In short. Yes, a buyer can settle an MSME claim for less than the full Section 16 interest. The catch is timing. Once a dispute has arisen, the interest has accrued, and the supplier is free to give up part of it. What the MSMED Act won't allow is a clause agreed in advance that excludes or caps interest. Conciliation before the Facilitation Council is the safest place to do the deal, since a signed settlement there has the force of an arbitral award. Expect to pay the principal in full. The interest is what you negotiate. Start with the ledger.
Is this your situation?
- A micro or small supplier has dragged your company before the MSME Facilitation Council with a delayed payment reference, and the notice is on the CFO's desk.
- You add up the Section 16 interest they're claiming. It's about as big as the unpaid principal. Maybe bigger.
- Some of the invoices are genuinely due, and you'll pay them. What you won't do is pay the full compound interest on top.
- The supplier's owner rang and said he'd drop interest if you pay this month. You want that promise to stick.
- Your vendor agreement says no interest is payable. Someone has already warned you that clause won't save you.
- You're a PSU, a listed company or a big buyer, and whatever you sign has to get past the board, the auditors and maybe vigilance.
Can a buyer legally pay less than the full MSME interest?
Yes. But only if the supplier agrees after the claim has arisen, and agrees freely. Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (the MSMED Act) makes a buyer liable for compound interest on late payments notwithstanding anything in any agreement between the parties. Section 24 then gives Sections 15 to 23 overriding effect over other laws. Put together, those words knock out any clause in a purchase order or vendor agreement, signed at the start of the relationship, that says no interest will be paid or caps it at 12 percent. We've dealt with that in detail in our guide on whether an MSME still gets interest when the contract says none is payable.
A settlement after the dispute is another matter entirely. Once interest has accrued, it belongs to the supplier, to claim or to let go. Section 63 of the Indian Contract Act, 1872 allows a promisee to remit performance in whole or in part, or to accept any satisfaction it thinks fit. So when a supplier takes its principal and only part of the interest, the law sees the supplier choosing to remit the rest. That's all an MSME compromise is. Councils record them all the time.
Where it goes wrong is pressure. Say the buyer held back unrelated payments until the supplier signed a waiver. Or it released a cheque only against a no dues certificate. Either document can be challenged later as involuntary. In National Insurance Co. Ltd v. Boghara Polyfab (2009) the Supreme Court accepted that a discharge given under financial pressure may not bind the person who gave it. So what matters isn't just how much the supplier gives up. It's how you got the waiver, and where it's recorded.
Why the interest number climbs so fast, and what that means for your offer
Section 16 interest is compounded with monthly rests, at three times the bank rate the Reserve Bank of India notifies. It starts on the appointed day. That's the day after the agreed credit period (which can never exceed 45 days from acceptance under Section 15), or, where nothing was agreed, the day after 15 days from acceptance. At that rate an invoice left unpaid for roughly four years can carry interest about equal to the invoice itself. Check the current bank rate before you run any numbers. Our guide on working out MSME delayed payment interest shows the calculation.
And the true cost is worse than the headline figure, for two reasons. First, Section 23 of the MSMED Act says interest paid under the Act isn't deductible when your taxable income is computed. Second, the tax rule that holds back a deduction for payments due to micro and small enterprises until they're actually paid (brought in as Section 43B(h) of the Income-tax Act, 1961, with effect from the 2024-25 assessment year) hits the principal side as well. The Income-tax Act, 2025 has applied from 1 April 2026, so ask your chartered accountant how the current provision treats your outstanding dues. There's background in our note on Section 43B(h).
This matters for strategy, because every month of delay piles on compound interest you can't even deduct. If you're going to pay the principal sooner or later anyway, you gain nothing by sitting on it while the interest gets argued about. In most files, our first move is to pull the two apart.
Where does a buyer get real bargaining room on interest?
Suppliers don't give up interest because they feel generous. They give it up because the buyer has a point, or because money in the bank today beats an award three years from now. Often both. Be honest with yourself about which points you really have.
A written objection within 15 days of delivery. Section 2(b) of the Act and its explanation say that if the buyer objects in writing to the goods or services within 15 days of delivery, acceptance moves to the day the supplier removes the objection. The appointed day shifts with it, and the interest period gets shorter. A phone complaint months later won't do this.
