This article has been written by Mr. Rohan Pallhal. Rohan is a final-year B.A. LL.B. (Hons.) student at Maharashtra National Law University, Mumbai.
You can contact the author via LinkedIn- https://in.linkedin.com/in/rohan-palhal-521196219
Introduction
By 2026, Micro, Small, and Medium Enterprises (MSMEs) have evolved from being the
“backbone”; of the Indian economic architecture to the primary engine driving the Viksit
Bharat (Developed India) 2047 objective. Nevertheless, despite the sector’s pivotal contribution
to GDP and employment, it remains susceptible to a persistent commercial pathogen: delayed
payments. To combat this, the Micro, Small and Medium Enterprises Development Act, 2006
(MSMED Act) created a specialised dispute resolution system through the Micro and Small
Enterprises Facilitation Council (MSEFC).
The legislative intent was clear: to form a hybrid judicial system of conciliation and arbitration
that supersedes the lethargy of civil courts. However, assessing the landscape in 2026 reveals the
MSEFC mechanism as a paradox. It is simultaneously a powerful statutory weapon for recovery
and a system clogged by procedural ambiguities and infrastructural deficits. This article analyses
the legal efficacy of the MSEFC, the friction between the MSMED Act and the Arbitration and
Conciliation Act, 1996, and the necessity of integrating Online Dispute Resolution (ODR).
Beyond Interest: The Statutory Armour
The MSMED Act offers a unique “statutory arbitration” framework. Section 15 acts as a ticking
clock, mandating payment within 45 days. Section 16 adds teeth to this mandate by imposing compound interest at three times the bank rate- a provision the Supreme Court has consistently
held to be mandatory and not discretionary.
However, the true legal innovation lies in Section 18. Unlike standard arbitration clauses that
rely on party autonomy, Section 18 overrides private agreements. As clarified in M/s Silpi
Industries etc. v. Kerala State Road Transport Corporation (2021), the MSMED Act is special
legislation that trumps the general Arbitration Act. This implies that even if a contract specifies
an arbitrator in London or Singapore, an unpaid MSME in India can unilaterally invoke the local
MSEFC jurisdiction. While this empowers the supplier, it often leads to friction where large
corporate buyers challenge the Council's jurisdiction, arguing that the Council lacks the technical
expertise to handle complex commercial disputes.
The Jurisdictional Quagmire and Limitation
The applicability of the Limitation Act, 1963 has been one of the most litigated aspects of the
MSEFC. For years, ambiguity allowed dormant claims to resurface. However, settled
jurisprudence now dictates that the MSMED Act does not give a ” lease of ” to time-
barred debts. This distinction is crucial for maintaining the sanctity of commercial certainty.
Furthermore, the interplay with the Insolvency and Bankruptcy Code (IBC) remains a flashpoint.
In 2026, with the IBC fully matured, we see a tactical divergence: while operational creditors
(MSMEs) often use the threat of insolvency (Section 9 of IBC) to recover dues, the MSEFC
route is preferred for disputed debts where the existence of a dispute would otherwise bar an IBC
petition. The MSEFC, therefore, acts as the primary adjudicator of fact regarding the quality of
goods or services, a role an Interim Resolution Professional cannot play.
The Section 19 Barrier: A Necessary Evil?
Perhaps the most contentious provision is Section 19, which requires a buyer to deposit 75% of
the awarded amount before challenging an MSEFC award. Corporate buyers have frequently
challenged this as violative of the right to judicial remedies.
However, from an analytical standpoint, Section 19 is the pivot upon which the efficacy of the
Act rests. Without it, large corporations with deep pockets would drag MSMEs through endless appeals under Section 34 of the Arbitration Act. The Supreme Court in Goodyear India Ltd. v.
Norton Intech Ltd. reaffirmed that this pre-deposit is non-negotiable.
While this protects MSMEs, it creates a “liquidity trap” for buyers who may have genuine
grievances regarding the award's procedural integrity. In instances where MSEFCs have
passed ex-parte awards without due process, the 75% requirement can seem draconian. The
courts in 2026 are increasingly adopting a nuanced approach—allowing payment in tranches in
exceptional cases—but the statutory bar remains high.
The Conciliation Dilemma and the Mediation Act, 2023
A significant development affecting the MSEFC landscape in recent years is the full
implementation of the Mediation Act, 2023. Section 18(2) of the MSMED Act mandates
conciliation before arbitration. Previously, this was often a formality, with Councils rushing
through it to reach arbitration.
The Mediation Act has institutionalized the quality of mediation. The challenge for MSEFCs
now is to harmonize their internal conciliation procedures with the standards set by the new Act.
If the Council acts as the conciliator and the conciliation fails, the same Council often acts as the
arbitrator (or refers it). While Silpi Industries upheld this dual role, legal scholars continue to
debate the violation of natural justice principles, specifically the rule against bias. As we move
forward, there is a strong case for separating the & “Conciliation Wing”; and “Arbitration Wing”;
within the MSEFC to ensure optical and substantive fairness.
The Digital Turn: ODR and Samadhaan
The sheer volume of cases has rendered physical hearings unsustainable. The MSME
Samadhaan portal was a step in the right direction, but in 2026, it requires an overhaul. The
future lies in Online Dispute Resolution (ODR).
Currently, the Council functions as a bottleneck. A shift toward ODR would allow for
asynchronous hearings, where parties upload submissions without waiting for physical dates.
Furthermore, AI-assisted case management could be utilized to calculate statutory interest, a
purely mathematical task, freeing up Council members for substantive adjudication. This digital leap would also enable virtual conciliation, allowing mediators from across the country to assist
in disputes, thereby breaking the geographical limitations of state-level Councils.
Conclusion
The MSEFC is a vital legislative experiment in leveling the playing field between the “David”;
(MSMEs) and the “Goliath” (Corporate Buyers). However, access to justice cannot be equated
with the mere filing of a claim. For the MSMED Act to remain relevant in 2026 and beyond, the
MSEFC must transition from a passive administrative body to a professional, digitally-enabled
arbitral institution. The focus must shift from merely “facilitating” to “effectively adjudicating,”;
ensuring that the promise of timely payment transforms from a statutory hope into a commercial
reality.
Endnotes
1. Micro, Small and Medium Enterprises Development Act, 2006, § 15-18.
2. M/S Steel Authority of India Ltd. v. Micro, Small Enterprise Facilitation Council, (2010)
SCC OnLine Bom 2208.
3. Gujarat State Petronet Ltd. v. Micro and Small Enterprises Facilitation Council, (2018)
SCC OnLine Guj 2367.
4. Principal Chief Engineer v. Manibhai & Brothers, (2020) SCC OnLine SC 1198.
5. Silpi Industries etc. v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC
439.
6. The Mediation Act, 2023, No. 32 of 2023, Acts of Parliament, 2023 (India).