Introduction
The Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”), aims to promote, develop and enhance the competitiveness of MSMEs. To address the issue of delayed payments, several provisions of the MSME Act provide additional safeguards and benefits to MSMEs. One such safeguard is Section 15, which outlines the buyer’s liability to make payments due to MSMEs once the goods or services are accepted/ deemed to be accepted.[1] Similarly, Section 16, read with Section 17, states that delays in payments for goods supplied or services rendered by MSMEs, shall attract a compound interest rate of three times the bank rate notified by the Reserve Bank of India.[2] Further, reference to the Micro and Small Enterprises Facilitation Council (“MSEFC”) for any amount due under Section 17 can be made under Section 18. However, questions on the applicability of this statutory provision are raised, when parties to a dispute do not invoke the MSEFC mechanism and go under the pre-existing arbitration agreements.
The present blog seeks to analyse the recent Supreme Court (“SC”) and High Court decisions to explore this legal question. Due to the existing divergent interpretations across various judicial forums, a definitive legal position remains elusive.
Existing laws
It is a settled principle of law in case of conflict — the MSME Act, being a special statute intended to benefit MSMEs, will have an overriding effect vis-à-vis the Arbitration and Conciliation 1996 (“A&C Act”), which is a general Act.
In Silpi Industries v. Kerala SRTC[3],SCheld that“…The provisions of Sections 15 to 23 of the Act are given overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.”
This ratio decidendi was followed in Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd.,[4] whichheld that although it cannot be disagreed that the Court cannot rewrite an agreement and read it as it is and parties to an arbitration agreement have autonomy to decide on the procedural and substantive laws, it is equally settled that “no agreement entered into between the parties could be given primacy over the statutory provisions. When the Special Act, i.e. the MSMED Act, 2006, has been created for ensuring timely and smooth payment to the suppliers who are the micro and small enterprises.
…. In fact, it is a substantial right created in favour of the party under the said provision. It is therefore held that no party to a dispute covered under Section 17 of the MSMED Act, 2006, would be precluded from making a reference to the Facilitation Council under Section 18(1) thereof, merely because there is an arbitration agreement existing between the parties…”
These judgments reinforced the statutory rights and protections laid down in the MSME Act and held that arbitration agreements cannot take precedence over statutory provisions. However, the aforementioned cases link recovery of payments under Section 17, MSME Act, with reference to MSEFC under Section 18, MSME Act. What happens when this statutory provision is not invoked and parties seek remedy by initiating ad-hoc arbitration.
A Single Judge Bench of the Delhi High Court (“DHC”) in Indian Highways Management v. Sowil Ltd.[5]held that Sections 15 to 17 provide a platform and mechanism for payment of monies due, by fixing a time frame, and in case of delays, provide for charging compound interest, for speedy recovery of the amount due. It was also held that provisions of Sections 15 and 16, MSME Act, confer substantive rights and are not contingent upon recourse to any dispute resolution mechanism. Thus, an expansive reading was provided for the right to statutory interest, be it under Section 18 or otherwise. This judgement was appealed against and upheld by the Division Bench. However, an appeal is currently pending before the SC.
Thereafter,DHC in Shristi Infrastructure Development v. Scorpio Engineering (P) Ltd.,[6] relied upon Indian Highways Management v. Sowil Ltd. to hold that “…Section 15 and 16 are substantive rights and are independent of Section 18. In order to attract the rigors of Section 15 and 16, it need not be that dispute redressal mechanism as provided under Section 18 of the MSMED Act be initiated. Interest as contemplated under Section 16 can be granted under ad-hoc arbitration.”
However, there was a different judicial interpretation in Idemia Syscom India (P) Ltd. v. Conjoinix Total Solutions (P) Ltd.,[7] (“Idemia”), wherein the parties had a valid arbitration agreement and arbitration proceedings were initiated under the agreement, instead of recourse to MSEFC. It was held that “…. thus, the legislative intent is clear that MSMED Act would have an overriding effect on the provisions of A&C Act. The provisions of MSMED Act would become ineffective if, by way of an independent arbitration agreement between the parties, the process mandated in Section 18 of the MSMED Act is sidestepped.”
