How to Respond If an MSME Supplier Files a Case Against Your Company

What to do in the first week after the notice arrives

Ask any company that has had to defend an MSME case as a buyer and you'll hear the same thing. The first week decides a lot. Before anyone starts drafting a reply to the MSME notice, read it properly and pin down who sent it, what date it fixes and what it wants you to file. A notice from a Micro and Small Enterprises Facilitation Council normally comes with the supplier's reference attached and gives you a date, either to appear or to send a written reply. Often the MSME Samadhaan portal sends an email before that. It looks like spam. It isn't. The Council can go ahead without you, and an award passed in your absence is slow and costly to get rid of.

Then make one person responsible. We see the same pattern in company after company: the notice reaches purchase, finance says purchase should have flagged the defects, purchase blames the plant, and three weeks vanish. Pick one officer to collect the papers, deal with the lawyer and attend the hearings. Hand that person the supplier's invoices, your ledger account of the supplier and every email about quality or price.

When a buyer walks in with an MSME notice, Advocate B.K. Singh first puts the date on the supplier's Udyam certificate next to the date of the purchase order. That single comparison often decides whether the Council can hear the claim at all. It takes five minutes on the Udyam verification page. Next he goes to the oldest unpaid invoice. Why? Because limitation usually decides how much of the claim is still alive.

What kind of case is this, and how long have you got?

Court case or Council reference: what changes?

Most of this guide is about the Facilitation Council, since that's where most suppliers go first. Some don't. A supplier with a shaky registration, or one that wants an urgent order, may file a commercial suit or a summary suit instead. Your defence then runs under the Code of Civil Procedure, 1908 as amended for commercial disputes. The deadlines there don't bend. In a summary suit you can't defend at all unless the court grants leave to defend, and for that you need a plausible defence on affidavit. Our sister site explains how that works on its page on getting leave to defend a summary suit. If it's an ordinary commercial suit, read its guide to defending a commercial suit.

An insolvency demand notice is partly law and partly pressure. You have ten days to reply in writing and set out any dispute that existed before the notice. A dispute you raise for the first time after it carries little weight. So if you've got quality complaints, short-supply records or debit notes, put them in that reply, with dates. Our note on when an MSME can choose insolvency over the Council looks at it from the supplier's side. That helps you guess the next move.

Jurisdiction objections a buyer can take

The threshold defences are often the strongest. If they succeed, the Council can't decide the claim at all. Begin with who the supplier is. Chapter V protects only a micro or small enterprise registered under the Act. A medium enterprise is outside. A supplier that's mainly a trader is generally outside too, because traders were let onto Udyam only for priority sector lending; our guide on whether a trader can go to the Council deals with that. And if the supplier's turnover pushed it into the medium category partway through the contract, invoices raised after that change may be beyond the Council's reach.

Next, the registration date. In Silpi Industries v. Kerala SRTC (2021) the Supreme Court treated a supplier that registered after the contract as unable to claim the Act's benefit for that contract, and later cases followed it. Then came NBCC (India) Ltd v. State of West Bengal (January 2025). A two-judge bench doubted that view and sent the question to a larger bench, and some High Courts have since applied NBCC to the facts in front of them. We'd still take the objection. Just don't treat it as a sure thing. Our guide on Udyam registration after the contract sets out both sides.

Third, look at what kind of contract it was. Several High Courts have held that a composite works contract (civil construction, say, or a turnkey installation) falls outside the Act. The Calcutta High Court has read the Act more broadly, and the Supreme Court hasn't settled the point. If yours was a works contract, say so and give reasons. Take every one of these objections in your first written reply, and take them again before the arbitral tribunal. Section 16(2) of the Arbitration and Conciliation Act, 1996 says a plea that the tribunal lacks jurisdiction has to be raised no later than the statement of defence. Leave it late and you'll struggle.

Has the supplier left it too late?

The Limitation Act, 1963 applies at the arbitration stage of an MSME dispute. For most supply and service claims that means three years from the due date of each invoice. The clock restarts if you acknowledged the debt in writing (Section 18 of the Limitation Act) or made a part payment (Section 19). In Sonali Power Equipments v. Chairman, MSEB (July 2025), the Supreme Court said a time-barred claim can still go to conciliation, since conciliation isn't adjudication. But the Council can't award a time-barred claim in arbitration.

That draws a clean line for the buyer. You can talk about the old invoices at conciliation. You might even settle them, for business reasons. If conciliation fails, though, you're entitled to insist that the arbitration covers only claims within time. Look hard at what your company has signed. Year-end balance confirmations sent to the supplier, entries in audited accounts and disclosures of outstanding dues can all be argued as acknowledgments that stretch the period. Our guide on the time limit for an MSME delayed payment claim is written from the supplier's side. That's how the Council will hear it argued, so read it.

