Steps to protect MSMEs from getting liquidated under IBC during Covid-19

Ashish M. Shaji

03 Apr, 2021

Micro, small and medium enterprises have a special place in the Indian economy as it is the key driver of employment, growth and financial inclusion in the country. However, due to the Covid-19 pandemic, the MSME sector was badly hit. Mandatory provisions were made under the IBC for the protection of MSMEs from getting liquidated under IBC. In this article, we shall look at those measures to protect MSME from getting liquidated under IBC during Covid-19.

Significance of MSMEs in India

The concept of MSMEs involves the first-ever legal framework for recognizing the concept of enterprise, which comprises of both manufacturing and repair entities. It defines medium enterprises and seeks to integrate three tiers of the enterprises, namely- micro, small and medium. The Act also provides for statutory consultative mechanism at national level with balanced representation of sections of stakeholders and with a wide range of advisory functions.

Micro, small and medium enterprises not just help in employing at comparatively low capital cost than large industries but also helps in industrialization of rural and backward areas, thereby reducing regional imbalances assuring more just distribution and wealth.

MSMEs are complementary to large industries as ancillary units, and the MSME sector contributes significantly to the socio-economic development of the country.

Previous threshold limit for MSME

Before the Covid-19 pandemic the threshold limit for MSME was as follows:

Manufacturing sector-

• Micro Enterprises- 0-25 lakh
• Small Enterprises- 25 lakh-5 crore
• Medium Enterprises- 5 crore-10 crore.

Service Sector-

• Micro Enterprises- 0-10 lakh
• Small Enterprises- 10 lakh-2 crore
• Medium Enterprises- 2 crore-5 crore.

However, when the country went into lockdown, only medical shops were open, and ration shops as they are indispensable for general public. Other non-commercial sectors were closed for indefinite period until further orders from the government. It came as a severe blow to the manufacturing sector as they didn’t even get sale orders. Due to this, all their loans, can’t be repaid at the demand of the creditor.

Therefore the financial creditor and the operational creditor would apply for liquidation under IBC before tribunal for getting their claims with interest. A resolution professional would be appointed to liquidate the assets of MSME and settle creditors’ claims.

Insolvency law committee report on MSME

As the low threshold of default of 1 lakh rupees required under the code for initiation of CIRP, a huge amount of applications were being filed for CIRP initiation. This caused an increased burden on the adjudicating authority.

Therefore a need was felt to review the minimum default threshold for admitting a case under section 4 of the code, and during this, it is recommended that it would be reasonable to notify a better default threshold. Close to 2000 cases were within the resolution process as of September 200. Therefore to lower the burden on filing over tribunal and on MSME, the adjudicating authority amended threshold limit, and even upon exceeding the threshold, promoter will be provided a chance for the revival of MSME.

Protecting MSME from getting liquidated under IBC: Amendment made under IBC for the welfare of MSME

Under section 4 of the IBC, 2016^[1], the minimum default was raised from 1 lakh rupees to 1 crore rupees as minimum default set to file a petition under Insolvency and Bankruptcy Code. The aforementioned amendment was for the welfare as many creditors would file petition against debtors, and with a view to reduce the number of liquidation and to keep the economy moving forward, the threshold limit was increased. The provision came into effect from 24^th March 2020.

Moreover, the Ministry of MSME has amended the threshold limit.

The criterion for MSMEs was as mentioned below:

• Micro Enterprises– where the investment in plant and machinery is not beyond 1 crore rupees and where the turnover doesn’t go beyond 5 crore rupees.
• Small Enterprises– where the investment in plant and machinery is not beyond 10 crore rupees and where the turnover doesn’t go beyond 50 crore rupees.
• Medium Enterprises– where the investment in plant and machinery is not beyond 50 crore rupees and where the turnover doesn’t go beyond 250 crore rupees.

Protecting MSME from getting liquidated under IBC: Other changes regarding CIRP

The promoters of MSMEs who don’t constitute as wilful defaulters can bid for their assets. In fact, they are going to get to submit resolution plan first, which can be placed before other potential suitors. The resolution plan has to be endorsed by the financial creditors having a minimum 66% voting power.

Some of the features are in sync with the pre-pack insolvency scheme that the government has proposed to. Moreover, the promoters would still run the MSMEs, unlike in the case of CIRP, where the resolution professional gets to run the affair with guidance from financial creditors.

This is for just MSME and would give a chance to revive itself. A special framework would assist them in resolving stress faster and better and thereby protecting them from getting liquidated under IBC.

Conclusion

Therefore these amendments made under MSME are expected to protect them from getting liquidated during times such as these. MSMEs further require special and a tailor made framework for resolution of MSMEs.

Read our article:Impact of Union Budget 2021 to MSME