The micro, small and medium enterprises (MSMEs) of our country have often been referred to as the backbone of India's growth. Data from official sources would reveal that in the year 2009 there were only 3.62 crore registered units. Today, there are more than 8.87 crore such enterprises accounting for about 35% of India's total manufacturing capabilities and 31% of the total GDP. Various schemes have been established over the years to ensure that that the MSME sector thrives, such as subsidies, reduction in manufacturing costs and collateral-free loans. The Hon'ble Finance Minister even proposed this year in the budget prepared for 2026-27, to establish dedicated funds (called the SME Growth Fund) upto Rs. 10,000 crores for boosting the liquidity.

Along this outlook, the legislature had their eyes set at the plight of MSME entities for whom the timely payments against the goods and services supplied to buyers mattered the most. In 1993, thus, the Interest on Delayed Payments to Small Scale and Ancillary Industrial Undertakings Act was enacted, which was later repealed and replaced by the Micro, Small and Medium Enterprises Development Act, 2006 ('MSMED Act'), with the former introducing dedicated recovery mechanisms, through the establishment of Facilitation Councils, for payments delayed to the enterprises. In 2017, the 'MSME Samadhaan portal' was introduced as an ease of filing applications and redressal mechanism for delayed payments. The legislations had many colourful provisions such as higher rates of interests to be awarded, statutory payment deadlines and arbitration as a mode of dispute resolution.

By and large, the new MSMED Act took its structure similar to the erstwhile 1993 Act, but, introduced a crucial difference through its Section 18(5), stipulating that a reference to adjudicate the dispute of non-payment by a MSME enterprise shall be decided within a period of 90 days from the date of making such a reference.

This was ambitious and bolstered many over the recent years to approach the Facilitation Council when their trade receivables were unjustifiably delayed. For the conventional method offered a system of approaching the Court of law, instituting a suit and obtaining a decree - a process which, was traditional, yet seldom inspired confidence among small enterprises. The journey through a civil litigation is inherently time-consuming, subject to procedural delays, adjournments, and docket congestion; not knowing the when the proceedings will reach quietus. Even after securing a favourable decree, the successful party must embark upon yet another round of proceedings in execution, where enforcement may itself encounter resistance, objections, and further delay. For MSMEs operating on limited (and even borrowed) working capital, such prolonged uncertainty diminishes the practical value of the remedy.

In contrast, the MSMED Act sought to provide a more secure and time-bound mechanism, at a lower cost. By incorporating principles of arbitration law and channelling disputes through the Facilitation Councils, it introduced an alternative adjudicatory framework with a statutory mandate under Section 18(5) to decide references within ninety days. The resulting determination takes the character of an arbitral award under the Arbitration and Conciliation Act, 1996, thereby limiting judicial interference to the narrow grounds available under Section 34 of that Act. Furthermore, the statutory requirement under Section 19 mandating a pre-deposit of seventy-five per cent of the awarded amount as a condition for challenging the award serves as a significant deterrent against frivolous or dilatory challenges. In design, therefore, the 'MSMED' framework promised speed, finality, above average compensation and enforceability - elements that were not assured without struggle through the conventional civil suits.

Yet, the promise of expedition that animated the framework under the MSMED Act has, in several jurisdictions, struggled to translate into practice. Recent data drawn from the MSME Samadhaan portal, reveals that across various authorities and facilitation councils, about 2,56,892 applications for recovery of dues have been filed since inception^[1]. Of these, 44,537 applications remain yet to be taken up for consideration, while 46,260 cases are presently under adjudication, thus, cumulatively reflecting a pendency rate of 36% (approx.). Notably, a substantial segment of the pending applications/cases comprises disputes against governmental bodies: about 32,797 applications have been filed against departments of the State and Central Governments and PSUs, and in as many as 26,407 instances, proceedings have been initiated under a lack of response from any of these entities^[2]. Despite being overburdened and exhibiting similar, if not more pendency, Courts continue to demonstrate better performance metrics. As an illustration, data from the National Judicial Data Grid^[3] indicates that roughly in about two quarters of this year, about 12,69,659 cases have been instituted before the High Courts across the nation, all the while disposing of about 11,91,970 cases, thus, achieving a disposal rate of roughly 93%. When measured against such benchmarks, the backlog within the MSME recovery framework is stark and raises serious concerns about institutional capacity and the dilution of a speedy disposal.

The issues, as practically observed are thus: first, most Facilitation Councils do not function on a regular or continuous basis. As the Facilitation Council is headed by the Director of Industries of the respective States, the adjudicatory role played by him/her is in addition to their primary duties. In several States, hearings are held only once a month, with each sitting listing upwards of 100 cases (approximately). In such circumstances, meaningful hearing becomes illusory; proceedings are often confined to routine adjournments to a date after several months, issuance of notices, or perfunctory directions rather than substantive adjudication. Secondly, although Section 21 of the MSMED Act mandates that the Council be comprised of three to five members, including the Director of Industries, representatives of micro or small enterprises, members from banking and financial institutions, and persons possessing special knowledge in industry, finance, law, trade or commerce, the ground reality frequently falls short of this statutory design. The composition is more often dominated by administrative functionaries, with limited representation of members possessing robust expertise in procedural and substantive law. Once disputes are reduced to contractual claims for payment, questions inevitably arise concerning interpretation of contractual terms, allocation of liability, evidentiary burdens, proof of supply, and determination of the dominant cause of delay. In the absence of members adequately trained in principles of evidence, commercial and arbitration jurisprudence, the Councils may struggle to navigate these complexities with the precision that such disputes demand.

The Facilitation Councils have to be strengthened by ushering in substantive changes. A law is only effective as its implementation. Either, adequate and periodic training must be provided to equip them to assess and understand areas of procedural and substantive law, or, the composition of these Councils, as stated in Section 21 of the MSMED Act, have to be followed in letter and spirit, by ensuring the presence of at least one member possessing demonstrable legal expertise or experience in commercial dispute resolution. Given that the determination under Section 18 culminates into an arbitral award (having minimal grounds for interference), the Councils must necessarily be equipped with appropriate legal competence. Above measures only constitute the first steps, possibly amongst many.

And these changes are a must, for an institutional body wielding quasi-judicial powers. For a sector that fuels nearly a third of the nation's GDP, the promise of effective recovery and redressal, must remain operational and not aspirational.

1. Dashboard data taken from the MSME Samadhaan website ↑

2. Data taken from the MSME Samadhaan – Delayed Payment Monitoring System ↑

3. National Judicial Data Grid – data pertaining to High Courts ↑

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   Author is an Advocate practicing at Madras High Court, Chennai. Views are personal.