Non-Registration Will Not Block MSMEs from Enforcing Referral Rights Under the MSMED Act
Introduction: Heart of the Problem
Many studies reveal that MSMEs have always been the main solid base of the Indian economy. They bring approximately 30 per cent to the GDP, they create jobs to more than 11 crore people, and they are drivers of innovation, grass-root entrepreneurship and regional growth. However, at the same time, regardless of this central role, MSMEs regularly encounter one key problem, namely, late payments. These delays are mostly posed by well established corporates or government departments whose payments take months or years without which small business people develop severe liquidity crunch.
In order to solve this, the Parliament passed the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act). This empowerment includes the numerous provisions given to the MSMEs among them is Section 18 which enabled the financial disputes by the MSMEs to be referred to the Micro and Small Enterprises facilitation council (MSEFC). This Council is very important in settling commercial cases involving buyers and suppliers which are in most cases, faster and fairer as compared to courts. Nevertheless, a consistent legal dispute that has cropped up in the recent few years is whether the MSME that is not registered, i.e., not registered in the Udyam portal[1] launched in 2020 can still exercise its rights given in the MSMED Act and submit a dispute to the Facilitation Council. This blog explores the legal position, reviews the surrounding judicial understanding and the reasons as to why lack of Udyam registration does not nullify the right of an MSME in pursuing a claim under Section 18.
Legal Framework: Understanding the Statutory Structure
In order to examine the problem, we should in the first place consider the corresponding clauses of the MSMED Act[2]. A supplier has been defined in section 2(n)[3] of the Act to mean a micro or small enterprise that has submitted to the authority as defined in section 8, a memorandum. With reference to its pre-July 1st, 2020, situation this implied filling in EM I and II forms with District Industries Centre. Since then, however, this process has been replaced with the Udyam Registration Portal, which is an online portal that automates this process of classifying enterprises based on investments and turnover in accordance with Section-7.[4]
In Section 15[5], the delay payment by a buyer is required to offer an MSME payment of money within 45 days after the date on which the goods or services are accepted or deemed to be accepted. In case this timeline is breached, the Section 16[6] comes to play and a penal interest amount is charged which is thrice the bank rate declared by the RBI[7]. Next is Section 18 that enables the supplier to lodge a reference with the Facilitation Council, in event of delayed payments.
The main issue in the debate matters to be addressed is whether registration on Udyam portal is a pre-requisite to consider an enterprise as a supplier and as a result also be entitled to file proceedings under Section 18[8] of the Act.
The Purpose of the Law: Not Just Technical Compliance
At a literal interpretation, it may seem that under Section 2 (n) suppliers are confined only to those who have sought a memorandum, now replaced with Udyam registration. However, this interpretation fails within minutes when seen in the light of the overall agenda of the MSMED Act. This was not good legislation; it was good legislation to help boost small businesses, not to harass them in the administrative speed bumps.
A condition of Udyam registration as a prerequisite to exercise rights under Section 18 would be sheer injustice to MSMEs on account of a procedural failure. The main objective of the Act is to allow prompt payments and have good remedies. The interpretation to disallow the ability to get access to the Facilitation Council just because of lack of Udyam registration would virtually kill the essence of the legislation.
The difference between procedure rights and substantive rights is commonly used in legal theory. Procedural rights deal with how a claim is applied, or how it is lifted- such as submitting a form or receipt of a certificate. Substantive rights, in their turn, are those which specify the legal entitlements-including the right to get the timely payment.
The Udyam registration is procedural to the tee. It is means of formalisation and identification of MSMEs and it neither generates, nor annihilates the right to claim payment under Section 15 or demand dispute resolution under Section 18. As a matter of fact, there is no such provision in the MSMED Act whereby in order to claim the provisions of the concerned sections of the MSMED Act, one is required to be registered under Udyam. That is why such an approach as non-registration to complicate the liability to payment is legally invalid.
Judicial Precedents: Courts Supporting Unregistered MSMEs
This difference has been greatly taken into consideration by the judiciary and the right of an MSME to approach the Facilitation Council, despite the non-registration has been consistently established on several occasions.
In Vaishno Enterprises[9], in the case of, Vaishno Enterprises and in the case of, According to the decision of the Delhi High Court, it was made clear that there is no need that the Udyam registration be compulsory to file the reference under Section 18[10]. The Court said that, so long as the enterprise meets the definition of a micro or small enterprise under Section 7[11], it becomes a supplier under the Act- even though the enterprise has not actually registered.
The Telangana High Court in JMC Projects[12] used a similar perspective. MSR India Ltd., where it was stated that the fact that there was no Udyam registration at the time of contract or at the time of dispute will not create an obstacle in the otherwise eligible enterprise to bring a claim.
In addition, in Principal Chief Engineer v. Manibhai and Brothers (Sleeper)[13]The matter was concerning limitation periods but still the Supreme Court reinforced the idea that beneficial legislations were bound to be interpreted to benefit the beneficiary. The sub-liminal communication of the courts has always been the same: the procedural requirement of registration must not be permitted to overturn substantive rights, especially where protection of small businesses against late payment is concerned.
