Can an MSME Get Interest Even If the Contract Says No Interest?

Does a no-interest clause stop an MSME's interest claim?

No, provided two things are true: you're a micro or small enterprise on Udyam, and the buyer paid late. Section 16 of the Micro, Small and Medium Enterprises Development Act, 2006 (we'll just say the MSMED Act) puts it plainly. A buyer who misses the time Section 15 gives must pay compound interest, with monthly rests, at three times the bank rate the Reserve Bank of India notifies. Then read the first words of that section: 'notwithstanding anything contained in any agreement between the buyer and the supplier or in any law for the time being in force'. That line in the purchase order, 'no interest shall be payable on delayed payment', is exactly the sort of term it was drafted to knock out.

Section 24 adds weight. It says Sections 15 to 23 have effect notwithstanding anything inconsistent in any other law. So the statutory right sits above your contract, and above general law too. In most cases the question is answered before anyone even opens the purchase order. On interest and on the credit period, Section 16 wins.

But being paid late doesn't automatically mean you'll collect. You have to be inside the Act. The payment has to be late the way the Act measures lateness, not the way you feel about it. You have to claim in time, and you mustn't have given the interest up in a way the law will respect. That's where the real fights happen. We take them one at a time below.

The sections that put Section 16 above your contract

What 'notwithstanding anything contained in any agreement' really does

Lawyers call it a non obstante clause, from the Latin for 'notwithstanding'. Its job is simple. If the contract points one way and the statute another, the statute wins. Parliament put it there because it knew who drafts the purchase order, and it's never the small supplier. The big buyer sends its standard terms. The supplier signs, or just starts supplying, and those terms nearly always favour the buyer on credit and interest. Section 16 takes that one subject off the table.

There's an older rule pointing the same way. Section 23 of the Indian Contract Act, 1872 makes an agreement void if its object or consideration would defeat the provisions of any law. A clause that exists only to switch off a statutory interest duty is hard to defend under that section as well. You'll rarely need it. The MSMED Act does the work by itself. Still, it's good to know that ordinary contract law gives the buyer no help either.

What the non obstante clause doesn't do is rewrite the rest of your contract. Price, specifications, delivery terms, inspection, warranty: all of that stays as agreed. Section 16 deals only with what happens when payment is late. So when you sit down with the purchase order, split it in two. Clauses on interest and credit period are overridden. Clauses on acceptance and quality aren't, and they can still decide the day interest starts.

Clauses that fall away, and clauses that still bite

• A flat 'no interest on delayed payment' clause. Doesn't survive against a supplier who qualifies. Interest runs at the statutory rate from the due date the Act fixes.
• A cap or a lower rate, say 9 percent simple. Fails to the extent it gives you less than Section 16. The statute sets the rate and the monthly compounding, both.
• Credit of more than 45 days. Cut down to 45 days from acceptance. Interest starts the day after day 45. Not day 90, not day 120.
• Pay-when-paid or back-to-back wording. 'We'll pay you once our client pays us' doesn't push back the due date under Section 15. Under this Act the buyer's cash flow is the buyer's headache.
• Inspection, acceptance and rejection clauses. These still count. If the buyer rejects goods in writing within 15 days of delivery, acceptance moves to the day the defect is cured, and interest on those goods starts later.
• Retention and milestone clauses. They can matter too, because they decide when a particular amount became payable in the first place. Retention released after a defect liability period falls due from the release date in the contract, still inside the 45-day ceiling.
• Set-off and liquidated damages. They don't cancel interest. What a buyer does with them is argue that the principal was smaller, so have an answer ready for each deduction.

Who's protected, and who isn't

The protection belongs to a 'supplier' in the Act's sense, and nobody else. Read that as a micro or small enterprise that has filed its memorandum, which these days means Udyam registration. Medium enterprises sign up on the same portal, but Chapter V doesn't cover them. If you're medium, your contract's interest clause generally stands and you claim under ordinary law. What counts as micro or small? Under the limits in force from 1 April 2025, a micro unit can have up to Rs 2.5 crore invested and up to Rs 10 crore turnover. A small one goes up to Rs 25 crore and Rs 100 crore.

Expect the registration date to be the buyer's main battle. The Supreme Court, in Silpi Industries v. Kerala SRTC (2021) and again in Gujarat State Civil Supplies Corporation v. Mahakali Foods (2022), said the benefits for a contract go only to a supplier who was registered on the day it was made. Then a two-judge bench, in NBCC (India) Ltd v. State of West Bengal (January 2025), took a wider view and sent the issue up to a larger bench. Relying on NBCC, the Delhi High Court in October 2026 allowed a Council reference to proceed even though registration came late. It's unsettled. Until the larger bench rules, read our guide on whether Udyam registration after the contract still helps before you lean on it.

