How to Recover Business Dues From a Government Department or PSU

Can you actually recover dues from a government department or PSU?

Yes. A government that owes money under a contract can be taken to court, the Centre and the states alike. Article 300 of the Constitution is the source. The Union sues and is sued as the Union of India, and each state under its own name. Section 79 of the Code of Civil Procedure, 1908 follows from that. Your suit names the Union of India or the state concerned. Not the department. Not the officer. Supply and works contracts with government stay commercial, too. Under the Explanation to Section 2(1)(c) of the Commercial Courts Act, 2015, a dispute keeps its commercial character even when the state or one of its agencies is a party.

What's different is the procedure. Before you sue a government, you have to serve a notice under Section 80 of the Code and wait two months. Order XXVII of the Code gives the government some procedural room, and a decree against it can't be executed until three months have gone by. PSUs, municipal bodies and development authorities each play by slightly different rules. So your first job is to pin down exactly who owes you. Apart from these extra steps, the case is built like any other money recovery suit.

In our experience, the real obstacle usually isn't legal at all. Government bills get stuck in files. A measurement nobody recorded. A completion certificate never issued. A budget head that's run dry, or an audit objection sitting unanswered on someone's desk. Recovering from a department often begins with finding the file. Notices and courts come after.

Department, PSU or statutory body: who exactly owes you?

Writing a Section 80 notice that won't fall apart

Under Section 80(1), you can't file a suit against the government, or against a public officer over something done in his official capacity, until two months have passed since written notice was delivered to the right person or left at his office. Who's the right person? For the Central Government, a Secretary to the Government, except in railway matters, where it's the General Manager of the railway. For a state government, a Secretary to that government or the Collector of the district. The notice has to set out the cause of action, the relief you want, and your name, description and residence. Later, your plaint must state that the notice was delivered.

Two sub-sections added later take some of the edge off. Section 80(2) lets the court allow a suit without notice when urgent relief is needed, though it won't grant relief without hearing the government first. Section 80(3) stops a suit being dismissed merely for an error or defect in the notice. That protection holds if the notice identified you by name, description and residence, reached the right office, and substantially showed the cause of action and relief. One more thing in your favour. Section 15(2) of the Limitation Act, 1963 keeps the notice period out of the limitation count.

When Advocate B.K. Singh drafts a Section 80 notice for a contractor, he attaches a bill-by-bill schedule. Each bill's number goes in, with the date it was submitted, the date of measurement or acceptance, the amount passed, the deductions and the amount released. He also cites every departmental letter that admits the work or the dues. His thinking is simple. The notice will land in the dealing section. A bare demand gets a bare denial. A schedule tends to get a reconciliation, and once in a while, a payment. Our page on the legal notice for recovery covers notice drafting more broadly.

Municipal corporations and development authorities: a different notice?

Often, yes. Plenty of statutes that set up local bodies and authorities come with their own notice clauses. Two Delhi examples are Section 478 of the Delhi Municipal Corporation Act, 1957 and Section 53B of the Delhi Development Act, 1957. Both require two months' written notice before a suit over anything done, or purporting to be done, under the Act. Both also say the suit must be filed within six months of the cause of action, except suits about immovable property. You'll find similar clauses in other states' municipal and development laws.

Whether these clauses reach a plain claim for unpaid contract bills, as opposed to a claim about something done under statutory power, is something courts have decided differently on different facts. So play safe. Send the statutory notice and a regular legal notice both, and treat the shorter period as your real deadline until someone advises you it doesn't apply. Losing a claim for want of one letter is a painful way to learn the rule.

Before suing: what actually gets a file moving inside the system?

Begin with the office that owes you. Write to the Drawing and Disbursing Officer and to the head of office. Quote the contract, the bill numbers and the dates, and ask in writing what's pending and with whom. Keep it factual. No threats yet. A specific letter puts things on record, and it often flushes out the real reason, like a completion certificate that was never issued or a budget allocation that hasn't arrived.

If your letters go unanswered, use the Right to Information Act, 2005. Ask for the status of each bill, the file notings on it, the name of the officer it's pending with and the reasons it hasn't been paid. Under Section 7(1), the public information officer has to reply within 30 days. Quite often the reply shows the bill is complete and just waiting for one signature. That's gold for a notice, a writ or a suit. For Central Government bodies there's also the CPGRAMS online grievance portal.

