MSMEs and Insolvency: A Special Treatment under the IBC
MSMEs, or micro, small, and medium enterprises, are vital for the economic growth and development of India, as they provide employment opportunities, contribute to manufacturing and exports, and support innovation and entrepreneurship. However, MSMEs also face various challenges such as lack of access to finance, technology, markets, infrastructure, and skilled manpower. These challenges may affect their viability and sustainability, especially in times of economic distress or crisis.
The Insolvency and Bankruptcy Code, 2016 (IBC) is an Indian law that governs the insolvency and bankruptcy proceedings for corporate persons, partnership firms, and individuals in a time-bound manner. The IBC aims to maximise the value of assets of the insolvent person, promote entrepreneurship, balance the interests of all stakeholders, and establish an Insolvency and Bankruptcy Board of India (IBBI) to regulate the process.
The IBC recognises the special role and needs of MSMEs in the Indian economy and provides them with certain benefits or exceptions in the insolvency resolution process. These benefits or exceptions are mainly related to the eligibility of promoters to submit resolution plans and the power of the Central Government to modify or exempt certain provisions for MSMEs. In this article, we will discuss the definition, classification, and registration of MSMEs, the benefits or exceptions for MSMEs under the IBC, and a recent case law on MSME registration during insolvency.
Definition, Classification, and Registration of MSMEs
The definition, classification, and registration of MSMEs are based on the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act) and the notification issued by the Ministry of Micro, Small and Medium Enterprises on June 1, 2020. The MSMED Act provides for the definition, classification, registration, promotion, development and facilitation of MSMEs in India. The notification revised the MSME classification and introduced a new portal for online registration of MSMEs called Udyam Registration Portal.
The revised criteria for MSME are based on both investment and annual turnover of the enterprises. The MSME classification is as follows:
|Category||Investment limit||Annual turnover limit|
|Micro||Less than Rs. 1 crore||Less than Rs. 5 crore|
|Small||Less than Rs. 10 crore||Less than Rs. 50 crore|
|Medium||Less than Rs. 50 crore||Less than Rs. 250 crore|
The registration is based on Aadhaar number, PAN number and GSTIN of the enterprises. The registration is not mandatory but it provides various benefits to the MSMEs such as collateral-free credit, subsidy on patent registration, overdraft interest rate exemption, industrial promotion subsidy eligibility, protection against delayed payments, etc.
Benefits or Exceptions for MSMEs under the IBC
The benefits or exceptions for MSMEs under the IBC are provided under section 240A of the IBC, which was introduced by the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018. The rationale behind these benefits or exceptions is to protect the interests of MSMEs, which are vital for the economic growth and development of India, and to facilitate their revival and restructuring during insolvency.
Section 240A(a) of the IBC states that section 29A© and section 29A(h) shall not apply to a resolution applicant in respect of a corporate debtor who is an MSME. Section 29A© disqualifies a person who has an account classified as a non-performing asset (NPA) for more than one year from being a resolution applicant. Section 29A(h) disqualifies a person who has executed an enforceable guarantee in favour of a creditor of the corporate debtor. By exempting these clauses, section 240A(a) allows the promoters of MSMEs, who may have defaulted on their loans or given personal guarantees, to bid for their own companies and retain control over them. This is because MSMEs are often dependent on their promoters for their management, technical expertise, and market linkages, and finding a suitable external resolution applicant may be difficult or costly.
Section 240A(b) of the IBC empowers the Central Government to direct that any of the provisions of the IBC shall not apply or shall apply with such modifications as may be specified to any MSME, if it considers necessary for the public interest. This gives the Central Government the flexibility to grant further relief or exemptions to MSMEs, depending on their specific needs and circumstances. For example, the Central Government may reduce the threshold amount for initiating insolvency proceedings against MSMEs, or extend the time limit for completing the insolvency resolution process for MSMEs.
A Recent Case Law on MSME Registration during Insolvency
A recent case law that illustrates the application of section 240A of the IBC is the case of Dharamveer Singh vs. Daulat Ram Jain (RP of Hardrock Attachments Pvt. Ltd.), decided by the National Company Law Tribunal (NCLT) Kolkata Bench on September 15, 2021. The case was about a corporate insolvency resolution process (CIRP) initiated against Hardrock Attachments Pvt. Ltd., a corporate debtor, by one of its financial creditors. The NCLT Kolkata Bench directed the resolution professional (RP) to register the corporate debtor as an MSME and obtain the necessary certificates from the concerned authorities. The NCLT held that the corporate debtor was eligible to be registered as an MSME under the revised definition of MSMEs that came into effect from July 1, 2020. The NCLT also observed that the registration would enable the corporate debtor to avail various benefits under the MSME Act and other schemes of the government.
Some of the important paragraphs from the judgment are:
- Paragraph 8: “The Applicant has submitted that the Corporate Debtor is eligible to be registered as MSME under the revised definition of MSMEs which came into effect from 01.07.2020. The Applicant has further submitted that the registration of the Corporate Debtor as MSME will enable it to avail various benefits under the MSMED Act and other schemes of the Government of India.”
- Paragraph 9: “The RP has submitted that he has no objection to register the Corporate Debtor as MSME and obtain necessary certificates from the concerned authorities. The RP has further submitted that he will take necessary steps to register the Corporate Debtor as MSME and obtain necessary certificates from the concerned authorities.”
- Paragraph 10: “We have heard the learned counsel for both the parties and perused the records. We find that the Corporate Debtor is eligible to be registered as MSME under the revised definition of MSMEs which came into effect from 01.07.2020. We also find that the registration of the Corporate Debtor as MSME will enable it to avail various benefits under the MSMED Act and other schemes of the Government of India.”
- Paragraph 11: “In view of the above, we direct the RP to register the Corporate Debtor as MSME and obtain necessary certificates from the concerned authorities within a period of 30 days from today and file a compliance report before this Tribunal.”
MSMEs are an important segment of the Indian economy and deserve special treatment in insolvency proceedings. The IBC provides such special treatment by allowing promoters of MSMEs to participate in resolution plans and giving power to the Central Government to modify or exempt certain provisions for MSMEs. The case of Hardrock Attachments Pvt. Ltd. shows how MSME registration can be done during insolvency and how it can benefit the corporate debtor and its stakeholders.
: [Notification on Revised Definition of MSME] : [Benefits of Registering as an MSME] : [Insolvency and Bankruptcy Code, 2016] : [Dharamveer Singh vs. Daulat Ram Jain (RP of Hardrock Attachments Pvt. Ltd.)] : [Insolvency and Bankruptcy Code (Amendment) Ordinance, 2018] : [Micro, Small and Medium Enterprises Development Act, 2006] : [Udyam Registration Portal].