MSME’S UNDER IBC REGIME

MSME’S UNDER IBC REGIME

IBC refers to Insolvency and Bankruptcy Code, 2016, the Bankruptcy Law of India which seeks to consolidate the existing framework by creating a single law for insolvency and bankruptcy. Certain provisions on Insolvency Law deals with Micro, Small and Medium Enterprises (MSME’s) which are reproduce below for reference. 1. Section 29A of IBC, 2016: Insolvency and Bankruptcy Code (Second Amendment) Ordinance, 2018 has brought relief to the Micro Small and Medium Enterprises (MSME) by relaxing the applicability of the provisions of Section 29A as regards submission of a resolution plan in case of such entities in their favour. Intention behind this is to restrain untrustworthy promoters from buying back assets at a subsidized price. 2. Central Government is empowered to 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 as defined in Section 7 of the Act.

3. Section 240A: Application of this Code to micro, small and medium enterprises:

Section 240A (1): provisions of clauses (c) and (h) of section 29A shall not apply to the resolution applicant in respect of corporate insolvency resolution process of any micro, small and medium enterprises. Section 240A (2): the Central Government may, in the public interest, by notification, direct that any of the provisions of this Code shall— a) not apply to micro, small and medium enterprises; or b) apply to micro, small and medium enterprises, with such modifications as may be specified in the notification. Section 29A – Clause C to H c. Clause c of section 29A debars a person or a person acting jointly or in concert with such person who-

•  has an account classified as NPA;
•  is a promoter of a corporate debtor the account of which has been classified as NPA;
•  is in the management of a corporate debtor the account of which has been classified as NPA
• is in control of a corporate debtor the account of which has been classified as NPA;

At least a period of 1 year should have elapsed from the date of classification till the insolvency commencement date. Therefore, any company (including the promoters/persons in the management of or control of such company) which has its account classified as NPA for last 1 year will not be able to file a resolution plan however, the Code provides for a carve out that such person shall be eligible to submit the resolution plan if such person makes payment of all overdue amounts with interest thereon and charges relating to non-performing asset accounts before submission of resolution plan. See also, clause (j) of Section 29A. Clause c of section 29A shall not apply to a resolution applicant where such applicant is a financial entity and is not a related party to the corporate debtor. d. the person has been convicted for any offence punishable with imprisonment for 2 (Two) years or more; The person shall be eligible to submit resolution plan after expiry of 2 years from the date of his release from imprisonment. e. is disqualified to act as a director under the Companies Act, 2013; f. is prohibited by SEBI from trading in securities or accessing the securities markets; g. Clause g of section 29A debars the person who has been

•  a promoter or
•  in the management or
•  control

of a corporate debtor in which a preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has taken place and an order has been made by the adjudicating authority under the provisions of the Code; Proviso of this clause allows the resolution applicant if such preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction has been taken place prior to the acquisition of corporate debtor by the resolution applicant pursuant to a resolution plan approved under this Code or pursuant to a scheme or plan approved by a financial sector regulator or a court, and such resolution applicant has not otherwise contributed to the preferential transaction, undervalued transaction, extortionate credit transaction or fraudulent transaction; h. The negative list includes persons who might have guaranteed the obligations of the corporate debtor which is currently in insolvency. As the provision goes:- Going by the construction of the clause, it appears that the guarantee should be in favour of that creditor who has applied for insolvency resolution of the corporate debtor. 4. With an intention to ease out the pressure on small sized companies and MSME and not drive them into insolvency and bankruptcy, The Finance Minister has also announced that the minimum threshold to initiate insolvency proceedings shall also be raised to Rs 1 crore from Rs 1 lakh. 5. Initiation of fresh insolvency proceedings shall also remain suspended for up to 1 year, depending on the situation of the pandemic. 6. Insertion of Section 10A in the IBC, a bold move to safeguard the businesses from the rigours of IBC. Section 10A seeks to eclipse section 7,9,10 that provides for filing of applications for initiating the CIRP in case of a default for a minimum period of six months. Timeline: for any default arising on or after 25th March, 2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf. Kindly note that: Provisions of Section 10A shall not apply to any default committed under the said sections before 25th March, 2020. 7. Report of Insolvency Law Committee (February, 2020) MSMEs have special position in the Indian economy, as key drivers of employment, growth & financial inclusion and forms major part operational creditors along with employees and trade creditors. “the Committee agreed that operational creditors should be allowed to have recourse to CIRP on a minimum default of INR 5 lakh only, and appropriate actions may be taken to revise the threshold accordingly” Disclaimer: Every effort has been made to avoid errors or omissions in this material. In spite of this, errors may creep in. Any mistake, error or discrepancy noted may be brought to our notice which shall be taken care of in the next edition. In no event the author shall be liable for any direct, indirect, special or incidental damage resulting from or arising out of or in connection with the use of this information.