Conditions that have been enhanced to protect MSME from getting liquidated During Covid-19 – Under IBC

This Article is about the MSME sector which has been devastated During the Covid Period. The mandatory provisions that were made under INSOLVENCY AND BANKRUPTCY CODE for the protection of MSME from getting Liquidated and primarily for the revival of MSME. MSME’s have special position in the Indian economy, as key drivers of employment, growth & financial inclusion and forms major part of operational creditors along with employees and trade creditors.

*Why is MSME important for the nation ?

The first-ever legal framework for recognition of the concept of “enterprise”, which comprises both manufacturing and repair entities. It defines medium enterprises for the primary time and seeks to integrate the three tiers of those enterprises, namely, micro, small and medium. The Act also provides for a statutory consultative mechanism at the national level with balanced representation of all sections of stakeholders, particularly the three classes of enterprises; and with a wide range of advisory functions.

MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution useful and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country.

In short government is helping the unemployed to make jobs for themselves and for others by providing

1) Bank Loans without security ,

2) Industrial Promotion Subsidy will be granted,

3) Less interest for Delayed Payments,

4) Low Electricity Bills,

5) ISO and Patent registration Subsidy.

*What was the Previous Threshold Limit for the MSME?

Previously before Covid the Threshold Limit for MSME was

Manufacturing sector – Micro enterprises – 0-25 lakh,

Small enterprises-25 lakh – 5 crore and

Medium enterprises- 5 crore – 10 crore

was the threshold limit particularly in plant and machinery Investment.

and for Service sector – Micro enterprises- 0-10 lakh,

Small Enterprises- 10 lakh- 2 crore and

Medium enterprises-2 crore – 5 crore

was the threshold limit Until covid in Plant and machinery investment.

But from 24th March 2020 the country has went under Lockdown ,due to various phases of lockdown only Medical shops and Ration shops which are tend to be necessary for the general public were opened other non commercial sectors were closed indefinitely until further orders from the government after which various relaxations were given in the passing months but even till today India is under Lockdown 10.0 .

So for the manufacturing sectors it was a severe blow. They can’t even get sale orders or raw material for manufacturing. As a result all their loans, debts cannot be repaid at the demand of the creditor. So what the financial creditor and the Operational creditor tend to do that they would apply for Liquidation under INSOLVENCY AND BANKRUPTCY CODE before our Hon’ble Tribunal for getting their claims along with interest. The Resolution professional would be appointed to Liquidate the assets of the MSME and settle the claims of the Creditors.

This would tear the sector and further no person would dare to enter the sector.

*What did the INSOLVENCY LAW COMMITTEE REPORT said about revival of MSME?

Due to the low threshold of default of INR 1 lakh that’s currently required under the Code for initiation of CIRP, an outsized number of applications were being filed for initiation of CIRP. This has led to an increased burden on the Adjudicating Authority. Therefore, a requirement to review the minimum default threshold for admitting a case under Section 4 of the Code was felt, and during this respect, it’s recommended that it would be appropriate to notify a better default threshold. 1,942 cases were within the resolution process as of September 2020. So the adjudicating authority in order to decrease the burden on filing over tribunal and on MSME the act was amended new threshold limit and even on exceeding threshold promoter will be given a chance for revival of MSME.

*What was the Amendment made Under INSOLVENCY AND BANKRUPTCY CODE of 2016 and MSME DEVELOPMENT ACT OF 2006 For the welfare of MSME?

Under Section -4 of Insolvency and Bankruptcy code of 2016 the Minimum default was increased from 1 lakh to 1 Crore rupees as minimum default set to file a petition under IBC. This amendment was in direct connection for the welfare as many creditors would file petition against debtors and in order to decrease the number of liquidation and to keep the economy running the threshold limit was increased if not then the whole nation would have started to file cases and liquidate. This provision came to effect 24/03/2020

Even the Ministry of MSME has Amended a New Threshold limit

on 01/06/2020 the Ministry of MSME

Section 7(9) of the ‘Micro, Small and Medium Enterprises Development Act, 2006

Notified the following criteria of micro, small and medium enterprises, namely:—

micro enterprise, where the investment in Plant and Machinery or Equipment doesn’t exceed 1 crore rupees and turnover doesn’t exceed 5 crore rupees;

small enterprise, where the investment in Plant and Machinery or Equipment doesn’t exceed 10 crore rupees and turnover doesn’t exceed 50 crore rupees;

medium enterprise, where the investment in Plant and Machinery or Equipment doesn’t exceed 50 crore rupees and turnover doesn’t exceed 250 crore rupees.

came to effect from 01/07/2020.

Thus these amendments have been brought up especially to recover the MSME from grave dark.

*What are the other changes Regarding CIRP(Corporate Insolvency Resolution Process) of MSME was brought into effect?

Promoters of MSMEs, who are not willful defaulters, can continue to bid for their assets. In fact, they’re going to get to submit resolution plans first, which can then be placed before other potential suitors under a Swiss challenge. The resolution plan must be endorsed by financial creditors having a minimum of 66% of the voting power. Some of these features are in sync with those of the so called prepack insolvency scheme that the govt has proposed to Also, promoters will still run the MSMEs, unlike within the CIRP where the resolution professional gets to run the affairs with guidance from financial creditors.

This feature is only for MSME this would give a chance for the revival of the MSME not for other company. The MSME’s typically account for the most important chunk of those cases, a special framework will help them resolve stress better and faster.

Thus these are the amendments made Under MSME for protection from liquidation.

FOOT NOTES

1)  https://taxguru.in/corporate-law/threshold-limit-initiation-insolvency-proceedings-raised-rs-1-crore.html

2) https://taxguru.in/corporate-law/govt-notifies-revised-criteria-classification-msme.html

3) https://ibbi.gov.in/uploads/resources/c6cb71c9f69f66858830630da08e45b4.pdf

4)  https://taxguru.in/corporate-law/ibbi-invites-comments-pre-packaged-insolvency-resolution-process.html

An Article by

G.Hariharran  B.Com LL.B.(Hons) IVth year

Tamil Nadu Dr. Ambedkar Law Univeristy (School of Excellence in Law )

[email protected]   / [email protected]

Author Bio

Qualification: Student- Others
Company: N/A
Location: Chennai, Tamil Nadu, India
Member Since: 20 Mar 2021 | Total Posts: 1

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