Recovering an Unpaid Invoice in India: The MSME Samadhaan Route, the Demand Process and What to Fix in Your Contracts

Late payment is the Indian SME's standing problem, and the law has given registered micro and small enterprises a route that larger businesses do not have. This guide sets out the sequence for recovering an unpaid invoice, from the first reminder to the Facilitation Council or arbitration, and the contract terms that shorten it next time. Position as of October 2026.

Step 1: Check the contract and the invoice

Before any formal step, confirm: the agreed payment term and its start date (invoice date or acceptance); that the invoice is compliant (GST, e-invoice where required, PO reference); that delivery or acceptance is documented; and whether the contract has an interest clause, a dispute clause and a notice clause. Recovery fails more often on paperwork than on law.

Step 2: If you are a registered micro or small enterprise

The MSMED Act, 2006 gives you three things:

• A statutory payment deadline. Section 15: the buyer must pay by the agreed date, and the agreed period "shall not exceed forty-five days from the day of acceptance or the day of deemed acceptance"; with no written agreement, within fifteen days.
• Statutory interest. Section 16: compound interest with monthly rests at three times the bank rate notified by the RBI on the amount from the appointed day or agreed date.
• A forum. Section 18: a reference to the Micro and Small Enterprises Facilitation Council (MSEFC) of the state, which first attempts conciliation and, failing that, decides the dispute by arbitration under the Arbitration and Conciliation Act, 1996; the Act requires references to be decided within ninety days of the reference. The buyer's appeal against an award requires deposit of 75% of the awarded amount (section 19). References are filed online through the MSME Samadhaan portal with the Udyam registration. ****

The buyer, meanwhile, loses its income-tax deduction until it pays (section 43B(h) of the Income-tax Act, 1961) and must disclose MSE dues in its accounts (section 22 of the MSMED Act), which is often the lever that gets a call returned.

Step 3: If you are not an MSE

• Demand process. A reminder at due date; a formal demand with the contract's interest after 15 days; a notice invoking the dispute clause after 30 days. Send each as the notice clause requires and keep the dispatch record.
• Dispute clause. If the contract provides arbitration, invoke it (section 21 of the Arbitration Act: proceedings commence on the request's receipt); if not, a summary suit for a liquidated sum under Order XXXVII of the Code of Civil Procedure, 1908 is the usual court route for invoices, and commercial courts handle disputes above the specified value with pre-institution mediation under section 12A of the Commercial Courts Act, 2015 unless urgent relief is sought.
• Limitation. Three years from when the amount fell due, under the Limitation Act, 1963; an acknowledgment in writing before expiry restarts the period (section 18 of the Limitation Act).

Step 4: Cheque dishonour

If the buyer paid by cheque and it bounced, section 138 of the Negotiable Instruments Act, 1881 makes dishonour for insufficiency of funds an offence if: the cheque was presented within its validity; the payee gave written notice demanding payment within thirty days of receiving the bank's return memo; and the drawer failed to pay within fifteen days of receiving the notice. The complaint must then be filed within one month of the cause of action. The timelines are strict; calendar them from the return memo.

What to fix in your contracts

• Payment term stated in days from a defined event (invoice receipt or acceptance), with the MSE 45-day cap where it applies.
• Interest on late payment at a stated rate (for MSEs, section 16 applies regardless).
• Invoice requirements and a dispute-notification window (the buyer must dispute within, say, 7 days or the invoice is deemed accepted).
• A notice clause with addresses and deemed receipt.
• A dispute clause with a seat and a sole arbitrator for speed.
• Place of execution and stamping, so the agreement is admissible when you need it (section 35, Indian Stamp Act, 1899).

Keep the evidence together

The contract with its stamp certificate and signature audit trail, the PO, delivery and acceptance records, the invoice and e-invoice, the reminders and demands with dispatch logs. Electronic records are proved under section 63 of the Bharatiya Sakshya Adhiniyam, 2023; a platform that can export the whole record for one invoice saves weeks.

Where Legatio fits. Legatio holds the contract, its execution record and its payment obligations, flags MSE invoices approaching day 45, and generates and dispatches demand notices with delivery logs. The recovery route is a decision with your adviser.

Position stated as of October 2026. General information, not legal advice.