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Corporate and Economic Laws · Specific Legal Provisions related to MSME Sector

MSEFC and Dispute Resolution under the MSMED Act

Updated 11 October 2026 · Fact-checked

The Micro and Small Enterprises Facilitation Council (MSEFC) is a State-level body that resolves disputes over amounts due to micro and small suppliers. Any party can refer a dispute under section 18. The Council conciliates first, then arbitrates if conciliation fails, and must decide within ninety days of the reference.

Understand MSEFC and Dispute Resolution

A micro or small supplier often waits long for payment from a larger buyer. A normal civil suit is slow. The MSMED Act, 2006 therefore gives a special forum: the Micro and Small Enterprises Facilitation Council (MSEFC).

Under section 20, the State Government establishes, by notification, one or more Councils at such places, with such jurisdiction and for such areas as the notification specifies. Under section 21, a Council has not less than three and not more than five members. They come from the State's Director of Industries (or an officer not below that rank), office-bearers of micro or small industry associations, representatives of banks and financial institutions lending to micro or small enterprises, and persons with special knowledge of industry, finance, law, trade or commerce. The Director of Industries (or equivalent officer) is the Chairperson. The composition, filling of vacancies and procedure are as the State Government prescribes.

Under section 18(1), any party to a dispute may make a reference to the Council for any amount due under section 17. Note that either party can refer, not only the supplier. The words 'notwithstanding anything contained in any other law' give this route priority.

The process has two stages. First, conciliation: the Council either conducts it itself or refers the matter to an alternate dispute resolution institution or centre. Sections 65 to 81 of the Arbitration and Conciliation Act, 1996 apply as if conciliation were started under Part III of that Act. Second, if conciliation fails and terminates without settlement, the Council either arbitrates itself or refers the dispute to an ADR institution or centre. The 1996 Act then applies as if there were an arbitration agreement under section 7(1) of that Act.

Section 18(4) gives jurisdiction over a dispute between a supplier located within the Council's jurisdiction and a buyer located anywhere in India. Section 18(5) requires every reference to be decided within ninety days from the date of making it. Section 19 protects the supplier against delaying appeals, and section 24 gives sections 15 to 23 overriding effect over inconsistent laws.

Key rules to remember

Who may refer (s.18(1))
Any party to a dispute → reference to MSEFC, for any amount due under section 17
Either supplier or buyer can refer. Section 17 deals with the buyer's liability to pay the supplier.
Two-stage procedure (s.18(2)-(3))
Reference → Conciliation (ss. 65-81 of the 1996 Act) → if unsuccessful and terminated, Arbitration (1996 Act applies as if under s.7(1))
The Council may act itself or refer to an ADR institution or centre at each stage.
Jurisdiction (s.18(4))
Supplier located within the Council's jurisdiction + buyer located anywhere in India
Location of the supplier decides which Council, not the buyer's location.
Time limit (s.18(5))
Decision within 90 days from the date of making the reference
Applies to every reference under section 18.
Pre-deposit (s.19)
Application to set aside decree, award or order: appellant (not being a supplier) must deposit 75% of the amount
Court will not entertain the application without the deposit. Pending disposal, the court orders a reasonable part of the deposit to be paid to the supplier.
Council size (s.21)
Members: minimum 3, maximum 5; Chairperson = Director of Industries or officer not below that rank
Established by State Government notification under section 20.
Overriding effect (s.24)
Sections 15 to 23 apply notwithstanding any inconsistent law
Covers the delayed payment and dispute resolution provisions.

How to solve MSEFC and Dispute Resolution questions

For any question on MSEFC, move from forum to procedure to outcome. Anchor each point to the section.

  1. 1Identify the parties and check the dispute concerns an amount due under section 17 to a supplier.
  2. 2Decide which Council has jurisdiction: the one where the supplier is located, whatever the buyer's location (s.18(4)).
  3. 3State who can refer: any party, supplier or buyer (s.18(1)).
  4. 4Describe stage one: conciliation by the Council itself or through an ADR institution, under ss. 65 to 81 of the Arbitration and Conciliation Act, 1996.
  5. 5If conciliation fails and terminates without settlement, describe arbitration by the Council or an ADR institution, with the 1996 Act applying.
  6. 6Apply the ninety-day limit from the date of reference (s.18(5)).
  7. 7If the buyer challenges the award in court, apply the 75% deposit rule of section 19.
  8. 8Mention section 24 if the question raises a conflict with another law, and conclude with a clear answer.

Quickest way: Forum-Process-Time-Appeal check

When to use it: Use for MCQs and short case questions where you must pick the correct statement quickly.

  1. Forum: State-level Council, 3 to 5 members, chaired by the Director of Industries or equivalent.
  2. Process: conciliation first, then arbitration only if conciliation fails.
  3. Time: 90 days from reference.
  4. Appeal: 75% deposit by a non-supplier appellant.
  5. Override: ss. 15 to 23 prevail over inconsistent laws.

