Now, insolvency proceedings will not be initiated up to 1 year. Earlier, the MCA had extended it to six months.
The government has raised the minimum threshold to initiate insolvency proceedings to Rs 1 crore from Rs 1 lakh, which largely insulates MSMEs. The Finance Minister added that the insolvency proceedings will not be initiated up to 1 year, recollecting that currently the MCA has extended it to six months.
The second important measure announced is a special insolvency resolution framework under Section 240A of the IBC which will be notified soon.
“This is a major step forward and in all probability will be going through an ordinance to achieve the goal immediately,” she said.
The FM has recently suspended Section 7, 9 and 10 of the Insolvency and Bankruptcy Code (IBC) for a period of 6 months. However, the SME sector wanted that IBC as a whole should be suspended for the said six month time period.
The MSME sector, however, is not very elated with the announcement. “How do such measures really help an industry and how does it really help in the ease of doing business? Does anyone plan for bankruptcy before they start a business? They would rather be keen to see tax benefits, refunds, online registrations, self declaration etc. Why would someone want to acquaint themselves with bankruptcy laws at the outset,” questions Mahavir Pratap Sharma, Immediate Past Chairman, CEPC.
Sharma adds that he thinks such measures only service the medium or the larger units of MSMEs. “It, in no way, covers the micro and smaller firms which are much larger in number. The micro firms are more in distress and need far more support and help. Smaller firms don’t go for bankruptcy proceedings in any case. I haven’t heard of any such cases in India. The government is still not focusing on the micro segment which constitutes the majority as far as MSMEs in the country are concerned,” says Sharma.
Animesh Saxena, President, FISME, welcomed the government’s announcement, but feels that all measures put forward by the government are focused more on enhancing business continuity and businesses revival for businesses. “However, the industry has been looking for something to immediately rescue the fund starved MSME sector. With zero revenue coming in throughout the last two months, the survival of MSMEs is today very much at stake. The cost of salary and wages in the sector goes up to 30-35%, then there are fixed costs like rentals, electricity etc. Also, the cost of wages and salaries are usually higher in this segment, because of the lack of automated operations. Hence, what we wanted from the FM were some immediate measures to help the sector remain afloat and these measures don’t seem to be aimed at that,” says Saxena.
According to Aashit Shah, Partner at J Sagar Associates, the proposed amendments to the IBC will provide respite to the MSME sector that has been the most affected by the pandemic.
“Hopefully, the amendments will not impact applications that were filed prior to the lockdown and are still pending admission. However, suspension of new IBC proceedings against companies that were in default unconnected to the pandemic will leave lenders with limited options. There is an urgent need for improvements to the RBI restructuring framework, introducing pre-packs and establishing a bad bank to safeguard the interests of lenders,” says Shah.
Section 240A of IBC applies to micro, small and medium enterprises.
It states that notwithstanding anything to the contrary contained in this Code, the 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.
Subject to sub-section (1), 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.