This decision signalled a deviation from the aforementioned court decisions as, while acknowledging that the MSME Act overrides A&C Act, it held that the provisions of Section 15 and 16 will be applicable only if the mechanism under Section 18 is invoked and the parties have the option to resolve their dispute under independent arbitration agreement without statutory interest.
The DHC’s decision in Idemia case presents a nuanced analysis on the subject. It ensures that MSMEs are unable to cherry-pick beneficial provisions under both the legislations and follow the prescribed mode of claiming statutorily available benefits.
It is pertinent to note that the A&C Act provides for statutory interest under Section 31(7), empowering the Arbitrator to grant interest.[8] Although no specific provision empowers an arbitrator to grant interest, courts have affirmed the power of the arbitrator to grant pre-reference, pendente lite, and post-award interest through judicial pronouncements. [9]
Conclusion:
It will be interesting to see the Hon’ble SC develop the jurisprudence on this. It may be argued that Sections 15 and 16 will apply only when remedy is sought under Section 18, aligning with the legislative intent, objective and purpose of the MSME legislation. This may also ensure that there is no exploitation of any kind whatsoever by the parties and no cherry picking is allowed. It is pertinent to adopt a balanced approach that preserves the sanctity of both the statutory frameworks, which includes protecting and promoting MSMEs and respecting party autonomy, as MSMEs will not be able to selectively invoke advantageous provisions from different legislations, especially at different stages of the adjudication process. Furthermore, this is in line with the relevant statutory frameworks, as the MSME Act’s resolution mechanism can be side-stepped by parties opting for ad-hoc arbitration.
In conclusion, the Supreme Court’s decision will affect businesses of all sizes, including MSMEs. Enterprises will need to carefully evaluate the dispute resolution process they choose to adopt.
[1] MSME Act, Section 2(a)(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
MSME Act, Section 15: Liability of buyer to make payment.
Where any supplier supplies any goods or renders any services to any buyer, the buyer shall make payment therefor on or before the date agreed upon between him and the supplier in writing or, where there is no agreement in this behalf, before the appointed day.
Provided that in no case the period agreed upon between the supplier and the buyer in writing shall exceed forty-five days from the day of acceptance or the day of deemed acceptance.
[2] MSME Act, Section 16: Date from which and rate at which interest is payable.
Where any buyer fails to make payment of the amount to the supplier, as required under section 15, the buyer shall, notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force, be liable to pay compound interest with monthly rests to the supplier on that amount from the appointed day or, as the case may be, from the date immediately following the date agreed upon, at three times of the bank rate notified by the Reserve Bank.
MSME Act, Section 17: Recovery of amount due.
For any goods supplied or services rendered by the supplier, the buyer shall be liable to pay the amount with interest thereon as provided under section 16.
[3] Silpi Industries v. Kerala SRTC, (2021) 18 SCC 790: 2021 SCC OnLine SC 439, para 36
[4] Gujarat State Civil Supplies Corpn. Ltd. v. Mahakali Foods (P) Ltd., (2023) 6 SCC 401, para 45 and 46
[5] Indian Highways Management v. Sowil Ltd 2021 SCC Online Del 5523, para 34
[6] Shristi Infrastructure Development v. Scorpio Engineering (P) Ltd., 2025 SCC OnLine Del 2985, para 73
[7] Idemia Syscom India (P) Ltd. v. Conjoinix Total Solutions (P) Ltd., 2025 SCC OnLine Del 1023, para 12
[8] A&C Act, Section 31(7): (a) Unless otherwise agreed by the parties, where and in so far as an arbitral award is for the payment of money, the arbitral tribunal may include in the sum for which the award is made interest, at such rate as it deems reasonable, on the whole or any part of the money, for the whole or any part of the period between the date on which the cause of action arose and the date on which the award is made.
1[(b) A sum directed to be paid by an arbitral award shall, unless the award otherwise directs, carry interest at the rate of two per cent. higher than the current rate of interest prevalent on the date of award, from the date of award to the date of payment.
Explanation. —The expression “current rate of interest” shall have the same meaning as assigned to it under clause (b) of section 2 of the Interest Act, 1978 (14 of 1978).]
[9] It was held in Pam Developments (P) Ltd. v. State of W.B. that,“When the agreement does not prohibit the grant of interest and a party claims interest, it is presumed that interest is an implied term of the agreement, and therefore, the arbitrator has the power to decide the same”