Common mistakes in MSEFC and Dispute Resolution

  • Saying only the supplier can make a reference.

    The Act is meant to protect suppliers, so students assume only they can approach the Council.

    Fix: Section 18(1) says any party to a dispute may make a reference.

  • Jumping straight to arbitration.

    Students remember MSEFC as an arbitration forum.

    Fix: Conciliation comes first. Arbitration follows only when conciliation is unsuccessful and terminates without settlement.

  • Deciding jurisdiction by the buyer's location.

    In ordinary suits, the defendant's location often matters.

    Fix: Section 18(4) looks at the supplier's location. The buyer may be anywhere in India.

  • Applying the 75% deposit to any party that challenges the award.

    Students recall the percentage but not the exception.

    Fix: The deposit is required from the appellant who is not a supplier. It is a condition for the court to entertain the application.

  • Writing the Council has 90 days to conciliate only, or counting from the date of the dispute.

    Time limits are mixed up with the stages.

    Fix: The ninety days run from the date of making the reference and cover the decision on the reference under section 18(5).

  • Stating the Council's size and Chairperson wrongly.

    Numbers are memorised loosely.

    Fix: Remember not less than three, not more than five members, with the Director of Industries (or officer not below that rank) as Chairperson.

Worked examples

Example 1

Sharma Textiles, a small enterprise located in Surat, supplied goods to Eastern Retail Ltd, a buyer in Kolkata. Payment is overdue and the parties dispute the amount. Which Council can hear the dispute, and what is the procedure?

Show the solution
  1. Jurisdiction: under section 18(4), the Council acts for a supplier within its jurisdiction and a buyer located anywhere in India. The supplier is in Surat, so the Council with jurisdiction over Surat can hear it, even though the buyer is in Kolkata.
  2. Reference: under section 18(1), either party may make a reference for the amount due under section 17.
  3. Conciliation: the Council conducts conciliation itself or refers it to an ADR institution or centre, with ss. 65 to 81 of the Arbitration and Conciliation Act, 1996 applying.
  4. Arbitration: if conciliation fails and terminates without settlement, the Council arbitrates itself or refers to an ADR institution or centre. The 1996 Act applies as if there were an arbitration agreement under section 7(1).
  5. Time: the reference must be decided within ninety days from the date of making it (s.18(5)).

Answer: The Council with jurisdiction over Surat (the supplier's location) hears the dispute. It first attempts conciliation, then arbitration if conciliation fails, and must decide within 90 days of the reference.

Example 2

An arbitral award of ₹40,00,000 is passed in favour of a micro enterprise against a buyer company. The buyer applies to the court to set aside the award. What must the buyer do, and what happens meanwhile?

Show the solution
  1. Section 19 bars the court from entertaining the application unless the appellant, not being a supplier, has deposited 75% of the amount in terms of the award.
  2. Compute: 75% of ₹40,00,000 = ₹30,00,000.
  3. The deposit must be made in the manner the court directs.
  4. Under the proviso, while the application is pending, the court orders that a reasonable percentage of the deposited amount be paid to the supplier, subject to conditions it considers necessary.

Answer: The buyer must deposit ₹30,00,000 (75% of ₹40,00,000) before the court entertains the application. Pending disposal, the court directs part of the deposit to be paid to the supplier as it considers reasonable.

Exam tips

  • Learn the section numbers: 18 for reference, procedure and time limit; 19 for the 75% deposit; 20 and 21 for establishment and composition; 24 for overriding effect.
  • In case scenarios, check the supplier's location first. It decides the Council.
  • MCQs often test numbers: 3 to 5 members, 90 days, 75%. Revise them together.
  • In written answers, present the two stages in order and name the Arbitration and Conciliation Act, 1996 provisions that apply.

Practice questions from Specific Legal Provisions related to MSME Sector

MSEFC and Dispute Resolution in other exams

The same ground in other exams, if you are preparing for more than one or want another angle on it.

MSEFC and Dispute Resolution: frequently asked questions

Can a buyer also approach the MSEFC?

Yes. Section 18(1) allows any party to a dispute to make a reference regarding an amount due under section 17. It is not limited to suppliers.

Is conciliation compulsory before arbitration?

Under section 18, the Council first conducts or arranges conciliation. Arbitration follows when conciliation is not successful and stands terminated without settlement.

What is the time limit for deciding a reference?

Section 18(5) requires every reference to be decided within ninety days from the date of making the reference.

What does the overriding effect of the MSMED Act mean?

Section 24 says sections 15 to 23 apply notwithstanding anything inconsistent in any other law for the time being in force. If another law conflicts with those sections, those sections prevail.