MSME Delayed Payments: New Recovery Options for Suppliers, New Exposure for Buyers
Updated: Sep 4
The Micro, Small and Medium Enterprises Development (Amendment) Act, 2026 received Presidential assent on 13 August 2026. Its provisions take effect only once the Central Government issues a commencement notification, and until that happens, the existing MSMED Act, 2006 (the current law governing MSME payments, registration, and disputes) continues to govern. That gap between assent and commencement is not a reason to wait. It is the window in which both sides of this problem can actually prepare.
Suppliers and buyers: different risks, same payment problem
If you're a micro or small supplier, a delayed payment has always been a cash-flow problem. It can now move more quickly through the Micro and Small Enterprises Facilitation Council (MSEFC) process, towards a settlement or arbitral award and, ultimately, recovery, once the Act is in force.
If you're a buyer, an unpaid MSME invoice has quietly become a legal and financial exposure, not just an operational one. A 75% pre-deposit to challenge an award, jurisdiction that follows the supplier rather than you, recovery as arrears of land revenue, and a route into insolvency proceedings all change what an aged payable is actually worth to hold.
If you sit between the two, as a lender, a finance team, or a procurement function, TReDS participation, receivables data, and vendor verification are about to matter operationally in a way they didn't before.
The scale behind this is not small. An estimated ₹7.34 lakh crore sits in unpaid MSME invoices, against a base of 9.16 crore registered MSMEs employing more than 40 crore people. This is the first substantive rewrite of India's MSME payment law in twenty years, and it is built specifically to close the gap between having a right on paper and actually collecting on it.
What's actually changing
Direct recovery without a separate execution proceeding
This is the most commercially significant change in the Act. Under the current law, even a supplier who wins at the Facilitation Council still has to pursue a separate execution proceeding in civil court to actually collect. New Section 18A removes that step: a mediated settlement or arbitral award can be recovered as an arrear of land revenue, through the District Collector or Deputy Commissioner with jurisdiction over where the buyer's assets are located, the same mechanism the government uses to collect unpaid tax.
On top of that, an unpaid award is recognised as a debt under the Insolvency and Bankruptcy Code, 2016. Subject to the applicable statutory requirements and thresholds, it may provide a basis for insolvency proceedings against a defaulting buyer.
For buyers, the key practical point is this: once these recovery mechanisms are operational, an unpaid MSME claim will no longer be a remote bookkeeping issue. It can become a claim capable of recovery against your assets through the revenue-recovery mechanism, rather than requiring the supplier to begin a separate civil execution proceeding.
A structured route that leads to arbitration
The Micro and Small Enterprises Facilitation Council (MSEFC) framework is no longer merely conciliatory in nature. Under Section 18, it becomes a one-stop forum that can act as both mediator and arbitrator for the same dispute, on a fixed clock:
Mediation must be completed within 90 days of the first appearance.
If mediation fails, the MSEFC must refer the matter to arbitration within 30 days.
The arbitral award is due within 90 days of pleadings being completed.
The statutory process is designed to take about 210 days from the first appearance to the award, although the actual duration may depend on compliance and the manner in which the proceedings are conducted. The arbitration stage is governed by the Arbitration and Conciliation Act, 1996. That means the award can be challenged and enforced through established legal routes: a Section 34 challenge to set it aside and Section 36 enforcement to recover under it. This is not a new, untested mechanism; it is an established arbitration framework that the MSEFC process is designed to reach more efficiently.
The dispute can generally be taken before the MSEFC where the supplier is registered, even if the buyer is located elsewhere. This reduces the scope for jurisdictional objections that can delay recovery.
Appeal risk and the 75% deposit
Section 19 is arguably the strongest practical point in the Act, for both legal and business readers. A buyer who wants to challenge a settlement or award must first deposit 75% of the awarded amount before the challenge is even heard. If that challenge is still pending after six months, the court must release at least 50% of the deposit to the supplier regardless of the outcome. The challenge itself has to be filed where the supplier is based.
For buyers, this means MSME payables need early legal and financial review. Once an award is made, the cost of challenging it is immediate and substantial, not a slow-moving court process you can absorb over time.
Need the practical checklist? Before you're in that position, it's worth working from a structured list rather than reacting invoice by invoice. We've built two: an MSME Supplier Recovery Checklist and an MSME Buyer Exposure Checklist, each covering what to prepare before the commencement notification is issued. Request either checklist.
TReDS and the operational workflow
Every Central Public Sector Enterprise must now settle MSME invoices through TReDS (Trade Receivables Discounting System), the RBI-regulated platform that lets a supplier discount an unpaid invoice with a bank rather than wait on the buyer. The Centre can extend this requirement to other bodies, and states can mandate it for their own public enterprises.
In practice, this cuts both ways. Suppliers should identify which receivables are actually financeable through TReDS rather than assuming all of them qualify. Buyers and procurement teams should review their invoice-processing systems, vendor data, and internal approval timelines now, since a TReDS-routed workflow moves at the platform's pace, not the buyer's.
What businesses should prepare for
Suppliers should be building a claim-ready file, not waiting for a dispute to force one together: Udyam registration details, purchase orders, invoices, delivery proof, correspondence, payment acknowledgements, and an invoice-wise interest calculation under Section 16 of the MSMED Act (three times the RBI Bank Rate, currently 5.50%, compounded monthly).
Buyers should be running an MSME-payables diagnostic across the same period: vendor classification against the revised thresholds (Micro up to ₹2.5 crore investment / ₹10 crore turnover; Small up to ₹25 crore / ₹100 crore, effective 1 April 2025), ageing analysis on payables to micro and small suppliers specifically, records of any genuinely disputed invoices, payment approval trails, contractual terms that promise credit periods longer than the statutory 45 days (Section 15, MSMED Act, 2006), and a realistic view of MSEFC exposure if those invoices were filed today.
Both lists matter because the law isn't in force yet. Preparation now is unpressured; preparation after a claim is filed is not.
What happens next
The Amendment Act has passed Parliament and received assent, but the Central Government has not yet notified when its provisions come into force, and different provisions may commence on different dates. Continue following the existing MSMED Act, 2006 framework until that notification is published in the Official Gazette.
When it is, both sides will need an immediate, day-one view: which documents are ready, how the MSEFC process actually runs in practice, what the recovery route looks like on the ground, and what challenging an award will really cost. That is not something to work out after the notification lands. It's something to have already answered.
Prepare before commencement
The Act is not yet in force. That makes this the right moment to identify exposure, organise documentation, and correct payment-process gaps before a dispute, not after one.
Suppliers: assess whether your unpaid invoices are ready for the MSEFC route, and whether your supporting records, registration, delivery proof, and interest calculations are actually complete.
Buyers: map your MSME vendors, quantify aged payables, separate genuine disputes from simple delay, and evaluate what the 75% pre-deposit and enforcement framework will mean for your specific exposure.
Talk to Dissent Advisory about your specific exposure. We'll walk through your invoice documentation, Udyam status, and payment controls with you, so you're working from a clear position before the commencement notification sets your timeline.
This article is for informational purposes only and does not constitute legal or tax advice.
Read the source documents:
Note: The Central Government has not yet published the Amendment Act's Gazette notification with commencement dates. Once that's out, we'll update this piece with a direct link.
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