Insolvency Amendment with respect to MSMEs

Author: Vidisha

India was dealing with very complex insolvency and restructuring procedures of corporate entities, partnership firms, and individuals which was fragmented across multiple legislations, resulting in delays in the timely resolution of the distressed entities.

Insolvency and Bankruptcy Code was introduced to consolidate and amend the laws relating to reorganizing and insolvency resolution of corporate worlds with the sole intention to remove the asymmetry between stakeholders and the company and preserve the interest of stakeholders. Provision enshrined under IBC provides a comprehensive framework for Resolution of Insolvency and Bankruptcy of Corporate persons, LLP, Individuals, Partnerships, and Sole Proprietorship Firms and MSMEs in a time-bound manner for maximization of value of assets.

MSMEs are the fulcrum of the Indian economy contributing about 30% of the country’s GDP. MSMEs are enterprises with an annual turnover of up to Rs 250 crore, and investment in plant and machinery or equipment up to Rs 50 crore. Micro, Small & Medium Enterprises Development Act, classifies MSMEs into two classes, namely, Service and Manufacturing which engage in providing services and manufacturing of goods respectively. These small businesses are intertwined with the rural economy that helps in the industrialization of these areas with a low capital cost. They are the source of employment for the entrepreneurs and provide them with loans and other supports.

Provisions of MSMEs under IBC

Sec 29A of the IBC provides for the persons who are ineligible to be Resolution Applicants and thus, forms an important criterion of eligibility to submit a Resolution Plan. This provision grants exemption to corporate debtors which are MSME(s), by permitting a promoter who is not a wilful defaulter or covered under any other specific disqualification provided under Section 29A.

Section 240A gives power to the Central Government to notify any non-application or modification of provisions under the Code to MSMEs. This protection and preservation of rights in the case of MSMEs will encourage entrepreneurs to enter and continue with their business by eliminating their fear of being insolvent.

In the case of Swiss Ribbon v UOI, it was observed by the Supreme Court that Section 240A provides a legitimate opportunity to a Resolution Applicant while making sure that the other prohibitions under Section 29A would continue to apply to all the corporate entities, thereby protecting the sanctity & intent behind the insertion of the Section, and the Code as an extension.

Amendments concerning MSMEs:

The economic hardship caused by Covid 19, lead to widespread disruption of small and medium businesses. As many went to liquidity crunch others faced maximum heat of this distress. Intrastate lockdown provisions and restrictions had interrupted the predictable cash flows leading to all-around uncertainty in business. To safeguard the interest of defaulters, the government has tried to mitigate the loss by promulgating the IBC amendment ordinance 2021. The ordinance focuses on outstanding debts and provides some respite to MSMEs. However, the amendment of 2018 encouraged the preservation of more MSMEs by exceeding Resolution plans for operational creditors i.e. MSMEs. But the short gapping of this amendment was that MSMEs were placed fourth in case of insolvency, leaving them very little to trickle down.

Amendment carried out in ordinance introduces alternative solvency process for MSMEs called as Pre-packaged insolvency resolution process which can be initiated by debtors with a base resolution plan under the Swiss Challenge Model. Sec 4 of the amended code states the minimum default amount to initiate PIRP to be at least 1 lakh rupees while giving the Central government power to increase the threshold of minimum default up to one crore rupees through a notification. The debtors must also propose a name of Resolution Professional, approved by 66% of Financial Creditors. The approved resolution plan by a committee of creditors will be examined by NCLT to approve or terminate within 30 days of receipt. A Moratorium will be provided to the debtor including filing or continuation of suits, execution of court orders, or recovery of property which will prohibit certain actions against the debtor. During the PIRP, if there has been fraudulent conduct or gross mismanagement Sec 77A of the code provides punishment to corporate debtors.

Conclusions and Findings:

With the introduction of PRIP Government has tried with bonafide intention to safeguard the interest of MSMEs. The Ordinance 2021 provides relief to the prolonged period of stress to MSMEs. Scrapping the hectic procedures during this wrecking pandemic with efficient practices would leverage the MSMEs against powerful corporates.For many people who are unemployed because of this pandemic, some up-gradation in the MSMEs sector will generate employment opportunities at a comparatively low cost for them.MSMEs have been undeniably the most important part of the Indian economy and allowing this mild recovery to MSMEs would help in bringing back the economy which has been drastically contracted.


Edited by Rangarajan R, Editor-in-chief, Lawgic Stratum

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