MSME & IBC 1.0 : Understanding MSME under the IBC, 2016
INTRODUCTION: MSME Act.
Micro, Small, and Medium Enterprises (MSME) has been the growth engines of New India and government has from time to time, announced special provisions related to this sector. This sector is governed by The Micro, Small, and Medium Enterprises Development Act, 2006[1] (“MSMED Act“), The MSMED Act plays a crucial role in providing a legal framework for enterprises in the manufacturing and service sectors. The Act aims to simplify definitions, classify enterprises, and address legislative issues affecting Micro, Small, and Medium Enterprises (MSMEs).
Vide notification F. No. 2/1(5)/2019-P&G/Policy (Pt.-IV)[2] dated 1st June 2020 (effective from 1st July 2020), Ministry of Micro, Small and Medium Enterprises outlined the specific criteria for micro, small, and medium enterprises in both manufacturing and service sectors being issued in accordance with MSMED Act:
- a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
- a small enterprise, where the investment in Plant and Machinery or Equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees;
- a medium enterprise, where the investment in Plant and Machinery or Equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees
Each MSME has to mandatorily obtained an Udyam registration. With Udyam registration, various benefits are been provided to MSME to grow and succeed.
PROVISIONS FOR RECOVERY / DISPUTE RESOLUTION UNDER MSMED ACT:
The Act also provides a platform for MSMEs to file complaints against buyers for the recovery of dues along with interest as per the MSMED Act. Sections 15 to 18 of the MSMED Act outline the procedure for recovering dues through the portal, allowing MSMEs to seek compensation with compound interest.
MSMEs can file cases through the MSME Samadhaan portal[3], followed by Mediation and then Statutory Arbitration. Vide Draft Policy for MSME [4], dated 02nd March 2022, Indian Institute of Public Administration made various observations and shortcomings in current dispute resolution mechanism available for MSME industry. Among the other exit code, the Draft Policy also suggests that MSMEs should be aligned with the Fast Track Corporate Insolvency Resolution Process under IBC, 2016.
AMENDMENTS PERTAINING TO MSME UNDER IBC, 2016
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was an attempt to amalgamate all the prior procedures and frameworks that dealt with the realm of insolvency and bankruptcy. Both the legislature and judiciary through their amendments or precedents have been trying to provide economic viable solutions for dealing with insolvency of companies as well as other aspects related to it.
Vide The Insolvency and Bankruptcy Code (Second Amendment) Ordinance, 2018[5], MSMEs facing insolvency proceeding were granted relief by allowing MSME promoters to bid for his enterprise undergoing Corporate Insolvency Resolution Process (CIRP). Vide this ordinance, Section 240A was inserted which empowers the Central Government to notify any situation of non-application of the Code’s provisions to MSMEs. The provisions of Section 29A (c) and (h) were further exempted from application to MSMEs.
Thereafter vide IBC (Amendment) Act, 2021[6], Pre-Packaged Insolvency Resolution Process (“PPIRP”) was introduced in the IBC. The prepackaged insolvency resolution process (pre-pack) is a mechanism that allows a distressed MSME company to work on a resolution plan in cooperation with its creditors before initiating formal insolvency proceedings. This was certainly a landmark amendment to IBC. The PPIRP is applicable only in respect of MSMEs. Pre-packaged insolvency (with different title/name) is quite prevalent globally wherein the process deals with restructure and/or reorganise of the debtor’s (individuals, proprietorship, partnership and corporations) assets. In India, as of now, the PPIRP is applicable only to corporates.
THE RECIPROCITY BETWEEN IBC & MSME:
Under IBC, MSME can be a debtor as well as creditor. As a creditor, MSME can file the petition before the Adjudicating authority. However, to file a claim against any other corporate, the claim amount has to be 1 crore and above[7]. MSME can also file their claim with the Interim Resolution Professional as an Operational creditors for the company already under going CIRP process. To file a claim under PPIRP, the corporate MSME (i) have committed a default of at least ₹10 lakh; (ii) is eligible to submit a resolution plan under section 29A of the Code; (iii) has not undergone a PPIRP during the three years preceding the initiation date; (iv) has not completed a CIRP during the three years preceding the initiation date; (v) is not undergoing a CIRP; and (vi) is not required to be liquidated by an order under section 33 of the Code.
THE ROLEPLAY SO FAR: CONCLUSION
Though both the MSME Act and IBC code has been amended from time to time to support the MSME dispute mechanism, it can be said that it is yet to achieve a realistic solution for the same. Under IBC, the PPIRP is applicable only to Corporates wherein more than 90% of the MSME industry is either a partnership firm or proprietorship firm. Further, the banks are reluctant to take haircut at first stage and it is difficult to get 66% approval of the financial creditors before filing the PPIRP application. Even in case where MSME is a creditor, they can file petition under IBC only if their claim is more than 1 crore. Further, their claim as Operational Creditors is much lower in the waterfall provided under Section 53 of the Code and because of the same, it becomes difficult for MSME to recover their amount.
As the landscape for MSMEs and IBC continues to evolve, we hope some further amendments are bought in order to provide a comprehensive framework for MSMEs development, resolution, and recovery.
Footnotes
1 https://samadhaan.msme.gov.in/WriteReadData/DocumentFile/MSMED2006act.pdf
2 https://msme.gov.in/sites/default/files/MSME_gazette_of_india_0.pdf
3 https://samadhaan.msme.gov.in/MyMsme/MSEFC/COM_MSEFC_EntLogin.aspx
4 https://lexcomply.com/rsjadmin/news/202203095523Office%20Memo%20PY-10024-6-2020-POLICY-DCMSME%20(E-17555)-%20Draft%20Policy%20for%20Micro,%20Small%20&%20Medium%20Enterprises%20in%20India.pdf
5 https://ibbi.gov.in/webadmin/pdf/whatsnew/2018/Aug/The%20Insolvency%20and%20Bankruptcy%20Code%20(Second%20Amendment)%20Act,%202018_2018-08-18%2018:42:09.pdf
6 https://prsindia.org/files/bills_acts/acts_parliament/2021/The%20Insolvency%20and%20Bankruptcy%20Code%20(Amendment)%20Act,%202021.pdf
7 Section 2, IBC (Amendment) Act, 2021