Traders are the other grey area. Retail and wholesale traders were let onto Udyam in 2021 for priority sector lending, and several High Courts have said that doesn't open the Council route to them. If you mostly buy and resell, first look at whether a trader can use the Facilitation Council. Service providers are clearly covered. So are manufacturers and job workers.

Can you give up the interest later?

Timing is everything here. A clause signed before any supply, sitting in the buyer's standard terms, is overridden by Section 16. A settlement struck after the dispute has started is a different animal altogether. Say a supplier knows exactly what it's owed, sits down with the buyer, and agrees to take the principal plus a smaller sum in full and final settlement. That's a compromise of an existing claim. Courts generally respect a genuine compromise like that, on the ordinary principle of accord and satisfaction (an agreed settlement that discharges the old claim). The Act stops the buyer contracting out of interest in advance. It doesn't stop you settling a dispute.

The awkward cases sit in the middle. Some buyers won't release a payment until you sign a no-claim certificate, or a letter saying nothing further is due. In National Insurance Co. v. Boghara Polyfab, decided in 2008, the Supreme Court accepted that a discharge signed under coercion or economic pressure doesn't necessarily end the claim. The party alleging pressure has to prove it, though. So if you sign one of these, put the pressure on record that same day, in an email. Don't wait a year to complain.

Paying the principal late doesn't wipe out the interest either. In SRK Metals and Plastics v. State of Assam (2026), the Gauhati High Court held that a supplier's interest claim couldn't be brushed aside just because the principal was paid while the case was on. Advocate B.K. Singh gives every MSME client the same small tip. Whenever a part payment comes in, or you're asked to sign something to get one, write back the same day that you accept it 'without prejudice to our claim for interest under Section 16 of the MSMED Act'. One line. It has saved more interest claims than any argument we've made later.

Does the arbitration clause or the contract rate matter before the Council?

Before the Facilitation Council, no. In Mahakali Foods (2022) the Supreme Court held that Chapter V of the MSMED Act overrides a private arbitration agreement once a supplier makes a reference under Section 18. The Council then applies the Act, Section 16 included. The section fixes the rate and gives the Council no discretion to pick a lower one. At conciliation, of course, the two sides can agree any settlement they like.

It gets messier outside the Council. Say the supplier bypasses it and invokes the arbitration clause in the contract. In some cases, Shristi Infrastructure Development v. Scorpio Engineering (2025) among them, the Delhi High Court has treated Sections 15 and 16 as a substantive right that an arbitral tribunal can apply. But in Idemia Syscom India v. Conjoinix Total Solutions (2025) the same court hinted that where the parties picked contractual arbitration and never used Section 18, the right may not apply on its own. If interest is a big part of what you're owed and you still have a choice of forum, that doubt alone points to the Council.

In a civil suit you can plead Section 16 interest. Expect the buyer to push for the ordinary rule under Section 34 of the Code of Civil Procedure, where interest is at the court's discretion. The commercialcourtlawyer.com guide on interest in a recovery suit shows how courts handle it. And at the NCLT? In SNJ Synthetics v. PepsiCo India Holdings (2025), the NCLAT refused to count Section 16 interest toward the insolvency threshold where the contract had no interest clause. Our note on when an MSME can go to insolvency instead of the Council covers that route.

Claiming the interest when the contract shuts it out

You can do the first four steps yourself in about a week. What happens after that depends on the buyer.

1. Check that the Act covers you

   Pull out your Udyam certificate and note the registration date and category. Put it next to the date of the purchase order, rate contract or work order behind each unpaid invoice. Any invoice raised under a contract older than your registration goes in a separate pile.

2. Mark up the clauses the Act overrides

   Take a marker to the no-interest clause, any cap, the credit period and any pay-when-paid wording. Use a different colour for the inspection and rejection clauses. Those can still shift your start date.

3. Work out each invoice's due date

   Acceptance is normally the day of delivery or service, unless the buyer raised a written objection within 15 days. Add the agreed credit period, but never more than 45 days. Nothing agreed in writing? Use 15 days. Interest starts the following day.

4. Prepare the interest sheet

   Use three times the bank rate in force for each month, compounded monthly, and knock off every part payment on the date it came in. The method is shown in our worked example on how to calculate MSME delayed payment interest.

5. Send a demand that cites Section 16

   Write to the buyer with principal and interest shown separately and the sheet attached. Add a sentence saying Section 16 applies notwithstanding the clause in its purchase order. Ask for payment, or a written reply, within 15 days.

6. Take it to the Facilitation Council

   If the money doesn't come, file a Section 18 reference online. The guide to filing an MSME Samadhaan complaint online goes through the form screen by screen. Claim interest up to the filing date, and further interest until payment.

7. Stand firm in conciliation, or settle on your own terms

   At the first sitting the buyer will read out its clause. You answer with Sections 16 and 24 and Mahakali Foods. If you accept less, make it a deliberate business call recorded in writing. Never give ground just because someone read a clause aloud.

