ARTICLE: DEBT RECOVERY UNDER MSMED ACT -

AN ALTERNATIVE TO IBC

1. INTRODUCTION

In recent years, the Micro, Small, and Medium Enterprises

(MSME) sector has developed as a vibrantly dynamic

component. This industry has become the backbone of the

Indian economy, supporting the industrial sector. It makes a

significant contribution as an ancillary unit to the overall

development of large companies and the country's

socioeconomic development.

Recent advancements in the considerations given to the

Micro, Small, and Medium Enterprises (MSME) Sector

promise a prosperous economic future from the ground up.

This sector's ingrained vulnerability must be preserved in its

ability to pay back what you owe. On March 24, 2020, the

Ministry of Finance, Government of India, issued a press

statement outlining several benefits with MSMEs as the

primary focus. The prospect of suspending Sections 7, 9, and

10 of the Insolvency and Bankruptcy Code, 2016 (IBC) has

also been mentioned in the press release and several media

stories. MSMEs often participate as Operational Creditors in

the context of the IBC and have a limited role in corporate

insolvency.

With the recent scenario and revisions to IBC, this industry

will gain as a corporate debtor; nonetheless, there is limited

relief. that MSMEs may obtain through Debt Recovery

through Civil Suits, we investigate a simpler and more

concentrated alternative under the Micro, Small, and Medium

Enterprises Development Act, 2006 (MSMED Act).

1.2 What is an MSME?

MSMEs serve as ancillary units to large companies, and this

sector contributes considerably to the country's inclusive

industrial development. MSMEs are expanding their domain

across sectors of the economy, generating a diversified range

of products and services to fulfill domestic and global market

demands.

MSMEs all over the world have challenges in sustaining

combat preparedness. Payment delays are a severe issue due

to a shortage of MSME capital. According to World Bank

Group research published in January 2014, 35% of MSMEs, or

one in every three, do not receive payment for 90 days or

more. While larger firms can mitigate the negative

consequences of delayed payment, managing cash flows is

difficult for MSMEs due to the nature of their company.

Furthermore, late payments result in 15-20% of an MSME's

cash flow being locked up, affecting the organization’s smooth

operation.

Manufacturers have the most trouble coping in this situation

since they must invest in raw resources, make items, and then

sell them to customers. Manufacturers who have already

spent heavily in purchasing raw materials for production face

a severe financial crunch as a result of the 90-day cycle for

collecting receivables and recurrent delays by their customers.

They are also limited by a lack of bargaining power because

they are caught between corporate buyers and a well-

connected raw material supplier base. Many MSMEs have

become NPAs as a result of late payments.

1.3 Effect of Pandemic Outbreak on MSMEs

The breakout of the COVID-19 pandemic in the country has

had a significant impact on the companies of many small and

big-scale sectors, prompting the government to alter several

regulations to prevent the country's economy from collapsing.

As a result of the pandemic, the Ministry of Finance,

Government of India, issued press statements1 on March 24,

2020, and again on May 13, 2020, stipulating several

advantages that prioritized have been developed. In such a

case, MSMEs would have to choose another option to recover

their debts. As a result, the repeal of sections 7, 9, and 10

would result in a pre-IBC era for MSMEs. the interests of

MSMEs.

According to these press statements, the minimal financial

limit for beginning an insolvency proceeding has been raised

from Rs 1 lakh to Rs 1 crore, with the risk of Sections 7, 9, and

10 being suspended.

2. PROMULGATED LEGAL REGIME TO CONSIDER

THE INTEREST OF MSME- MSMED ACT

Small-scale industries and services contribute significantly to

the economy, and to support this sector, the government

created the Micro, Small, and Medium Enterprises

Development Act (MSMED), 2006. This Act encourages and

strengthens the advancement and competitiveness of MSMEs.

To help the ailing economy, the Government of India has

issued an Economic Relief Package2 that prioritizes MSMEs

to protect their interests. The following is a full description of

MSME in compliance with the provisions of the MSMED Act,

2006, and the amended definition of MSME as released by

the Government of India via Economic Relief Package on May

13, 2020.

