IBC: These 3 provisions can be potential threat to MSMEs unless government takes this key step

Updated: March 25, 2020 12:19 PM

Ease of Doing Business for MSMEs: One may indisputably note that in the context of the prevailing mechanism under IBC, there are several inherent yet critical issues which would inevitably affect the MSMEs’ operations.

MSMEs would virtually find it impractical to recover their full dues from the corporate debtor under the resolution plan.
  • By Harish Kumar

Ease of Doing Business for MSMEs: Micro small and medium enterprise (MSME) — a sector employing about 111 million people, and contributing about 48 per cent and 28 per cent to India’s export and GDP respectively, unquestionably has been a backbone of Indian economy. In fact, having recognized the practical challenges MSMEs have been confronting with, the government has taken numerous steps in the recent past to address such concerns. However, evidently, one of the critical areas where further constructive steps may be taken for MSMEs is the Insolvency & Bankruptcy Code, 2016 (IBC). One may indisputably note that in the context of the prevailing mechanism under IBC, there are several inherent yet critical issues which would inevitably affect the MSMEs’ operations (of which about 97 per cent constituents are sole proprietors and partnership firms) if they are subject to the said mechanism as per its extant framework.

For instance, MSMEs (essentially classified as ‘unsecured operational creditors’ under IBC) would virtually find it impractical to recover their full dues from the corporate debtor (being referred to IBC process) under the resolution plan, or as per waterfall mechanism in the event, the corporate debtor is ordered to be liquidated for want of a workable resolution plan. Remarkably, the Federation of Indian Micro Small Medium Enterprise had recognized that the prevalent recovery process under IBC is one-sided as the MSMEs get nothing if their buyer undergoes IBC. In its pre-budget presentation to the Finance Minister, it had requested to create a separate sub-category of MSMEs within the operational creditors and accord the MSMEs with special rights of recovering full payment due against the corporate debtor facing corporate insolvency resolution process (CIRP) or liquidation.

Also read: FM Sitharaman rescues MSMEs from insolvency proceedings amid Coronavirus; raises default threshold

Other such practical concern is the finalization of a feasible resolution plan for an MSME (being a corporate debtor under CIRP), which plan may reasonably be forthcoming and viable in case the promoters of MSMEs are given a fair opportunity for participating in the resolution plan. Section 240A of IBC (as introduced recently) has dispensed with certain in-eligibility norms for promoters as referred to in Section 29A (in case the corporate debtor is an MSME). Nevertheless, it may be considered to re-look the scope of amended Section 29A to assess if further relaxation may be provided to the promoters who are not willful defaulter but are subject to Section 29A due to bona fide reasons beyond their control. Evidently, while the IBC is still in its evolving stage, yet the courts including the Apex Court and NCLAT, in numerous cases, have started interpreting the relevant provisions of IBC liberally, if the corporate debtor is an MSME.

Speedy yet cost-effective resolution under IBC is yet another aspect most of the MSMEs are concerned about. Considering the amount of debt, the recovery rate as well as the time taken to realize the amount, the cost incurred in recovery proceedings is a considerable factor for MSMEs to decide whether to pursue such debt through IBC route. Potentially, an enabling provision allowing the MSMEs to go for out-of-court settlement (such as through mediation) may address such concern. Evidently, the RBI’s Report of the Expert Committee on MSMEs has also recommended that due to lack of sophistication on the part of MSMEs, IBC should provide for out-of-court assistance to MSMEs such as mediation, debt-counselling etc.

Thus, a quick look of IBC provisions in the backdrop of MSMEs’ working would certainly justify a distinct resolution regime for MSMEs under IBC when compared with big-sized corporate. Significantly, with the insertion of Section 240A (which empowers the central government to make necessary amendments/modification to IBC in case of MSMEs), the government may consider utilizing this weapon, and expedite identifying relevant areas, and issuing specific directions (with necessary modifications) as regard the applicability of relevant provisions to IBC to MSMEs.

Harish Kumar is the Partner at L&L Partners. Views expressed are the author’s own.

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