An unpaid invoice is not simply an accounting problem. For a micro or small enterprise in India, the MSMED Act, 2006 may provide a specific recovery route, including statutory interest and proceedings before the Micro and Small Enterprises Facilitation Council (MSEFC).

But the first question is not “How old is the invoice?” It is whether your business and the transaction qualify for these protections at all.

What should you do when a client does not pay an invoice?

Start by establishing the debt properly.

Collect the contract or purchase order, invoice, proof that the goods were delivered or services performed, emails or messages acknowledging the work, payment terms, account statements and any communication in which the buyer acknowledges or disputes the amount.

Then check four things:

1. What payment date was agreed?

2. Was your enterprise eligible for the MSMED Act protections for this supply?

3. Is the buyer genuinely disputing the goods or services, or simply delaying payment?

4. Which recovery route makes commercial sense for the amount and circumstances?

These questions determine whether the matter should remain a commercial collection exercise, move to a formal demand, proceed through the MSME delayed-payment mechanism, or require another dispute-resolution route.

Does the 45-day MSME payment rule apply?

Section 15 of the Micro, Small and Medium Enterprises Development Act, 2006 creates a special payment rule for qualifying suppliers.

Where the supplier and buyer have agreed a payment date in writing, the agreed credit period cannot exceed 45 days from the day of acceptance or deemed acceptance of the goods or services.

Where there is no written agreement on the payment date, the Act instead refers to the “appointed day”. Broadly, this is linked to the expiry of 15 days from acceptance or deemed acceptance.

So the frequently repeated statement that “every MSME invoice must be paid within 45 days” is incomplete.

The applicable due date depends on the statutory framework and the parties' written payment terms. What Section 15 does make clear is that a written agreement cannot extend the statutory credit period beyond 45 days.

Does every MSME get this protection?

No.

The delayed-payment mechanism under the MSMED Act is specifically relevant to qualifying micro and small enterprises. A medium enterprise should not assume that being classified generally as an MSME gives it the same remedy.

Registration and its timing can also matter.

The Supreme Court has held that a business cannot obtain registration after entering into the relevant contract and then use that registration retrospectively to claim the MSMED Act's benefits for earlier supplies. Subsequent registration operates prospectively for eligible supplies made after registration.

This makes the chronology important. Before relying on the MSMED Act, check:

• your enterprise classification;

• the nature of the registered activity;

• when the relevant registration took effect; and

• when the contract and supplies in question arose.

Trading enterprises also require particular care. Government guidance on the delayed-payment mechanism states that enterprises registered under trading activities corresponding to NIC Codes 45, 46 and 47 are not eligible for these delayed-payment provisions.

What interest can an MSME claim on delayed payment?

The financial consequence can be substantial.

Under Section 16 of the MSMED Act, where the buyer fails to pay as required by Section 15, the buyer becomes liable for compound interest with monthly rests at three times the Bank Rate notified by the Reserve Bank of India.

This is not ordinary contractual interest.

The Act imposes the liability notwithstanding a contrary agreement between the parties. The calculation should therefore be made invoice by invoice, using the relevant due date and applicable RBI Bank Rate rather than assuming a convenient flat percentage.

For the buyer, there is another consequence: Section 23 provides that interest payable or paid under the MSMED Act is not allowed as a deduction when computing income under the Income-tax Act.

Should you send a legal notice first?

Often, a structured written demand is commercially sensible before starting formal proceedings, but whether a legal notice is necessary depends on the facts and the route being considered.

A useful demand should do more than say “pay immediately”.

It should identify the invoices, supplies, contractual payment terms, outstanding principal, relevant acknowledgements and, where applicable, the statutory delayed-payment position.

The purpose is to make the dispute precise.

A buyer who simply overlooked an invoice may pay. A buyer with a genuine objection may finally identify it. A buyer deliberately delaying payment has less room to keep the issue ambiguous.