Admitted deductions and set-off. Rejected lots. Short supplies. Debit notes the supplier accepted. Payments you made that never got credited in the supplier's ledger. Every one of these brings down the principal that interest runs on.
Registration timing and category. Silpi Industries v. Kerala State Road Transport Corporation (2021) and Gujarat State Civil Supplies Corporation v. Mahakali Foods (2022) held that a supplier must be registered when the contract is made to get the Act's benefits. After NBCC (India) Ltd v. State of West Bengal (2025), a larger bench of the Supreme Court is looking at whether that's right, so this point is a gamble for both sides. Traders and medium enterprises fall outside the delayed payment protection altogether. Our page on the usual reasons MSME claims get rejected lists the objections suppliers worry about.
Limitation for arbitration. In Sonali Power Equipments v. Maharashtra State Electricity Board (2025), the Supreme Court held that an old claim can still go to conciliation, but the arbitration stage is subject to the Limitation Act. So a supplier holding invoices more than three years old, with no written acknowledgment or part payment to rescue them, can only recover those through a settlement. That's a genuine bargaining chip for you. It cuts both ways, though. Refuse to settle and the supplier may push the fresher invoices into arbitration and come at you harder.
Threatening to challenge the award gets you nowhere. Section 19 makes a buyer deposit 75 percent of the awarded amount before a court will even hear the challenge. Lose at the Council and you'll be paying most of the money upfront regardless. That 75 percent deposit rule is exactly why most sensible settlements happen before the award. Not after.
What does a buyer's lawyer look at before putting an offer on the table?
When a buyer walks in with a Council notice, the first thing Advocate B.K. Singh checks is whether the buyer's own records have already admitted the debt. Companies have to disclose unpaid amounts owed to micro and small suppliers, with interest, in their annual accounts under Section 22 of the MSMED Act. Companies covered by the half-yearly MSME Form 1 return also report dues outstanding beyond 45 days to the Registrar of Companies. Then there are balance confirmations your accounts team signed, and emails agreeing the ledger balance. If those papers show the full principal as due, nobody will believe a quality complaint raised for the first time now. The offer has to rest on something else. Read why MSME Form 1 matters in a payment dispute.
Next, the supplier's file. Is its Udyam registration older than the purchase order? Is the supplying unit actually in the state whose Council sent the notice? Are all the invoices inside three years, or does the claim lean on an acknowledgment? Those answers tell you whether the lawyer across the table is negotiating from comfort or from worry.
Last, cash. A settlement you can't pay on time is worse than none at all. Default, and the full claim may come back, with a breach added to the record. Only agree to a schedule your treasury has actually signed off.
Where should an MSME settlement be recorded so it actually holds?
Where you record it matters as much as the number. Recorded in the right forum, a settlement ends the case and is hard to reopen. Signed across a conference table and never filed, it leaves the Council reference alive. And it leaves the supplier free to say later that it signed under pressure.
Before any reference is filed. A written settlement agreement between the two of you will do, as long as it's clear, signed by people with authority, and pays the agreed sum on agreed dates. The supplier releases all claims under the listed invoices. If the deal falls apart later, the agreement is enforced like any other contract, through a suit.
During conciliation before the Council. Section 18(2) applies Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 to conciliation before the Council. Under Section 73, a settlement agreement signed by the parties and authenticated by the conciliator is final and binding. Section 74 gives it the same status and effect as an arbitral award on agreed terms. For a buyer, there's no stronger place to lock in an MSME interest waiver. Why? The statutory body records it. And it's enforceable like a decree. Our guide on what happens in MSME conciliation before arbitration walks through the sittings.
During arbitration. Conciliation has failed and the Council, or an institution, is now arbitrating. You can still settle. Section 30 allows the tribunal to record the settlement as an arbitral award on agreed terms. People call it a consent award.
After the award. You can still settle here. But the supplier knows it's holding an enforceable award, and you know a challenge means the 75 percent deposit. Discounts at this point tend to be small. Get the settlement recorded in the execution or Section 34 proceedings, so the court marks the award as satisfied or the challenge as withdrawn.
There are other routes too. Some states hold Lok Adalats or special sittings for MSME cases. The Ministry of MSME has added an online dispute resolution facility linked to the Samadhaan system (check what's currently available). And if the supplier went for a commercial suit instead, a settlement reached in Section 12A pre-institution mediation also carries the status of an arbitral award.