Look at the dispute clause in your own contract. Works contracts tend to climb in rungs. The engineer-in-charge comes first, then a superintending engineer or a dispute resolution committee, and arbitration at the top. The Department of Expenditure, Ministry of Finance, put out guidelines in June 2024 urging negotiated settlement and mediation for public procurement disputes, with a high-level committee proposed for the large ones. GeM orders work on their own clock. Once the buyer issues the receipt and acceptance certificate, payment timelines start running, and sellers get an incident and grievance process. The terms differ over time, so check the ones that governed your order on the Government e-Marketplace (GeM).

PSU payment pending? Try the MSME Facilitation Council

Micro and small enterprises registered on the Udyam portal get real muscle from the Micro, Small and Medium Enterprises Development Act, 2006, and it works against government buyers as well as private ones. Under Section 15, the buyer must pay on the agreed date. That date can't be more than 45 days after it accepted your goods or services. With no agreement at all, it's the 15th day. Pay late and Section 16 kicks in. The buyer owes compound interest, with monthly rests, at three times the bank rate notified by the Reserve Bank of India. A civil court rarely gives you that much.

Section 18 lets you refer the dispute to the Micro and Small Enterprises Facilitation Council. The Council tries conciliation first and then arbitrates. You file online through the MSME Samadhaan portal. In Gujarat State Civil Supplies Corporation v Mahakali Foods (2022), the Supreme Court held that this route overrides an arbitration clause in the contract. That matters, because nearly every government contract has one. Courts have also said the supplier should be registered when the contract is made. Registration taken later may not help for earlier supplies. Limitation applies here as well (Silpi Industries v Kerala State Road Transport Corporation, 2021). If yours is a pure works contract, check the current position before going this way. Whether such contracts fall within the MSMED Act's delayed payment provisions has been fought over in the courts.

Against a PSU, Section 19 is the big one. A buyer that wants to challenge the Council's award in court has to deposit 75 percent of the awarded amount first. Public sector buyers that appeal almost by habit tend to think twice when three-quarters of the money has to go in upfront. Our guide comparing DIAC arbitration with the MSME Facilitation Council helps you choose between the two.

And if the contract has an arbitration clause?

Most government and PSU contracts have one, older works contracts especially. File a suit anyway and the department or PSU can apply under Section 8 of the Arbitration and Conciliation Act, 1996 to send the dispute to arbitration. The court will usually agree. So read the general and special conditions of contract before you pick a forum.

Two things have shifted lately. In November 2024, a Constitution Bench of the Supreme Court struck at clauses that let a public sector party name a sole arbitrator by itself, or that make the contractor choose from a list the PSU drew up. Such clauses, it said, break the rule of equal treatment of parties. The ruling governs appointments made after the judgment. Then there's the 2024 Finance Ministry advice that public procurement contracts shouldn't carry arbitration clauses as a matter of routine. Expect more new contracts to send disputes to mediation and the courts. Arbitration petitions under Sections 9, 11 and 34 are handled on our network site, arbitrationlawyer.in.

Writ petition or civil suit: which fits government dues?

Writs under Article 226 of the Constitution are filed directly in the High Court. They can move faster than a suit. They're a poor fit for disputed facts, though. The leading case is ABL International v Export Credit Guarantee Corporation of India (2004). There the Supreme Court allowed that a contractual money claim against the state or an instrumentality can be heard in writ, where the facts aren't seriously in dispute and the state has behaved arbitrarily. Even then, the High Court may tell you to go and file a civil suit. That discretion stays with it.

The textbook writ case is an admitted bill. The work's done, measurements recorded, the bill passed and sanctioned, and the money hasn't been released for a year or more with no reason given. The textbook suit case is a disputed bill, where the department says the work was defective, claims deductions or penalties, or argues over quantities. Don't sit on a writ, either. Long delay can sink it. If your claim has admitted and disputed parts, a writ for the admitted portion and a suit or arbitration for the rest is sometimes possible. Get advice before you split a claim, though.

Provisions that govern suits against the government

Recovering from a government department, step by step

1. Put the whole bill file together

   Collect the contract, work orders, measurement records, running and final bills, inspection or acceptance certificates, the completion certificate and every letter. Then draw up a bill-wise statement of what's due. Don't leave out retention money and the security deposit.

2. Find out where the bill is stuck

   Write to the paying office, and file an RTI application asking for the bill's status and file notings. If something's missing from your side, like a pending document, sort it out before you escalate.