Defending the claim on its merits

Once the Council has jurisdiction, the real fight is over acceptance, quantity, quality and payments. Under Section 2(b) of the MSMED Act, read with Section 15, the goods or services count as accepted on the day they're delivered or rendered, unless the buyer objects in writing within 15 days. If it does, acceptance is pushed back until the supplier removes the objection. So a written rejection note, a quality inspection report or an email listing defects within 15 days of delivery is worth more than anything else in a buyer's file. Later complaints still count on the merits. They don't move the date from which interest runs.

Then reconcile the account, invoice by invoice. Suppliers' claims regularly include invoices you've already paid, credit notes both sides agreed, GST the supplier never deposited (so you couldn't take the credit), and TDS you deducted that shows up in the supplier's own tax statement. A clean reconciliation usually knocks out part of the claim before anyone argues law. After that, check the interest working. Section 16 interest runs from the agreed date, which can never be more than 45 days from acceptance, and it's compounded monthly at three times the bank rate. Supplier sheets often start from the invoice date, use the wrong rate for some periods, or charge interest that was waived in an earlier settlement. Give it an afternoon with a spreadsheet.

Last, think about a counter claim. Silpi Industries also held that a buyer can raise a counter claim and set-off in arbitration before the Council. Liquidated damages for late delivery, the cost of replacing rejected goods and penalties under a service level clause can all be pleaded. You'll need proof, and the contract has to back them.

What about the arbitration clause in your purchase order?

Against a registered micro or small supplier, it usually doesn't help. In Gujarat State Civil Supplies Corporation v. Mahakali Foods (2022), the Supreme Court held that Section 18 of the MSMED Act overrides a private arbitration agreement. The supplier can go to the Council even if your purchase order names an arbitrator or an institution. Some buyers respond by filing a Section 11 petition to appoint their own arbitrator after the supplier has already gone to the Council. That's unlikely to work. It just adds cost.

The clause comes back into play if the supplier isn't eligible for the Council. Win your objection on registration, category or the nature of the contract and the dispute returns to the forum your contract picked. That's one more reason to object early and clearly, because it keeps your contractual forum alive if the Council route falls away. A buyer that takes full part in Council arbitration without objecting may be held to have accepted it.

Handling conciliation before the Council

Section 18(2) sends the dispute to conciliation first, under Sections 65 to 81 of the Arbitration and Conciliation Act. It's a negotiation, and Section 81 of that Act protects what happens in the room. Views expressed, proposals made and admissions offered during conciliation can't be relied on later in arbitration or court. So you can make a real offer without hurting your defence. Still say, out loud, that any proposal is without prejudice. Our guide on how MSME conciliation works before arbitration walks through the process.

Send someone who can settle. Not a junior told to listen and report back. Councils can tell when the buyer's representative can't commit to anything, and those matters move to arbitration faster. At this stage Advocate B.K. Singh usually tells buyers to go through the supplier's interest sheet line by line before offering a rupee. The gap between the supplier's figure and a correctly worked one is often the most persuasive thing on the table. And a buyer that shows, calmly, that interest has been run from the wrong dates gets taken more seriously on its other objections too. For drafting the settlement terms, see our guide on settling an MSME claim without paying full interest.

Open legal questions, and how a buyer can use them

As at the latest reports we've seen, three questions were pending before larger benches of the Supreme Court. Check where each stands before you lean on it. One: can a supplier that registered after the contract use Section 18 at all? That's the NBCC reference. Two: can Council members who ran the conciliation then sit as arbitrators, despite Section 80 of the Arbitration and Conciliation Act, and how far does a writ petition lie against Council orders? In Tamil Nadu Cements Corporation v. MSEFC (January 2025), a three-judge bench referred those to a Constitution Bench. Three: is the 90-day period in Section 18(5) for deciding a reference mandatory? The Supreme Court agreed in 2025 to look at that, in a case from Maharashtra.

For a buyer these aren't academic. If any of them helps you, record the objection in writing at the first hearing and repeat it in the statement of defence. Should the law move your way later, an objection taken on time is far easier to use than one you discover after the award. But don't hang your whole defence on an open question. Councils apply the law as it stands. They'll expect a defence on the merits as well.

Keep an eye on the MSMED (Amendment) Act, 2026 too, published on 13 August 2026. Once its new provisions take effect, Section 18 will provide for mediation within 90 days instead of today's conciliation. A new Section 18A will let suppliers recover awards as arrears of land revenue. And a substituted Section 19 will require the court to release at least 50 percent of the buyer's deposit to the supplier if a challenge has been pending for more than six months. Parts of the Act were reported to be in force from 15 October 2026, but we hadn't found these three provisions notified as of late October 2026. Check the current position. It changes what a long challenge costs you, by a lot.

Replying to a Facilitation Council notice, step by step

This order works for most buyers defending an MSME case before the Council. Get the first three steps done within a week of the notice.

