The Micro, Small and Medium Enterprises (“MSME”) sector has emerged as one of the most vibrant and dynamic components of the Indian economy. MSMEs generate substantial employment at relatively low capital cost and contribute meaningfully to the industrialisation of rural and backward regions. This not only helps reduce regional disparities but also promotes a more equitable distribution of income and supports balanced economic growth.
With agility and innovation at their core, MSMEs today produce over 60,000 products, ranging from traditional crafts to high-end technology, catering to both domestic and international markets. However, in the regular course of business, disputes with vendors, distributors, clients, or consumers are inevitable. The manner in which these are handled can significantly impact commercial relationships, operational stability and financial outcomes.
For MSMEs, often operating with limited working capital and lean teams, maintaining stable supply chains and commercial ties is crucial. In this context, resolving disputes amicably, without resorting to adversarial methods like litigation or arbitration, becomes essential to sustaining goodwill and securing long-term business opportunities.
Delayed payments remain one of the most critical challenges faced by MSMEs. Despite the legal framework under the Micro, Small and Medium Enterprises Development Act, 2006 (“Act”), delays in payment continue to be widespread. Buyers, including large corporates, public sector undertakings and government departments, often fail to adhere to the statutory 45-day timeline for making payments.
MSMEs, concerned about the risk of jeopardising future business, are often reluctant to assert their claims. The result is a severe strain on working capital and a negative impact on business continuity.
Although the Act provides for the payment of compound interest at three times the RBI Bank Rate on delayed payments and mandates redressal through Micro and Small Enterprises Facilitation Councils (“MSEFCs”), several structural issues persist:
Exclusion of Medium Enterprises: Section 2(n) of the Act covers only micro and small enterprises, leaving medium enterprises without similar protection.
Fear of retaliation: MSMEs often avoid filing claims, worried about being blacklisted by larger buyers.
Strict timelines: Section 18(5) stipulates resolution within 90 days. This is rarely met, and there have been calls to extend this period.
Limited training in Alternate Dispute Resolution Process: Most officials in MSEFC lack formal training in mediation or arbitration, which hinders effective and impartial dispute resolution. Further, in cases when the disputes could not be resolved through mediation, referrals are made to institutional arbitration tribunals or centres.
To address payment disputes, the Ministry of MSME launched the MSME Samadhaan Portal, allowing micro and small enterprises to file claims online. These are forwarded to the respective MSEFC for conciliation, and if needed, for arbitration.
This online mechanism improves transparency and reduces procedural hurdles. Importantly, the conciliation process offers parties a chance to resolve disputes through dialogue, preserving commercial relationships without initiating aggressive legal action.
However, the effectiveness of these tools still depends on awareness, strategic communication, and timely legal advice, areas where professional support can significantly improve outcomes.
Some practical measures that MSMEs can adopt to resolve disputes without damaging key business relationships are:
1. Adopting a collaborative approach
Disputes should be approached with the aim of finding a mutually workable solution. Avoid attributing blame and instead focus on shared commercial objectives.
2. Negotiate flexible payment terms
Where delays occur, MSMEs may consider proposing milestone-based or staggered payment schedules. This keeps communication open and improves chances of recovery.
3. Maintain detailed documentation
Preferably entering into supply and/ or procurement agreements, maintaining a clear paper trail of invoices, acknowledgements, reminders, and email correspondence, recording any deviations from the terms of the contract in written forms such as emails or minutes of meetings. This helps establish facts and supports your position in any conciliation or arbitration process.
4. Explore informal resolution before escalation
Seeking early and timely professional assistance allows for risk assessment and negotiation strategy, often resolving issues without initiating formal proceedings.
As we recognise the contribution of MSMEs on MSME Day, it is also time to address the systemic gaps that undermine their stability.
Expand the scope of the Act to include medium enterprises within the definition of "supplier"
Restructure resolution timelines to reflect the realities of commercial disputes.
Dispute resolution must move toward a more responsive, business-sensitive system that enables recovery without jeopardising long-term partnerships.
Train MSEFC officials in various methods and techniques of Alternative Dispute Resolution.
In commercial matters, preserving the relationship often holds greater value than enforcing the contract. For MSMEs, effective dispute management lies in early intervention, effective documentation, pragmatic strategy, and measured legal response.
With the right institutional support and legal guidance, Indian MSMEs can navigate disputes thoughtfully, protecting both their rights and their reputation. In doing so, they not only safeguard their business but also contribute to building a more resilient and equitable economy.
About the authors: Apoorva Misra is a Partner, Nishant Rewalia and Amol Rana are Associates at Ahlawat & Associates.
Disclaimer: The opinions expressed in this article are those of the author(s). The opinions presented do not necessarily reflect the views of Bar & Bench.
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