Recovery and Confirmation of MSME Creditors by Companies: A New Revolution for MSME Sector

Present Situation 

In the today’s era in India, delayed payment from debtors or customers are the biggest problem with which the business entities are facing. At present the situation so bad that almost every second business unit is willing to take the advantage of usage of working capital of its supplier and does not want to pay in time and trying to manage their fund for its own use and there are very less companies who pays to its suppliers in time. In spite of having the interest clause in the purchase order (PO) or service agreement with the customer, there is no payment of penal interest on account of delay. MSMEs are the most affected sector with this problem of delayed realization of their bills and receivables, particularly from large corporate buyers and government organizations, leading to financial hardships and liquidity constraints.

This is also a key reason for many of them turning into non-performing assets (NPAs) and business failure, affecting their sustainability and survival as now RBI is taking stringent action against NPA accounts. The MSMEs face two-fold pressure which are delayed payments of their bills and the looming threat of turning into an NPA (for defaults in honoring bank commitments). According to the cases reported in MSME Samadhaan Portal launched in October, 2017 MSMEs have filed 5850 (approx.) applications related to delayed payments or non-payments. These cases involve an amount of 1510 crores.

Developments Through IBC

Till now, there was no solution of this acute problem and interestingly there was no clue with any government to deal with such problem. Now Modi Government has taken up the steps to resolve this business blocking problem. With the introduction of Insolvency and Bankruptcy Code, 2016, the big cases of non-payment were handled by this law whereas MSMEs did not got due attention due to legal involvement and threat of loss of business with the customer. Considering this, the government has come up with another solution specially for MSMEs who are the most affected section of the business ecosystem.

New Action Plan by ROC for MSMEs

Now, Registrar of Companies is asking the detail of the default and delay in payments to MSME (means Micro, Small and medium Business entities whether they are individual, firm, LLP or companies) along with the complete list of the name, amount outstanding, period of delay with reason and total outstanding to MSME exceeding 45 days through filing the ‘MSME FORM I’ with ROC. The companies are also required to file the half yearly report on the delay of payment to MSME as well as a one-time report.

In order to protect the interest of small scale business enterprises and to foster their growth the Central Government on 22.01.2019 has issued a notification under the MSMED Act, 2006 to ensure timely and smooth flow of credit to MSMEs and minimize sickness among them. As Per the Notification Number S.O. 5622(E), every specified company shall file an Initial Return in MSME Form I stating details of all outstanding dues to Micro or small enterprises suppliers existing on the date of notification of this order within thirty days from the date of publication of this notification.

Compliance: –

A half-yearly return MSME-1 specifying the payments outstanding to micro and small enterprises suppliers which are outstanding for more than  45 days from the date of acceptance or the date of deemed acceptance of goods or services stating the following: a)The amount of payment due, and b) the reasons of delay. Though the ROC has not designated form till now and it is yet to come.

Who are MSMEs:- 

Enterprises engaged in the manufacture or production:

A micro enterprise is an enterprise where investment in plant and machinery does not exceed Rs. 25 lakh; A small enterprise is an enterprise where the investment in plant and machinery is more than Rs. 25 lakh but does not exceed Rs. 5 crore and A medium enterprise is an enterprise where the investment in plant and machinery is more than Rs.5 crore but does not exceed Rs.10 crore.

Enterprises engaged in providing or rendering of services

Enterprises engaged in providing or rendering of services and whose investment in equipment (original cost excluding land and building and furniture, fittings and other items not directly related to the service rendered or as may be notified under the MSMED Act, 2006 are specified below.

A micro enterprise is an enterprise where the investment in equipment does not exceed Rs. 10 lakh; A small enterprise is an enterprise where the investment in equipment is more than Rs.10 lakh but does not exceed Rs. 2 crore; and A medium enterprise is an enterprise where the investment in equipment is more than Rs. 2 crore but does not exceed Rs. 5 crore. A Micro or Small Enterprise means an enterprise which has filed a memorandum with the specified authority and has obtained the Unique Identification Number for MSMEs.

Penal provisions

The Penal provisions are serious for non-compliance. If the said details are not submitted to Registrar of Companies on MCA on or before 22.02.2019 or the information submitted is incorrect or incomplete, then the fine on company is up to Rs. 25,000 and the Directors, CFO & CS shall be punishable for imprisonment up to 6 months OR fine not less than Rs. 25,000 up to Rs. 3,00,000 per person each.

Impact of this step on MSMEs:

MSME suppliers who were barred by Limitation Act to not to sue the outstanding creditors for amounts outstanding for more than 3 years will get a new opportunity to file the cases against such companies for the pending payments. It will be an automatic confirmation about their legitimate dues and bar of limitation will not be applicable once it is disclosed in ROC. MSMEs will be able to improve their cash flow as a result of which working capital volume of the MSMEs will improve and in result the business process of MSMEs will be improved. MSMEs will be able to file cases against the corporates under Insolvency and Bankruptcy Code for recovery of their money or any other law of as per applicability as the case may be.

Transparency will be increase as the outstanding records will be available with ROC as this record will be similar to the “Information Utility” of IBC and will support the detection of cases of fake debtors and creditors by the persons who are taking / taken the loans. ROC will become the data registry for various legal and financial record purposes. On improvement of payment cycle for the entire business ecosystem where the MSMEs is also a constituent, and the rotation of business will move fast which will also lead to further business development. With this positive rotation and development of business, the GDP of the country will be grown up. To sum up, the value maximization will be achieved by enhanced profitability of the business entities as well as more taxes to the Government.