ALTERNATIVE MEASURES UNDER IBC FOR PROTECTION OF MSMEs

BY SIDDHARTH SONI

 

Introduction

 

MSMEs (Micro, Small & Medium Enterprises) all sized business units defined as per the terms of their investment. According to §7 of the Micro, Small & Medium Enterprises Development (MSMED) Act, 2006 segregates MSMEs into two categories, one being manufacturing and the other being services. MSMEs form the basis of the Indian economy and provide employment opportunities to thousands. The Indian Government in June 2018 allowed promoters to bid for enterprise undergoing Corporate Insolvency Resolution process (CIRP), thus providing huge reliefs to MSMEs facing Insolvency proceedings under the Insolvency and Bankruptcy Ordinance, 2018. After the President assented to the ordinance, the IBC Ordinance brought in important changes for MSMEs. The present article focusses on the potential threats that would be faced by MSMEs and what are the available measures under the IBC to protect them.

 

Potential Threats that MSMEs could face under IBC

 

MSMEs contribute to about 48 percent of India’s total exports and about 28 percent to the total GDP of the country. The first and the foremost being that MSMEs would not be able to recover their due amount of money from their corporate debtors. MSMEs get nothing if their buyer undergoes IBC and thus this recovery process under the IBC is just unfair and one-sided. Another concern being that there exists no feasible plan which can prove to be useful in case the promoters of MSMEs are given a fair opportunity for participating in the resolution plan. Certain in-qualification standards for promoters are mentioned under §240A of the Insolvency and Bankruptcy Code, 2016. Another threat that the MSMEs are concerned with is the speedy and a cost-effective resolution method. In lieu of this, pursuing a debt through the IBC route sometimes becomes challenging for the MSMEs. When compared with big corporates, MSMEs seem to dace many challenges yet threats for their regular functioning.

 

Amendments required for the benefits of MSMEs

 

In a bid to encourage entrepreneurs to enter into a business and to encourage sustainable growth of the credit market in India, below mentioned are some recommendations. These recommendations were also given Injeti Srinivas Committee in 2018:

1. MSMEs should be exempted under the application of §29A of the IBC because the only people who are interested in acquiring an MSME are its promoters.
2. The Central government should exempt or vary application of provisions of the Code by way of a notification for a certain class or classes of companies, including for MSMEs.
3. MSMEs should be provided with a relief from the provision of the Code by inserting §240A in the Code, which specifically exempts resolution applicants for MSMEs that are undergoing CIRP from all eligibility criteria stated in §29A except the requirement that they should not be classified as wilful defaulters.

It is important for the smooth functioning of MSMEs, that they must be free from threats that might possibly cause huge harm to the MSMEs. The Hon’ble Supreme Court in the case of Swiss Ribbons Pvt. Ltd. vs. Union of India and Ors., was of the opinion that MSME friendly provisions should be added in the IBC and MSMEs should be exempted under §29A of the Code. The IBC Amendment Ordinance 2018 included Section 240A in the Code which specifically dispenses the applicability of Section 29A clause (c) and (h) of the Code, in case the Corporate Debtor is an MSME, which relates to such promoters who have become NPA can also bid for their companies. NCLAT was in another judgement of Saravana Global Holdings Ltd. & Anr. Vs. Bafna Pharmaceuticals Ltd. & Ors. held that ‘The intention of the legislature shows that the Promoters of ‘MSME’ should be encouraged to pay back the amount with the satisfaction of the ‘Committee of Creditors’ to regain the control of the ‘Corporate Debtor’ and entrepreneurship by filing ‘Resolution Plan’ which is viable, feasible and fulfils other criteria as laid down by the ‘Insolvency and Bankruptcy Board of India’.

 

Even the Ministry of Finance, in a series of tweets, mentioned that the IBC Ordinance of 2018 will boost the MSME sector by providing them with a special dispensation in the insolvency process. “Exemption from various provisions in the Resolution process will help the MSMEs turnaround faster”, said the ministry.

 

Effect of Covid-19 on MSMEs

 

The Indian Economy has hit hard due to the current pandemic. With more than half of the world pushed back into recession, 2020 seems to be worse than the global financial crisis in 2007-08. With sharp-rise of cases across several countries, the economic damage in these countries would experience a steep increase. Moreover, the International Monetary Fund has predicted that this pandemic would instigate the worst recession since the Great Depression of 1929. As a preventive measure to the upcoming recession, governments have now started pressurizing employers to pay wages to their employees without doing any work.

 

The Indian Government issued an order dated 29th March, 2020 which stated that employers deducting wages of their employees during the lockdown period would be held legally accountable. The national lockdown was clamped by the Home Ministry by invoking the National Disaster Management Act, 2005 along with the Epidemic Diseases Act, 1897. The ministry stressed on the closure of all commercial and private establishments, all transport services, industrial establishments, educational institutions exempting essential services. The Government wants the employers of any kind not to deduct any salaries of their employees during this lockdown period. MSMEs seem to be effected from this order, as providing all the workers with remuneration for the lockdown period would lead several MSMEs to be pushed into state of insolvency.

 

The Hon’ble Supreme Court in the case of Chief Regional Manager, United India Insurance Company Limited v. Siraj Uddin Khan [Civil Appeal No. 5390 of 2019, decided on 11 July 2019] decided that no employee can claim wages for the period that he/she remained without leave or justification. In the present circumstances, neither the employees offer work nor the workers would be able to report their work. Also, not each and every work be completed through technology and also work from home cannot be thought of as an alternative to the works done at grass-root levels. Therefore, the principle of ‘No work, no pay’ cannot be invoked in the present circumstances. There have been several reports that certain MSMEs are uncertain of paying salaries to their employees amidst the lockdown.

 

Government’s Reaction to protect MSMEs

 

A list of Covid-19 operations were released by the Reserve Bank of India. Banks have been advised to achieve a 20% year-on-year growth in credit to micro and small enterprises, and a 10% annual growth in the number of micro enterprise accounts, said the recommendations of the Prime Minister’s Task Force on MSMEs. Banks have been permitted to categorise their MSME general banking branches having 60% or more of their advances to the MSME sector. Several measures have been taken by the government including protection of credit-loss and credit sanctioning official, introducing Cluster-based approach, manging a Simplified loan processing and assessment and the establishment of a Central Research Institute to foster a conducive environment for the growth of entrepreneurs and development of skill sets and dissemination.

 

Conclusion

 

Considering the employment opportunities provided by the MSMEs, the Indian Government would need to come up with a scheme to subsidize employers towards the wages paid during the lockdown. The scheme can be linked to profits earned by the industrial establishment and the wage bill for a month. In the absence of such a scheme, private employers especially small and medium industries will be put through hardships that could even bankrupt them. The government while drawing a stimulus or revival plan for the economy should certainly consider subsiding the wage cost for the lockdown period, if not in entirety, at least in part. If for any reason the government decides to extend the lockdown it should bear the wage burden and should not give any advisory for payment of full wages given it lacks the authority to do so. Maybe, the Govt can advise the establishments to bear/ pay only the necessary amount which is required for subsistence of living or payment of some school fee expenses, which are bare minimum for running the household; which is today being run with zero petrol expenditure, and zero entertainment expenses. Only a proportion of wage expense can be borne by the employers.

 

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of any agency of the Indian government. Examples of analysis performed within this article are only examples. They should not be utilized in real-world analytic products as they are based only on very limited and dated open source information. Assumptions made within the analysis are not reflective of the position of any Indian government State.

The author is a 2nd-year law student at Symbiosis Law School, Pune.