Debt Recovery4 July 2025By Lexworth Law
Each year, small and mid-sized businesses quietly lose lakhs in unpaid dues — not because their invoices are invalid or their customers refuse to pay, but because the legal window to enforce payment quietly closes.
And this isn't just a handful of companies. Outstanding receivables have long been a quiet crisis in the world of small and mid-sized enterprises. Year after year, SMEs close their books with lakhs in unpaid invoices — many of them several years old. Companies often carry forward old dues in the hope of eventual settlement — unaware that after a certain point, the law may no longer be on their side. Because the diminishing chance at recovery isn't just about a defaulting customer. It's also about the law. Specifically, the Limitation Act, 1963.
Here's the bigger picture: according to CRISIL, average debtor days for Indian SMEs rose to 116 days in 2023, a clear sign of deteriorating collection cycles. The IFC estimates India's MSME credit gap to exceed $240 billion, much of which is locked in old unpaid invoices.
The irony in all of this is too hard to ignore. Many of these amounts are never recovered — not because they aren't genuine, but because the legal right to enforce them expires by the time anyone realises it's already too late.
What the Limitation Act Says
The Limitation Act prescribes a three-year period to bring a legal claim for unpaid dues under a contract. This period typically begins from the date payment becomes due. Cross that deadline, and even if the dues are legitimate, the right to enforce them may be extinguished in law.
But the Act offers lifelines. Sections 18 and 19 provide a way to renew limitation:
- Section 18: If the debtor acknowledges the debt in writing and signs it before the three years expire, a new three-year clock starts from that acknowledgment.
- Section 19: If any part-payment is made within the three-year window, the limitation restarts from that date.
These options, available to operational creditors under the same Limitation Act, are terribly underused — not because they're obscure, but because businesses rarely think about them when there's no immediate dispute.
What Courts Have Said: A Jurisprudential Snapshot
Over the years, courts have expanded on what acts actually constitute "acknowledgment" and "part-payment."
- In Mahabir Cold Storage v. CIT, the Supreme Court held that entries in a company's balance sheet can amount to valid acknowledgment under Section 18.
- Food Corporation of India v. Assam State Co-op. Marketing (2004) reaffirmed that mere negotiations or verbal assurances are not sufficient to stop limitation.
To add to this, recent High Court judgments have even treated WhatsApp chats and signed emails as acknowledgments — provided the sender's identity is clear and the communication is within time.
That said, the courts have been cautious. Acknowledgments after the limitation has expired offer no help. And vague, unsigned, or indirect statements don't make the cut as acknowledgment either.
The Risk of Dormant Dues
Most SMEs chase payments informally — calls, gentle reminders, emails. But few bother to get a signed email or confirmation of balance from the debtor, or even a small token part-payment. Without those, the clock quietly expires in the background.
Consider this illustration. A vendor supplies goods worth ₹5 lakhs to a client in January 2020. The invoice clearly states a 30-day credit period. The goods are accepted without dispute, but the payment never comes. The vendor sends a few reminders, even speaks to the client informally, but nothing is put in writing. No legal action is initiated. Fast forward to January 2023 — exactly three years have passed. Under the Limitation Act, 1963, the vendor's right to sue for recovery of the unpaid amount has now expired.
For most commercial transactions involving the supply of goods or services, the law provides a 3-year window from the date the payment becomes due. If no payment is made and no written acknowledgment is obtained within that period, the debt becomes time-barred. Even if the vendor is morally or contractually owed the money, the court will refuse to entertain a claim filed too late.
Had the client made a part-payment any time before January 2023, or acknowledged the debt in writing (email, WhatsApp, letter, etc.), the limitation period would have restarted from the date of that payment or acknowledgment. But in the absence of either, the vendor loses not only money but also the legal remedy to recover it.
This is not an isolated case. In industries like logistics, retail, wholesale trade and manufacturing, it is common to extend credit on trust or with informal terms. Unfortunately, that leaves businesses exposed to silent defaults, tolerated delays, and inaction due to lack of awareness about legal timelines. What begins as a business risk turns into a permanent loss simply because no one flagged the limitation deadline.
No, the MSMED Act Doesn't Override Limitation
Many MSMEs registered under the MSMED Act, 2006 assume that registration offers blanket protection when recovering delayed payments. The Act does offer a statutory mechanism for dispute resolution through facilitation councils and entitles the supplier to compound interest on delayed payments.
However, this protection comes with a caveat: the MSMED Act does not override the Limitation Act when it comes to the enforceability of claims. Several High Courts — including Bombay, Delhi and Madras — have clarified that while the MSMED framework provides a faster, alternate route for resolution, it does not extend or suspend the limitation period under general civil law. Even a claim before a Facilitation Council must be brought within the standard three-year window, unless kept alive through a valid written acknowledgment of debt, or a part-payment toward the outstanding amount.
Failing either of these, even an otherwise valid claim under the MSMED Act can be dismissed as time-barred. Registration under the Act gives you tools — but not a time extension.
Limitation Risk Audit: A 3-Step SME Checklist
- Step 1 — Age your invoices. Use accounting tools to identify all receivables older than 24 months.
- Step 2 — Get something in writing. Email the client for a confirmation of balance — even a single-line reply can be enough under Section 18.
- Step 3 — Encourage token payments. Ask for a small part-payment (even ₹1,000) — it resets the clock under Section 19.
A sample acknowledgment might read: "We acknowledge the outstanding dues of ₹4,10,000 towards invoices raised between Jan–Mar 2021. We're working to release payment shortly." — to be sent on email or letterhead, with date and signature.
In Conclusion
The Limitation Act isn't designed to punish businesses — it exists to bring legal certainty and closure. But in the high-pressure world of SMEs and startups, critical deadlines often slip through the cracks, and when they do, what was once a recoverable debt quietly becomes a lost legal right.
At Lexworth, our advice to clients has consistently focused on building systems, not just reactions. We encourage businesses to regularly audit and track receivables, especially those nearing the 2.5–3 year mark; to maintain legally valid acknowledgments or part-payment records when granting extensions; to issue timely, properly worded demand and recovery notices that interrupt or reset limitation clocks; and, when necessary, to defend against stale, time-barred claims that can no longer be enforced in law.
The key is not to fear the limitation period — but to respect it. By staying legally alert and proactively managing your receivables, you protect not just your cash flow, but your legal leverage.
This note is for general information only, may reflect the law as it stood at the date of writing, and does not constitute legal advice. For advice on a specific situation, please seek independent counsel.
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