1. Diary the date and get on the portal

   Note the date the Council has fixed. Log in to the MSME Samadhaan portal with the reference number and read the supplier's claim. Our guide on checking MSME Samadhaan case status shows where the next date appears.

2. Check who the supplier really is

   Pull up the Udyam certificate, its date and the category. Line them up against your purchase order and invoice dates. Note any stretch when the supplier was medium, or registered as a trader.

3. Reconcile the account

   List every invoice, payment, debit note, credit note and TDS entry. Mark what you accept is due, what you dispute and why, and what's already been paid.

4. Find the written objections

   Collect rejection notes, inspection reports and defect emails, with their dates. See which ones fall within 15 days of delivery. Those count most.

5. File the written reply

   Jurisdiction objections go first. Then limitation, then the merits and your corrected interest figure. Attach the reconciliation and the main documents. Stick to facts.

6. Go to conciliation with authority

   Send an officer who can agree a number. Try to settle the undisputed part, and keep your objections on the rest on record.

7. Defend the arbitration

   If conciliation fails, file a statement of defence and any counter claim within the time the tribunal gives. Raise jurisdiction under Section 16. Lead evidence, then argue.

8. Pay or challenge

   When the award arrives, decide within weeks. A challenge under Section 34 needs a 75 percent deposit under Section 19 of the MSMED Act and has to be filed within three months, with 30 more days allowed only for sufficient cause.

Papers your team should pull out now

How long a buyer's defence takes, and what it costs

Where the case is heard, and where you can challenge the award

Section 18(4) gives jurisdiction to the Council of the state where the supplier is located. Where your company sits doesn't matter. Nor does the delivery point. So a Faridabad buyer can end up answering a claim before the Council for the supplier's area in Uttar Pradesh, and a Delhi company can be called before the Haryana Council. Ask early whether your people can join by video conference (many Councils now allow it) and whether the Council plans to refer the arbitration to an institution.

A challenge goes to the court with supervisory jurisdiction over the place of arbitration. That's generally where the Council sits, not where your registered office is. For an award in a commercial dispute, it means the Commercial Court for that district, or a High Court with original jurisdiction where that applies. In India Glycols v. MSEFC (2023) the Supreme Court held that a writ petition against a Council award isn't ordinarily maintainable, because Section 34 is available with the 75 percent deposit. How far that bar goes is one of the questions now before a Constitution Bench. Before you plan your next move, read our guides on whether a buyer can challenge an MSME Council award and on enforcement and the 75 percent deposit.

Mistakes buyers keep making in MSME cases

• Treating the Samadhaan email as spam. The first notice often comes through the portal, not the post. Ignore it and you can miss conciliation altogether.
• Replying only on the merits. If you've got a registration, category, works contract or limitation point, lead with it, in writing. Raised late, a jurisdiction objection is weak.
• Counting on phone complaints. Defects mentioned on calls or in meetings don't postpone acceptance. Only a written objection within 15 days does that.
• Signing balance confirmations on autopilot. A year-end confirmation of the supplier's balance can restart limitation. Have finance read what it actually says before anyone signs.
• Sending someone who can't decide anything. If your person can't make an offer at conciliation, you lose the chance to settle the undisputed part cheaply.
• Forgetting what delay costs. Section 16 interest compounds monthly at three times the bank rate, and Section 23 of the MSMED Act disallows it as a tax deduction. A defence that only buys time is often the most expensive one you can run.

When to settle, and when to fight

Settle whatever you can't honestly dispute. If the goods were received and used, nobody objected in writing, and the supplier was clearly registered as micro or small at the time, the principal is due. The interest on it is running at a rate no commercial loan comes near. Pay that part fast, even while you contest the rest. It cuts your exposure. It also makes your objections on the disputed part look genuine.

Fight where your buyer defence is on paper: a jurisdiction objection with dates behind it, a limitation bar on old invoices, a written rejection within 15 days, or a counter claim you can prove. Advocate B.K. Singh often asks buyers to split the file into these two piles in the first week. Once they get mixed up, the whole defence starts to look like a refusal to pay. One more thing. Suppliers' lawyers read your disclosures under Section 22 of the MSMED Act and your company's half-yearly return just as closely as you do. Our guide on MSME Form 1 in a payment dispute explains why that matters.

What to do this week

Diary the hearing date. Download the supplier's claim from the portal and print its Udyam verification page. Ask finance for a reconciled ledger and the list of TDS entries and credit notes. Ask the plant or project team for every written rejection, with its date. Decide who'll represent the company, and how much authority that person carries into the room. And if what you've got is a suit or an insolvency demand rather than a Council notice, start counting days today. Those deadlines are shorter, and far less forgiving.

If you'd like the notice, purchase orders and ledger looked at before you file a reply, you can send your papers to Advocate B.K. Singh's team through our contact page.