Practical Impact: Protecting Informal Businesses
This legal elucidation has tremendous repercussions in reality. There are more than 6.3 crore MSMEs in India and only a part of them is registered on Udyam portal. Others are non-formal, especially those in rurals or semi-urban regions. In the event that the process of registering was created as a requirement of being able to exercise their rights to seek legal redress, millions of small business owners would be put at disadvantage.
The method by the courts makes such businesses not lag behind. It enables small businesses to supersede big buyers who attempt to avoid liability based on procedural considerations. This is critical more so because of the lack of balance of power between the small vendor and the large corporation.
It also keeps the buyers responsible. They will not be able to say that they need not make payments since the supplier was not registered anymore. Section 15 will apply to each and every buyer and registration of the supplier will not impair the payment obligation within 45 days.
The Case for Administrative Clarity
Nevertheless, the judicial clarity has not prevented certain Facilitation Councils from refusing the references on the basis of failure to consider the absence of Udyam registration. This leads to unwarranted litigation, time wastage and disappointment of MSMEs. It is in this case that the Ministry of MSMEs [14]ought to intervene.
This would be greatly simplified by a mere circular stating that it is not a legal requirement that one has to be registered in order to invoke Section 18. It would also avert the lower order authorities to adopt an inconsistent opinion and strengthen the interpretation of the Courts by the executive.
Interestingly India is adopting the best practices of other countries in its approach. In the United Kingdom, disputes and payment delays are addressed by the Small Business Commissioner which does not require formal registration. What counts is the nature and the size of the business. On the same note, small business protection is offered in Australia without associating any centralised registration to it. This improves more access to justice.
Our legal system in India through the interpretive approach is catching up with these international standards through the liberal interpretation of MSMED Act by our judiciary and further substantiating the Indian inclination for the creation of an all-inclusive economy.
Now the question; should the MSMEs still register? Yes…but not because it is legally binding. There are big benefits of registration. It provides an official status, streamlines the process of credit and government schemes and reduces interaction with bureaucratic and legal systems. It also prevents the possibilities of opposition by buyers or Councils in dispute settlement.[15]
The important lesson is that failure to be registered should not be an impediment by an MSME to enforce its rights. In case of delay in payment and the enterprises are a micro or small business on investment and turnover grounds, there is no reason it cannot go to the Facilitation Council.
Conclusion: Protecting Rights Beyond Paperwork
In conclusion, the MSMED Act is an innovative legislation that should enhance the power of the small business and not enslave it into technicalities. It is correct that the courts have refused to impose an obligation of registration over the Udyam portal in order to invoke the remedies under Section 18. Failure to register does not waive the right of an enterprise to make claims of delayed payment or submit redress with the Facilitation Council.
This is an interpretation that will satisfy the letter and the spirit of the law. It supports the rule that the procedural obstacles to access to justice should not prevail and especially in those laws that are aimed to benefit vulnerable people. To the MSMEs, they will feel relieved as well as reminded, and know that; they have a right to assert and demand what they are entitled to lawfully, with no registration certificate or without in hand.
Author:– Dhrati Garg, in case of any queries please contact/write back to us at support@ipandlegalfilings.com or IP & Legal Filing.
References
Micro, Small and Medium Enterprises Development Act, 2006, Sections 2(n), 7, 8, 15, 16, 18, 19.
Vaishno Enterprises v. Hamilton Write India Pvt. Ltd., 2022 SCC OnLine Del 2586.
JMC Projects v. MSR India Ltd., 2021 SCC OnLine TSIC 49.
Principal Chief Engineer v. Manibhai and Brothers (Sleeper), (2022) 2 SCC 608.
Ministry of MSME, Government of India. https://msme.gov.in
Udyam Registration Portal. https://udyamregistration.gov.in
CII Report, “MSME Sector in India: Challenges and the Road Ahead”, 2023.
Reserve Bank of India, Guidelines on Interest Rate Policy, https://www.rbi.org.in/Scripts/BS_ViewMonetaryCreditPolicy.aspx.
[1] Udyam Registration Portal, Ministry of Micro, Small & Medium Enterprises, https://udyamregistration.gov.in.
[2] Micro, Small and Medium Enterprises Development Act, No. 27 of 2006, § 2(n), 15–19, INDIA CODE (2006), https://legislative.gov.in/sites/default/files/A2006-27.pdf.
[3] Ibid.
[4] Supra.
[5] Ibid.
[6] Id.
[7] Reserve Bank of India, Guidelines on Interest Rate Policy, https://www.rbi.org.in/Scripts/BS_ViewMonetaryCreditPolicy.aspx.
[8] Id.
[9] Vaishno Enters. v. Hamilton Write India Pvt. Ltd., 2022 SCC OnLine Del 2586 (India).
[10] Supra.
[11] Supra.
[12] JMC Projects (India) Ltd. v. MSR India Ltd., 2021 SCC OnLine TSIC 49 (India).
[13] Principal Chief Eng’r v. Manibhai & Bros. (Sleeper), (2022) 2 S.C.C. 608 (India).
[14] Ministry of Micro, Small and Medium Enterprises, Gov’t of India, https://msme.gov.in.
[15] Confederation of Indian Industry (CII), MSME Sector in India: Challenges and the Road Ahead (2023), https://www.cii.in/.
