless the appellant, not being a supplier, has deposited 75% of the amount in terms of the award. The court may order that a portion of the deposit be paid to the supplier pending the challenge. Courts have treated the deposit as mandatory, and the Supreme Court in Goodyear India v Norton Intech Rubbers (2012) and later cases has held that it cannot be waived.

This changes the economics of a challenge. A buyer facing a ₹1 crore award must deposit ₹75 lakh before the court will hear it. The MSMED (Amendment) Act, 2026 contains a new Section 19 providing for release of 50% to the supplier after six months, but that provision is not yet in force. Plan the deposit as part of the decision whether to challenge.

Using the conciliation stage

Under Section 18(2), the council first conducts conciliation, applying the conciliation provisions of the Arbitration Act. Many buyers treat this as a formality and send junior staff without authority. That is a mistake. Conciliation is the stage at which the buyer can argue for a fair calculation, raise threshold defences informally, and agree a settlement that may be far lower than a likely award with full interest.

Prepare for conciliation as for a negotiation: know the undisputed principal, the strength of the defences, the realistic interest, and the cost of an award plus the 75% deposit. A settlement at conciliation has the status of an arbitral award and ends the matter.

Government and PSU buyers

Government departments and public sector undertakings frequently face council references. They often have additional defences, such as contract terms making payment subject to budget releases or third-party funds, but councils and courts have generally held that such terms cannot override the MSMED Act's payment deadlines. Public sector buyers must also disclose MSME dues and, under the 2026 amendment, central public sector enterprises must be on TReDS platforms, which provide a route for suppliers to discount invoices.

For government buyers, the internal approvals needed for settlement can be slow. Plan early, so that a settlement in conciliation can be authorised before the arbitration stage.

Counter-claims and set-offs

A buyer may have its own claims against the supplier: for defective goods, delayed delivery, liquidated damages, or excess payments. These can be raised as counter-claims or set-offs in the council's arbitration, provided they arise from the same transactions. The Supreme Court in Mahakali Foods noted that the council's arbitration is governed by the Arbitration Act, under which counter-claims and set-offs can be adjudicated.

Prepare counter-claims with the same care as a claim: documents showing the defect or delay, the contractual basis, and the calculation. A strong counter-claim improves the buyer's position in settlement.

Tax consequences of late payment

For buyers that are assessed to income tax, payments due to micro and small enterprises that are not made within the time allowed under Section 15 of the MSMED Act are disallowed as an expense in the year of the expenditure, and allowed only in the year of actual payment. This was Section 43B(h) of the Income-tax Act, 1961, and is now carried into Section 37(2)(g) of the Income-tax Act, 2025, in force from 1 April 2026. Interest paid under Section 16 is not deductible under Section 23 of the MSMED Act.

So delayed payments carry both a council claim risk and a tax cost. See MSME 45-day payment rule.

Challenging a council award

A council award can be challenged under Section 34 of the Arbitration Act on the usual grounds, after depositing 75%. Common grounds in council cases include lack of jurisdiction because the supplier was not a micro or small enterprise at the relevant time, failure to give the buyer a hearing, and awards of interest on time-barred claims. The court's review remains narrow, and re-arguing the merits rarely succeeds. See challenge MSME award.

Is the claim really for goods or services?

The delayed payment chapter covers amounts due for goods supplied or services rendered by a supplier to a buyer. Claims that are not for goods or services, such as damages for breach of a contract, refunds of advances, or claims under works contracts that are not supplies by the enterprise itself, may fall outside the council's jurisdiction under Section 18, or only partly within it. Some courts have also examined whether works contracts and construction services fall within the Act; the answer depends on the facts and the supplier's registration.

Read the reference carefully and separate the heads of claim. Where some claims are outside the Act, object to the council deciding them, and argue that any such claims belong in the forum chosen by the contract.

Buyer's records that win cases

Buyers who defend council claims successfully usually have good records: purchase orders with clear payment terms, goods receipt notes with dates, inspection reports, written objections within 15 days, debit notes with reasons, and correspondence. Buyers who lose usually have none of these, or have objections made only orally or months later.

If your business buys regularly from MSMEs, set up a simple record-keeping process now, before any claim. It costs little and makes defending a claim much easier. See MSME 45-day payment rule.

Appearing before the council

Council hearings are usually less formal than court proceedings, and many are now online through the ODR portal. Appear through a representative with authority, file a written reply with documents, and ask for the supplier's documents if they have not been served. If the council proceeds to arbitration, insist on the procedure required by the Arbitration Act, including a reasoned award. Keep a record of every hearing and order, since procedural fairness may matter in any later challenge.