Existing MSME Classification

Criteria: Investment in Plant & Machinery or

Equipment

Classification Micro Small Medium

Mfg. Investment Investment (Rs. 5 Investment

 (Rs. 10
Enterprises (Rs. 25 Lac Crore
Crore

Services Investment Investment (Rs. 2 Investment

Enterprise (Rs. 10 Lac Crore (Rs. 5 Crore

Revised MSME Classification

Composite Criteria: Investment and Annual

Turnover

Classification Micro Small Medium

Investment
Investment
(Rs. 10 Investment (Rs.
(Rs. 1 Crore
Manufacturing Crore and 20 Crore and
and
& Services Turnover Turnover (Rs. 100
Turnover
(Rs. 50 Crore
(Rs. 5 Crore
Crore

2.1 The Micro, Small, and Medium Enterprises

Developmental Act 2006 (MSMED)

The MSMED Act is an Act established by the Indian

Parliament that intends to facilitate the promotion, growth,

and competitiveness of micro, small, and medium companies.

According to the Act, the Buyer's preliminary responsibility

under the MSMED is to make all payments before the

stipulated period, or if no such agreement exists, the MSME is

entitled to receive payments 45 days from the date of

acceptance of goods or services2. In the event of non-

compliance, the buyer is obligated to pay three times the bank

lending rate on any products and services delivered. This

establishes a time constraint for payments to the MSME.

If such payment is not paid, a reference can be made to the

Micro and Small Enterprise Facilitation Council (MSEFC) in

the specified form, and it will be decided within 90 days after

filing the reference.

3. PROCEDURE UNDER THE MSEFC

When a case is sent to the MSEFC, both parties are notified

online. Conciliation provides both parties with the

opportunity for mutual settlement. If the conciliation process

fails, the MSEFC decides whether the dispute is to be

resolved.

It is either continued as a case or rejected; if accepted as a

case, it is directed to arbitration. MSEFC makes a final and

binding decision. During the insolvency proceedings, the

award holder is treated as a secured debtor and must be

informed to the Interim Resolution Professional and the

Hon'ble National Company Law Tribunal (NCLT). A binding

and enforceable award can also be rendered against a foreign

buyer. The award is carried out by the Arbitration and

Conciliation Act of 1996.

The respondent receives three notifications of order, after

which a notice is published in a daily newspaper in the

respondent's neighborhood. If the buyer refuses to

participate, the buyer’s silence confirms their liability. The

buyer's offences will be tried by a Metropolitan Magistrate or

a Magistrate of First Class, or by courts of higher hierarchy.

The State Council's jurisdiction can be extended to a district

that does not have a council.

4. ALTERNATIVE FOR MSME

The MSMED Act was enacted in 2006 to safeguard MSMEs

and ensure maximum profit in a short period. It is a

comprehensive act aimed at promoting and regulating small

businesses. Following the implementation of the Insolvency

and Bankruptcy Code in 2016, MSMEs were regarded in the

same manner as other Operational Creditors. The Insolvency

Resolution preparation mechanism is used in the IBC to allow

creditors to prepare a resolution process. Because MSMEs are

designated Operational Creditors under the IBC, MSMEs file

their claims with the bankruptcy Resolution Professional

(IRP) or the Resolution Professional (RP) during the

bankruptcy process. Following that, IRP or RP accepts,

rejects, or adjusts the liability.

Section 29A of the IBC specifies who is entitled to be a

resolution applicant. MSMEs have special powers under IBC

Section 240A (1). Certain provisions of Section 29A do not

apply to the resolution applicant in the corporate insolvency

resolution process of any micro, small, or medium firm,

according to this section. The government has also been given

the authority under this section to exclude MSME from IBC.

Following the recent revision to the IBC, big-scale industries

with vast capital may be able to survive by resorting to

measures such as recovery cases, summary suits, and so on to

recover their dues.

However, because MSMEs lack sufficient money, liquid

assets, and resources to maintain themselves throughout the

delayed recovery, this sector may experience turmoil and

collapse. As a result of the suspension of the provisions that

trigger the insolvency process, as well as the rise in the

threshold for initiating the insolvency process, MSMEs with

no other choice under the IBC will be forced to use the

MSMED Act.

The MSME is entitled to payment under this Act within 45

days of the buyer's acceptance of goods or services. If the

buyer fails to make payment to the supplier, the buyer will be

liable to pay compound interest on the amount from the day

of acceptance or deemed acceptance of goods or services, as

the case may be, to the date immediately following the date

agreed upon, at three times the bank rate notified by the

Reserve Bank. If such payment is not made, a referral can be

made to the Micro and Small Enterprise Facilitation Council

(MSEFC), and the disagreement must be resolved within 90

days of the date of reference.