Settling at each stage: what's realistic, and how final it is
| Stage | What a buyer can usually get | The document that records it | How final it is |
|---|---|---|---|
| Before a reference | The most room; interest often comes down a long way if the principal is paid quickly | Signed settlement agreement plus release | A binding contract; enforced through a suit if broken |
| Conciliation before the Council | Good room, particularly if you have genuine objections or old invoices | Settlement agreement under Sections 73 and 74, authenticated by the conciliator | Has the status of an arbitral award; enforceable as a decree |
| Council or institutional arbitration | Some room; it depends on how the evidence is going | Consent award under Section 30 | An arbitral award; enforceable as a decree |
| After the award | Very little; perhaps instalments or a small trim on interest | Settlement recorded in execution or Section 34 proceedings | Final once it's recorded and paid |
| Lok Adalat or ODR sitting | It varies; handy when both sides want it over quickly | Lok Adalat award or recorded settlement | A Lok Adalat award is final, and there's no appeal |
Settling an MSME claim as a buyer, step by step
This is the order we usually work in. The timelines are typical ranges. They depend on when the Council lists the matter and how fast both sides can sign off on figures.
Reconcile the ledger (1 to 2 weeks)
Put the supplier's statement next to your books: invoices, goods receipt notes, debit notes, payments and TDS. List every invoice with its delivery date, any written objection and the date it was paid, or note that it's still due. Most disputes get smaller once the two ledgers are compared line by line.
Work out your exposure (a few days)
Calculate the Section 16 interest on each invoice from its appointed day, at three times the bank rate with monthly rests. Then work out what you honestly think a Council would award once your real defences are taken into account. The gap between those two numbers is your negotiating range.
Pay the undisputed principal if you can
Paying admitted principal stops more compound interest building on that amount, and it shows good faith. Pay against named invoices and put in writing that the payment is without prejudice to both sides' positions on interest. Don't assume paying the principal kills the interest claim. It doesn't.
Make a written offer, marked without prejudice
Set out the principal paid or offered, the interest you're willing to pay, and the dates. Don't admit anything you wouldn't accept anyway. If a reference is already pending, propose recording the settlement before the Council at the next conciliation sitting.
Agree the wording of the document
Pin down the invoices covered, the total, the instalments, what happens on default, withdrawal of any counter-claim, costs and the release. Whoever signs for the supplier should show their authority, such as a board resolution for a company or a letter from all the partners for a firm.
Record it in the right forum
File the settlement before the Council for authentication under Section 73, or before the tribunal for a consent award under Section 30. If nothing is pending, keep the signed agreement safe along with proof of authority.
Pay on time and close the file
Pay by bank transfer, quoting the settlement. Get the Council's closure order or the award on agreed terms. Then update your Section 22 disclosure and MSME Form 1 for the next period.
How should the deal itself be put together?
Most MSME settlements that actually work look much the same. The principal is paid in full, and fast. Interest is cut down to a smaller lump sum, sometimes paid in two or three instalments. Suppliers fight interest cuts far less once the principal has landed in their bank account, because principal is what pays wages and the steel bill. Advocate B.K. Singh's usual advice to a buyer is to put the principal on the table at the first sitting, if the company can afford it, and keep the haggling to interest alone. Argue about both at once and you'll probably end up giving ground on both.
There are several ways to frame the interest number. Some settlements fix a lump sum. Some pay interest only up to a cut-off date. Some apply a lower rate across the whole period. Others pay interest on certain invoices but not on lots where the buyer has a genuine quality complaint. Choose whichever framing the supplier's accountant can explain to the partners. He's the one who'll recommend saying yes.
Instalments need a default clause. The common approach is a conditional waiver. The supplier gives up the balance interest on condition that every instalment arrives on time; if the buyer defaults, the supplier can pursue its original claim, giving credit for whatever's been paid. Courts are wary of clauses that simply tack a large sum on for default, since those can be attacked as a penalty. So write the default as losing a conditional concession, not as a fresh charge.
Sort out the tax side before anyone signs. Ask your accountant how TDS applies to the interest portion and how GST treats it. You don't want the supplier surprised by a deduction, and you want the figure you agreed to be the figure that's actually paid. The commercialcourtlawyer.com guide on drafting a payment settlement agreement that's easy to enforce goes further into default and enforcement clauses.
If talks fail, can your offer letter be used against you?