Do not, however, allow repeated informal follow-ups to continue indefinitely. Limitation can affect recovery claims, including proceedings arising under the MSMED framework.

Can you file through MSME Samadhaan?

For an eligible micro or small enterprise, MSME Samadhaan provides the online mechanism through which delayed-payment applications can be submitted.

An important distinction is that MSME Samadhaan is the filing portal; it does not itself decide the dispute.

Applications are forwarded to the concerned MSEFC. The Facilitation Council is the statutory body that deals with the reference.

Under Section 18 of the MSMED Act, a dispute concerning an amount due under Section 17 can be referred to the MSEFC.

The process begins with conciliation. If conciliation does not result in settlement, the dispute can proceed to arbitration before the Council or be referred to an institution or centre providing alternative dispute-resolution services.

Section 18 states that every reference should be decided within 90 days from the date of the reference. That is the statutory framework; businesses should not treat it as a guarantee that every real-world proceeding will conclude within exactly 90 days.

What if your contract already has an arbitration clause?

Do not assume that an arbitration clause automatically prevents an eligible supplier from approaching the MSEFC.

The Supreme Court has recognised the overriding statutory character of the Section 18 mechanism. The MSMED Act's conciliation and arbitration framework can operate notwithstanding a separately agreed arbitration mechanism.

This can materially change the recovery strategy where the supplier qualifies under the Act.

What happens if the buyer challenges an MSEFC award?

The MSMED Act creates another significant protection.

Under Section 19, where a buyer seeks to set aside an award or order covered by that provision, the court cannot entertain the challenge unless the buyer deposits 75% of the amount in terms of the award or order, subject to the statutory framework governing the deposit and possible payment to the supplier.

This does not make an MSEFC award immune from challenge. It does, however, impose a substantial pre-deposit requirement on a buyer seeking to challenge it.

What if the buyer says the goods or services were defective?

An invoice does not become automatically payable merely because it was issued.

If the buyer raises a genuine dispute about quality, quantity, performance, delivery, contractual milestones or another obligation, the underlying evidence matters.

This is why businesses should preserve more than invoices.

Purchase orders, signed delivery records, completion confirmations, acceptance emails, change requests, timesheets, milestone approvals and correspondence can become important evidence of whether the contractual obligation was actually performed.

The MSMED Act provides a recovery mechanism. It does not eliminate genuine contractual disputes.

What if you do not qualify for the MSMED route?

An unpaid invoice does not become legally unrecoverable merely because the special MSMED mechanism is unavailable.

Depending on the contract and facts, other options may include a contractual demand, arbitration, a civil or commercial recovery proceeding, or other legally available remedies.

The correct route depends on factors such as the amount involved, contractual dispute-resolution clause, documentary evidence, limitation position, location of the parties and whether the debt itself is disputed.

That distinction matters: MSME status can provide an additional statutory route; it is not the source of the underlying contractual right to be paid.

A practical unpaid-invoice checklist

Before escalating the matter, assemble:

• the contract, work order or purchase order;

• invoices and account statement;

• proof of delivery or performance;

• agreed payment terms;

• Udyam registration details and effective date;

• communications acknowledging the invoice or outstanding amount;

• any objections raised by the buyer;

• details of part-payments, if any; and

• a clear invoice-wise calculation of the amount outstanding.

Then determine whether the MSMED delayed-payment provisions actually apply before choosing the recovery route.

The business decision

When an invoice remains unpaid, the strongest response is usually not the most aggressive one. It is the one based on the correct legal route and complete evidence.

For an eligible micro or small enterprise, Sections 15 to 18 of the MSMED Act can significantly alter the position through statutory payment periods, compound interest and the MSEFC mechanism.

But eligibility should be established first. Registration status, timing, the nature of the enterprise, the underlying transaction, contractual terms, evidence and limitation can all affect the answer.

An unpaid invoice therefore calls for two separate questions:

Is the money legally due?

And, if it is, what is the most effective legally available route to recover it?