The following are important sections 4 for recovery

under the MSMED Act:

Section 15 - specifies the buyer's obligation to make

payment. The buyer must pay the MSME within 45
days of acceptance or considered acceptance, as
negotiated between the MSME and the buyer.

Section 16- If the buyer fails to pay the amount due to

the supplier, the buyer is obligated to pay compound
interest on the amount due to the supplier.

Section 18 - states that any party to the dispute must

refer to the MSEFC. Following that, the conciliation
proceedings are undertaken by sections 65 to 81 of the
Arbitration and Conciliation Act of 1996.

5. IMPLICATIONS OF RECENT AMENDMENTS

Delays in payments hurt the MSME's operating capital during

the resolution process under IBC, resulting in financial

distress. The liquidation value in a resolution plan can be zero

at times. As a result, the MSME may be forced to undergo

extensive restructuring, which will have a significant influence

on the capital value held by the MSME and, as a result, the

operation of MSMEs. As a result of the changes to the terms of

the IBC, MSMEs might look into a simpler and more focused

way through the MSMED Act. To protect MSMEs, the time

range for payment and case disposition is short under this

Act. Furthermore, the MSMEs are entitled to the guaranteed

principal amount plus interest.

The MSMED Act promotes early recovery of dues and

compound interest owed to the MSME by the buyer,

preventing loss of operations and reduced capital while an

application filed by the MSME is pending. The timeframe for

disposing of the lawsuit is 90 days assures that the issue is

resolved quickly. Recently, the MSMED developed an online

site for micro and small businesses to file applications, thus

relieving them of litigation costs.

This alternative remedy, without a doubt, is a simple

approach to collecting the debts, and the change in the

minimal threshold for starting insolvency protects MSMEs

when they are Corporate Debtors. However, this also

eliminates the MSMEs' exceptional privileges as Operational

Creditors. The alternative remedy will result in the MSME

having a single point of contact for conflict resolution.

We are still waiting for the ordinance to be passed to suspend

Sections 7, 9, and 10. There is a chance that certain sections

will not be suspended indefinitely. The overall goal is to save

MSMEs from the current challenging scenario while also

sustaining the economy.

5.1 Progress under the MSME SAMADHAAN

Statistically, since the launch of the online site MSME

SAMADHAAN on October 30, 2017, the MSEFC has received

13091 cases, of which 3145 have been resolved, for a total of

598.83 crores. According to the figures below, MSEs filed

39,769 applications, of which a significant proportion of cases

were resolved.
 Applications & Cases status of Micro and Small
Units (MSEs)

1,53,703
Applications filed by MSEs
More info

14355
Applications Mutually Settled
More info

38570
Applications yet to be viewed by MSEFC Council
More info

38896
Applications Rejected by MSEFC Council
More info

29874
Cases Disposed by MSEFC Council
More info

32008
Cases Currently under Consideration by MSEFC
 Source
https://samadhaan.msme.gov.in/MyMsme/MSEFC/M
SEFC_Welcome.aspx%3cas

Gujarat has filed the most MSME delayed payment cases

(2938), followed by Haryana (1680 cases) and Rajasthan

(1337 instances). Tamil Nadu has the most cases filed in South

India (909), with over half of them previously disposed of4.

This statistical data shows that a significant number of cases

have been heard and resolved.

CONCLUSION

MSEFC has several advantages, which are summarized below:

- A faster and more cost-effective method for MSME vendors

- Most advantageous because MSME vendors are primarily

operational creditors.

- Cases can be filed online through the MSME SAMADHAAN

site.

- The complete amount owing, including interest accrued

during the time, can be determined without regard to the

Resolution plan or Liquidation Amount.

- A defaulter filing an appeal must deposit 75% of the award

amount before filing the appeal.

- MSME can access the status via an online portal.

Keeping in mind the growing need to protect and support

MSMEs It must be considered that the MSMED Act could

provide a progressive step towards financially stabilizing these

firms at this difficult moment.

The planned suspension of the trigger provisions in the IBC

for six months may not be sufficient, and from a practical

standpoint, this period may be extended. If that is the case, it

stands to reason that MSMEs will turn to the MSMED Act for

sustenance and stability. This sector faces numerous obstacles

and should be protected from being driven into inappropriate

litigation; thus, the procedure established under the Act itself

must be strengthened; made very effective, and most

importantly, robust in implementation to assist the sector.