DEBT RECOVERY BY MSME

The recent developments in the considerations given to the Micro, Small and Medium Enterprises (MSME) Sector, promises an effective economic future from the ground level. The imbibed vulnerability of this sector needs to be protected in their ability to recover dues. The Ministry of Finance, Government of India, on 24th March 2020, released a Press statement which stipulated various benefits keeping the MSMEs as the main priority. A possibility in suspension of Sec 7,9 and 10of the Insolvency and Bankruptcy Code, 2016 (IBC) has also been anticipated through the Press release as well as various media articles. In the context of the IBC, the MSMEs generally participate as Operational Creditors and have limited participation in the corporate insolvency resolution process of Corporate Debtors. With the recent situation and the changes made to IBC, while this sector will benefit as a corporate debtor; there is limited relief that MSMEs may receive through Debt Recovery through Civil Suits and hence we look into a simpler and focused method through the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act).

What is an MSME?

MSMEs are complementary to large industries as ancillary units and this sector contributes significantly in the inclusive industrial development of the country. The MSMEs are widening their domain across sectors of the economy, producing a diverse range of products and services to meet demands of domestic as well as global markets. The classification of MSME is as follows:

The Micro, Small and Medium Enterprises Developmental Act 2006 (MSMED).

The MSMED Act is as Act passed by the Parliament of India which aims at facilitating the promotion, development and enhancing the competitiveness of micro, small and medium enterprises. Under the Act the preliminary liability of the Buyer under the MSMED is to make all payments before the agreed time or if in absence of such agreement, the MSME is entitled to receive payments, 45 days from the date of acceptance of goods or services². On failure to oblige, the buyer is liable to pay a compound interest on three times the bank lending rate for any goods and services supplied. This secures a time limit on the payments to be made to the MSME. On failure of such payment, a reference can be made to the Micro and Small Enterprise Facilitation Council (MSEFC) in the prescribed form and it shall be decided within 90 days from the date of making the reference.

Micro and Small Enterprise Facilitation Council (MSEFC)

Micro and Small Enterprise Facilitation Council (MSEFC) is established under the MSMED Act to take up matters with reference to any amount due from the buyer for goods and services rendered. MSEFC contains around 2-5 members:

•  Director of Industries
•   1 or more office-bearers or representatives of MSE’s associations in the State
• -1 or more banks or financial institutions lending to MSEs
• -1 or more persons having special knowledge in field of industry, finance, law, trade or commerce

Procedure under MSEFC

Once a matter is referred to the MSEFC, online intimation is given to both parties. A chance for mutual settlement is given for both parties through conciliation. On failure of conciliation process, the MSEFC determines if the matter is to be continued as a case or to be rejected and if accepted as a case, it is referred to arbitration. MSEFC gives a final and binding award. The award is to be communicated to Interim Resolution Professional and Hon’ble National Company Law Tribunal (NCLT) during insolvency procedure wherein the award holder is treated as a secured debtor. The award can also be made against foreign buyer, which is binding and enforceable. The Execution of the award is under the Arbitration and Conciliation Act, 1996. The buyer cannot appeal the award.

Three notices of order are given to respondent after which a notice is published in daily newspaper in the area of respondent. If the buyer does not cooperate, the silence of the buyers is a confirmation of their liability. The offences of the buyer shall be tried by the Metropolitan Magistrate or Magistrate of First Class or courts of higher hierarchy. The jurisdiction of State council can be extended to a district not having a council.

MSMED over IBC?

As compared toa possible application made under the IBC, the MSME sector including Start-ups can obtain recourse in a speedier manner through the MSEFC to resolve pending issues.It is well established that the IBC is invoked for the resolution of a stressed company and not for recovery of dues. Nevertheless, Operational Creditors often files applications/ claims under the IBC in hopes for amicable settlement. The downside of this being that there always exists an equal probability that the Debtor may be put to liquidation and as per the waterfall mechanism the OC receives close to nothing. Hence it is always advantageous for MSMEs and Start-up industries to approach MSMED Act before any other recourse. Also provided that, with recent developments in suspension of section 7 and 9 of IBC, it is only prudent that MSMEs adopt alternative methods.

With the suspension of the trigger provisions under Section 7, 9 and 10 of the IBC, we maybe be able to ascertain that it proves as a breather for most MSMEs and other firms as well. However, on the other side, the Creditors are to await for a further course of action, to avail some sort of reassurance towards the debt owed from Corporate Debtors. Operational Creditors would have to wait longer with no other legal recourse. This could put a good number of MSME Operational Creditors in financial stress apart from the economic slowdown caused by the pandemic. At this juncture, MSME’s can avail the benefits of the MSMED Act to assure that some amount of recourse is provided by way of debt recovery.

Progress under MSME SAMADHAAN

Statistically, since the initiation of the online portal MSME SAMADHAAN on 30th October 2017, the total number of cases filed in the MSEFC are 13091 out of which 3145 have been disposed, granting a total amount of 598.83 Crores³. The total number of Applications filed by MSEs are 39,769 out which a good number of cases have been brought to conclusion as per the data available below:

The highest number of MSME delayed payment cases have been filed in Gujarat (2938 cases) followed by Haryana (1680 cases) and Rajasthan (1337 cases). In South India Tamil Nadu has the highest number of cases filed (909 cases) with almost half the cases disposed already^4. This statistical data proves that there has been a good number of cases heard and disposed off.

Conclusion

There are certain benefits of MSEFC which have been summarized below:

• Faster and most affordable process for the MSME-vendors
• Most beneficial as MSME-vendors are mainly Operational Creditors.
• Filing of cases can be made through online portal – MSME SAMADHAAN
• The total amount due along with interest accrued during the period can be obtained without limiting to the Resolution plan and Liquidation Amount.
• Defaulter approaching for appeal must deposit 75% of the Award amount prior to filing of appeal.
• MSME can check the status through online portal

Keeping in mind the growing need to safeguard the MSMEs and encourage growth, it must be taken into consideration that MSMED Act could provide a progressive step towards financially stabilizing these entities during this tough time. The suspension of the trigger clauses in the IBC for about six months as proposed may not be sufficient and looking at it from a practical angle, there could be an extension of this period. If that is the case then it becomes only logical that the MSMEs take recourse under the MSMED Act for sustenance and stability. This sector as it is has several challenges and should be protected from being pushed into unwarranted litigation and hence the process set up under the Act itself has to be strengthened; made very effective and most importantly strong at execution to help out the sector.