Settlement talks are protected. Not completely, though. Section 21 of the Bharatiya Sakshya Adhiniyam, 2023 (which replaced Section 23 of the Indian Evidence Act) says that in civil cases an admission isn't relevant if it was made on an express condition that it won't be given in evidence, or in circumstances from which the parties must have understood that. That's the legal footing for marking letters without prejudice.
Conciliation before the Council has extra cover. Section 81 of the Arbitration Act bars the parties from relying, in later arbitration or court proceedings, on views expressed, admissions made or settlement proposals put forward during conciliation. Section 75 keeps the conciliation confidential. In plain terms, what you say across the table at a Council sitting is safer than what you put in an ordinary email the week before.
Two warnings. A clear written admission of a debt can operate as an acknowledgment under Section 18 of the Limitation Act and hand the supplier a fresh three years, and courts haven't always protected such admissions just because they sat inside settlement correspondence. And a letter admitting the full principal makes your later quality defence very hard to believe. Frame offers as what you'll pay to close the matter. Never as what you accept you owe.
Does settling clean up your disclosures and tax position?
It settles the claim. It doesn't rewrite the past. Your annual accounts for the years the dues were outstanding already show the unpaid principal and interest under Section 22. MSME Form 1 returns for earlier half-years are already filed. The settlement changes what you report from here on. Your auditors will still want to see the settlement document, the Council's closure order and proof of payment before they accept a reversal of any interest you'd provided for.
Interest you do pay under the settlement stays non-deductible under Section 23 of the MSMED Act, if it's interest payable under the Act. Some buyers try calling it a trade discount or a settlement premium instead. Don't do that without your accountant's advice. A label that doesn't match the substance can cause more tax trouble than it saves.
Listed companies and PSUs have extra internal hoops: board or committee approval, disclosure where it's material, and, in public bodies, an approval chain that may run through finance and vigilance. A settlement recorded before the Council under Section 73 is much easier to defend inside the organisation than a private deal. A statutory body has seen it and authenticated it.
When shouldn't a buyer settle?
Settling isn't always the right call. Suppose the supplier clearly wasn't registered when the contract was made, so its invoices fall outside the Act on the current law, and the debt is also time-barred for a suit. Then the honest answer may be that nothing is legally recoverable from you. Or the goods were rejected in writing within 15 days and sent back. There may be no principal at all. In cases like these, pay whatever you do owe and defend the rest.
Even then, count the cost. Defending a Council arbitration takes time and management attention, and so does a Section 34 challenge with the 75 percent deposit if you lose. If the supplier looks likely to win on most of the principal, a small give on interest to close things early can work out cheaper than being right about one invoice. Our guide on how to respond when an MSME supplier files a case against your company covers the defence. The one on whether a buyer can challenge an MSME Council award tells you what happens if you lose.
Where buyers trip up in MSME settlements
- Paying the principal and thinking the interest disappears. Section 16 interest builds up for the period of delay whether or not you pay the principal later. Without a written waiver, the supplier can still come after it.
- Trusting a full and final cheque. Writing "full and final" on a cheque, or in the bank narration, doesn't bind the supplier on its own, especially if the supplier protests quickly. Get a signed agreement.
- Leaving the Council case hanging. If the reference isn't withdrawn or closed on the settlement, it can be revived. Record the settlement right there.
- Doing the deal with the wrong person. The supplier's sales manager can't waive the company's interest. Ask for written authority.
- Forgetting your own counter-claim. If you filed a counter-claim for penalties, the settlement should say it's withdrawn. Otherwise someone may argue it's still alive.
- Covering only some of the invoices. List six invoices and miss a seventh under the same purchase order, and you've invited a second claim. Cover the whole account up to a stated date.
- Promising money treasury hasn't approved. One missed instalment can bring back the full claim. Agree dates you'll actually meet.
Papers to pull together before you negotiate
- Purchase orders or work orders and the vendor agreement, including any credit period clause in it
- The supplier's invoices, with your goods receipt notes or records showing you accepted the service
- Any written rejection or objection you sent within 15 days of delivery, and proof it was sent
- Debit notes, credit notes and records of goods you returned
- Your ledger for this supplier and the supplier's own statement of account
- Payment records with UTR numbers, and the TDS certificates you issued
- Balance confirmations, audit confirmations and any emails acknowledging the dues
- The Section 22 disclosure note from your recent annual accounts, and MSME Form 1 filings if you file them
- The supplier's Udyam certificate, and the Council's notice with the claim statement
- Your internal approval limits for settlement, so whoever negotiates knows what they can sign
A made-up example: a Manesar parts buyer and a Faridabad fabricator
We've invented this one to show how the pieces fit. A Manesar company that assembles two-wheeler parts buys sheet-metal brackets from a small fabrication unit in Faridabad. In a slow year, payments slip. The fabricator files a reference before the Haryana Council for Rs 38 lakh in principal and about Rs 26 lakh in Section 16 interest, across invoices spread over four years.