If it goes on to arbitration before the Council, the award will normally direct interest at the Section 16 rate until payment. A buyer that wants to challenge it has to deposit 75 percent of the awarded amount first, under Section 19.

Time and money at each stage

Papers that beat a no-interest clause

The buyer's usual arguments, and the answers

First comes consent. 'You signed the purchase order, so you agreed to no interest.' But Section 16 works notwithstanding any agreement, so whether you agreed is beside the point. Then the commercial argument: the price assumed long credit, and interest would hand you a windfall. Parliament heard that one already. It answered by capping credit at 45 days.

The third argument is conduct, and it's the one to take seriously. Five years of dealing, never a rupee of interest charged, never an interest invoice raised, every late payment taken without protest. Sometimes this works. Not because a supplier can be estopped from relying on a statute, but because years of silence give the buyer room to say a later settlement covered everything. When Advocate B.K. Singh reads a buyer's reply in these matters, he first splits the arguments into two heaps: those attacking the debt, and those attacking only the interest. If the buyer doesn't dispute the principal and argues only about its clause, the reply is weaker than it looks. You can say exactly that at the first conciliation sitting.

Fourth, limitation. Interest can't bring a time-barred claim back to life. In Sonali Power Equipments (2025), the Supreme Court held that conciliation can go ahead on an old claim, but the arbitration stage is subject to the Limitation Act. Test each invoice using our note on the time limit for an MSME delayed payment claim.

The contract names another city. Where is the claim heard?

The Council of the supplier's own state hears it. That's you. Section 18(4) says so, and the Supreme Court held in Harcharan Dass Gupta v. Union of India (May 2025) that this statutory rule beats a seat of arbitration fixed by contract. A Bawana or Okhla unit files before the Delhi Council, even if the buyer's terms insist that 'courts at Mumbai alone shall have jurisdiction'. If the award is challenged, the challenge goes to the courts that have jurisdiction over that Council.

Got units in more than one state? Usually it's the unit that made the supply, and that appears on the Udyam record, that decides it. See which Council has jurisdiction. If the buyer sits in another state, the practical side of notices and enforcement is in our guide on recovering dues from a buyer in another state.

How it plays out for different suppliers and buyers

• Manufacturers supplying goods. The cleanest case there is. The delivery challans fix acceptance, and once you're registered the no-interest clause counts for nothing.
• Service providers and IT vendors. Same right, but proving acceptance is harder. Hold on to sign-off emails, approved timesheets and milestone certificates. The buyer will say it never accepted the service.
• Job workers. You get interest on the job charge you billed, not on the value of the buyer's own material. Make that obvious in your sheet.
• Works contractors. Whether a composite works contract falls under the Act has been argued in several courts. Take advice before you build a large construction claim on Section 16.
• Suppliers to PSUs and government departments. Tender conditions often rule out interest. The Act binds them as buyers just the same. Expect a long reply, though, and a Section 34 challenge to any award.
• Medium enterprises. Sorry, Section 16 won't help you. The contract's interest clause generally decides it, subject to what a court awards under ordinary law.

If you're the buyer, what should you do about your clause?

Stop relying on it for micro and small suppliers. Keeping it in your standard terms gets you nothing against a registered supplier, and it lulls your accounts team into thinking they're safe. The interest you owe has to appear in your audited accounts under Section 22. It can't be deducted for income tax under Section 23. And late payments also affect the deduction for the underlying expense under Section 43B(h) of the Income-tax Act, 1961, and the matching rule in the new Income-tax Act, 2025.

Companies owing micro or small suppliers for more than 45 days also have to report those dues to the Registrar of Companies in a half-yearly return, which we explain in our note on MSME Form 1. A supplier's lawyer often looks for those filings first. They can work as an admission. The real fix is boring. Pick out MSME vendors by their Udyam numbers and pay them within 45 days. If a claim has already landed, our guide on how a buyer can settle an MSME claim without paying full interest sets out the realistic options.

Your to-do list for this week

Find your Udyam certificate. Then gather the purchase orders behind each invoice that's unpaid or was paid late. One colour for the interest and credit clauses, another for acceptance and rejection. Write out every invoice with three dates against it: delivery, any written rejection, and the day the money really reached you. If you ever signed a no-claim letter, dig it out along with the emails from that week. Then do the interest sum, or have your accountant do it, following our note on when an MSME can claim interest at three times the bank rate.

Don't sign anything new in exchange for a payment unless it carries the Section 16 reservation line. And don't let the clause in the buyer's terms talk you out of claiming. For a supplier who qualifies, it's usually the weakest part of the buyer's case.

Want someone to look over your purchase orders, payment history and interest sheet before you send a demand or file a reference? Or to hear when the law on registration and interest moves? Share your papers with Advocate B.K. Singh's team through the contact page.