3. Serve the Section 80 notice, plus any statutory notice

   Get the notice to the correct officer and keep proof of delivery. Serve any notice the authority's own statute demands as well. With a PSU company, a regular legal notice to its registered office and the contracting unit is enough.

4. Pick the forum

   Your options are a civil suit, the MSME Facilitation Council (if you're a registered micro or small supplier), arbitration under the contract, or a writ for admitted dues. Which one turns on the contract, your registration status and whether the dues are disputed.

5. Apply for Section 12A mediation where you'll sue

   For a commercial suit, apply for pre-institution mediation unless you need urgent relief. Government bodies do take part, and the 2024 Finance Ministry guidelines encourage them to settle.

6. File once the notice period is over

   File after the two months under Section 80 have passed, and say in the plaint that notice was served. If the contract or an acknowledgment fixes the amount, see whether a summary suit is possible. Our guide on summary suits against a government body explains when that works.

7. Get to decree, then execute

   Push the suit through pleadings, case management and evidence. After the decree, let the three months under Section 82 run, then apply for execution, usually by attaching funds held for the department. Our page on execution of decree has the detail.

How long each stage takes and what it costs

Where do you file against a department or PSU?

Section 20 of the Code governs territorial jurisdiction. Against the Union or a state, the safest anchor is where the cause of action arose. That could be where the contract was awarded or signed, where the supplies went or the work was done, or where the bills were payable. Take a contract awarded by a Delhi office for work at a Ghaziabad site, with bills paid from Delhi. Both places may have jurisdiction. The contract may also have a clause choosing one. Our guide on filing a recovery suit when the debtor is in another city explains how courts weigh such facts.

A PSU set up as a company gets no special handling. The Explanation to Section 20 applies to it as it would to any corporation. So if your claim arose where the PSU keeps a regional office or unit, that's where you file, and its corporate office in another city doesn't come into it. Then value. Claims of Rs 3 lakh or more are commercial suits. Delhi sends those up to Rs 2 crore to the District Judge (Commercial Court), and anything bigger to the Commercial Division of the Delhi High Court. That limit may change, so check it. Writs are different. Under Article 226(2), you go to the High Court in whose territory the cause of action arose, wholly or in part.

Papers to collect for a claim against a government buyer

How contractors and suppliers lose good claims

• Notice to the wrong officer, or no notice at all. A suit against the government filed without a valid Section 80 notice, and without leave under Section 80(2), can be rejected. Writing to the local executive engineer isn't notice to a Secretary.
• Letting limitation run while the file crawls. A pending file doesn't stop the clock. A departmental letter restarts it as an acknowledgment under Section 18 of the Limitation Act only if it admits liability. One saying the matter is 'being examined' may not count. Our guide on the time limit for recovering unpaid dues explains how it works.
• Signing a no-claim certificate and saying nothing. Offices sometimes want a no-claim or no-dues certificate before they'll release the final payment. Courts have accepted that a certificate signed under economic pressure doesn't always kill the claim, but you have to be able to prove the pressure. Advocate B.K. Singh tells contractors in this spot to send a protest letter the same day. It should record that the certificate was signed only to get the admitted dues released, and that every other claim is reserved.
• Forgetting retention money and the security deposit. Together they're often bigger than the last bill, and they get left out of notices all the time. Our guide on recovering retention money deals with them.
• Suing the officer personally. A suit for contract dues lies against the Union, the state or the body. Not against the officer who sat on your payment, unless he acted outside his official capacity.

What to do this week about a stuck government bill

Put together the bill-wise statement and the file. Send the paying office a specific written query. If nothing comes back in a reasonable time, file an RTI application. Compare your Udyam registration date with the contract date. Read the dispute clause. Then work out how much of the three-year limitation is left on your oldest bill. If time's short, serve the Section 80 notice now. The two months won't count against limitation.

Think about interest from day one. On old government dues it can be a big slice of the claim. Courts can award interest under Section 34 of the Code, and registered micro and small suppliers get the higher statutory rate under the MSMED Act. Our guide on how much interest you can claim on unpaid dues explains both. When talks and notices get you nowhere, the money recovery suit is still the general route, and that page sets out its stages.

Want your contract, bills and letters with the department looked at before you choose between a notice, the MSME Council, a writ and a suit? Share them with Advocate B.K. Singh's team through the contact page.