The buyer's accounts team reconciles the two ledgers. It finds Rs 3.5 lakh of payments the fabricator never credited. It finds two lots, worth about Rs 2 lakh, rejected in writing within a week of delivery. And three early invoices, about Rs 4 lakh, turn out to be more than three years old with no balance confirmation after them. The principal really in dispute drops to about Rs 32.5 lakh.
Before the second conciliation sitting, the buyer pays Rs 28.5 lakh of admitted principal against named invoices, marked without prejudice to the interest dispute. At the sitting it offers the rest of the principal plus Rs 9 lakh towards interest, in three monthly instalments, with the old invoices folded into the release. Both sides move a little. They land on Rs 11 lakh of interest. The settlement is signed, the conciliator authenticates it under Section 73, and the reference is closed. The fabricator gets most of its principal straight away and a firm date for the rest. The buyer pays under half the interest claimed and walks away with a document that ends the matter.
What to do this week if a supplier's claim is pending
Get accounts to reconcile the supplier's ledger against yours, invoice by invoice. Ask them to dig out any written rejections and balance confirmations while they're at it. Work out the Section 16 interest properly, and then the figure you honestly think a Council would award. If some principal is plainly due, think about paying it now. Then decide, with advice, whether to make an offer before the next conciliation sitting. The sooner the principal goes out, the better your argument for a cut in interest. And the less compound interest you're carrying while you talk.
If you'd like a lawyer to go through the Council notice, your ledgers and the supplier's registration before you make an offer, or you want to know when the larger bench rules on registration, share your papers with Advocate B.K. Singh's team through the contact page.
Frequently asked questions
Is an MSME interest waiver written into the purchase order valid?
No. Section 16 makes interest payable notwithstanding any agreement, so a clause signed at the start that excludes or caps interest doesn't bind the supplier. Only a waiver given freely, after the interest has accrued, can bring it down.
Can the MSME Council force the supplier to take a lower amount?
No. In conciliation the Council can suggest terms, but a settlement needs both sides to agree. If conciliation fails, the Council arbitrates and decides the claim on law and evidence. That can include full interest.
Does a settlement before the Council have to be stamped or registered?
A settlement agreement authenticated by the conciliator has the status of an arbitral award under Section 74. Stamp duty can vary by state and by how the document is worded, so check the current stamp rules where it's signed.
Can the supplier reopen the settlement later?
Only on narrow grounds, like fraud or a genuine case that its consent was obtained by coercion. A settlement recorded before the Council with both sides represented is very hard to reopen. A private letter squeezed out by holding back other payments is far easier to attack.
How long does an MSME settlement usually take?
When both sides want it, terms can be agreed in two to six weeks and recorded at the next conciliation sitting. Inside large buyers and PSUs, internal approvals often take longer than the negotiation.
Should a buyer pay the principal before the interest is agreed?
Often, yes, if it's clearly due. It stops more compound interest building on that amount, and it makes a reduction easier to talk about. Pay against named invoices and say in writing that the payment is without prejudice to the interest dispute.
Can a buyer settle part of the claim and fight the rest?
Yes. Parties often settle the admitted invoices and leave disputed lots or penalty counter-claims for the Council to decide. The settlement should spell out exactly which invoices it covers, so what's left to fight about is clear.
Will an MSME compromise hurt the buyer's credit or vendor rating?
The settlement itself stays between the parties and the Council. But unpaid dues to micro and small suppliers already show up in your financial statements and, for companies that file it, in MSME Form 1. Paying and closing them improves what future disclosures show.
Advocate B.K. Singh
Founder of B.K. Singh & Associates. MCA, LL.B., LL.M. More than twenty years in practice before the Supreme Court, the Delhi High Court, district and commercial courts in Delhi NCR, and tribunals.
This guide explains the law in general terms and is not legal advice. For advice on your own papers, contact the team.