MSME

Case BriefsSupreme Court

Supreme Court: The bench of MR Shah* and AS Bopanna, JJ has held that in an appeal/application filed under Section 34 of the Arbitration & Conciliation Act, 1996 read with Section 19[1] of the Micro, Small and Medium Enterprises Development Act, 2006 (MSME Act, 2006), the appellate court would not have any discretion to deviate from deposit of 75% of the awarded amount as a pre-deposit.

The Court held that as per Section 19 of the MSME Act, 2006, at the time/before entertaining the application for setting aside the award made under Section 34 of the Arbitration & Conciliation Act, the applicant/appellant has to deposit 75% of the amount in terms of the award as a pre-deposit.

Hence, the requirement of deposit of 75% of the amount in terms of the award as a pre-deposit is mandatory. However, at the same time, considering the hardship which may be projected before the appellate court and if the appellate court is satisfied that there shall be undue hardship caused to the appellant/applicant to deposit 75% of the awarded amount as a predeposit at a time, the court may allow the pre-deposit to be made in instalments.

In Goodyear India Limited v. Norton Intech Rubbers Private Limited, (2012) 6 SCC 345, the Court had taken the same view wherein it was held that in the manner directed by such court” would indicate the discretion given to the court to allow the pre-deposit to be made, if felt necessary, in instalments. Otherwise the deposit of 75% as a pre-deposit is mandatory and the appellate court would have no discretion at all to deviate from the mandate under Section 19 of the MSME Act, 2006.

Hence, considering the language used in Section 19 of the MSME Act, 2006 and the object and purpose of providing deposit of 75% of the awarded amount as a pre-deposit while preferring the application/appeal for setting aside the award, it has to be held that the requirement of deposit of 75% of the awarded amount as a predeposit is mandatory.

[Gujarat State Disaster Management Authority v. Aska Equipments Limited, 2021 SCC OnLine SC 917, decided on 08.10.2021]

_____________________________________________________________________________________________

Counsels

For appellant: Advocate Ajay Kumar

For Respondent: Advocate Jitender Chaudhary

*Judgment by: Justice MR Shah

Know Thy Judge | Justice M. R. Shah

[1] 19. Application for setting aside decree, award or order – No application for setting aside any decree, award or other order made either by the Council itself or by any institution or centre providing alternate dispute resolution services to which a reference is made by the Council, shall be entertained by any court unless the appellant (not being a supplier) has deposited with it seventy-five per cent of the amount in terms of the decree, award or, as the case may be, the other order in the manner directed by such court: Provided that pending disposal of the application to set aside the decree, award or order, the court shall order that such percentage of the amount deposited shall be paid to the supplier, as it considers reasonable under the circumstances of the case, subject to such conditions as it deems necessary to impose.

Legislation UpdatesStatutes/Bills/Ordinances

On August 12, 2021, the Central Government has notified the Insolvency and Bankruptcy Code Amendment Act, 2021 which has brought Pre-packaged Insolvency Resolution Process for MSMEs. The Act repeals Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 and amends the provisions of IBC Act, 2016. It shall be deemed to have come into force on the 4th day of April, 2021

 

Key Highlights of the Act:

  • Application for initiating Prepacked Insolvency Resolution Process may be filed in the event of a default of at least one lakh rupees. The Central Government may increase the threshold of minimum default up to one crore rupees through a notification.
  • Definitions of ‘Pre-packed Insolvency has been inserted.

“pre-packaged insolvency resolution process costs” means

(a) the amount of any interim finance and the costs incurred in raising such finance;

(b) the fees payable to any person acting as a resolution professional and any expenses incurred by him for conducting the pre-packaged insolvency resolution process during the pre-packaged insolvency resolution process period, subject to sub-section (6) of section 54F;

(c) any costs incurred by the resolution professional in running the business of the corporate debtor as a going concern pursuant to an order under sub-section (2) of section 54J;

(d) any costs incurred at the expense of the Government to facilitate the pre-packaged insolvency resolution process; and

(e) any other costs as may be specified;

  • Chapter III A has been inserted on Prepacked Insolvency Resolution Process providing the following:
    1. Corporate debtors eligible for pre-packaged insolvency resolution process: Application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006
    2. Duties of Insolvency Professional before initiation of pre-packed insolvency resolution process: The duties of Insolvency Professional are as follows:
      • prepare a report, confirming whether the corporate debtor meets the requirements of section 54A, and the base resolution plan conforms to the requirements referred to in 54A (4) (c).
      • file such reports and other documents, with the Board, as may be specified.
    3. Application to initiate pre-packaged insolvency resolution process: Where a corporate debtor meets the requirements of section 54A, a corporate applicant thereof may file an application with the Adjudicating Authority for initiating pre-packaged insolvency resolution process.
    4. Time-limit for completion of pre-packaged insolvency resolution process: The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date.
    5. Declaration of moratorium and public announcement during pre- packaged insolvency resolution process: The Adjudicating Authority shall, on the pre-packaged insolvency commencement date, along with the order of admission declare a moratorium and appoint a insolvency professional.
    6. Duties and powers of resolution professional during pre- packaged insolvency resolution process: The resolution professional shall perform the following duties, namely:—

      (a) confirm the list of claims submitted by the corporate debtor under section 54G;
      (b) inform creditors regarding their claims;
      (c) maintain an updated list of claims;

      (d) monitor management of the affairs of the corporate debtor;

      (e) inform the committee of creditors in the event of breach of any of the obligations of the Board of Directors or partners, as the case may be, of the corporate debtor, under the provisions of this Chapter and the rules and regulations made thereunder;

      (f) constitute the committee of creditors and convene and attend all its meetings;

      (g) prepare the information memorandum on the basis of the preliminary information memorandum submitted under section 54G;

      (h) file applications for avoidance of transactions under Chapter III or fraudulent or wrongful trading under Chapter VI.

    7. List of claims and preliminary information memorandum: The corporate debtor shall, within two days of the pre-packaged insolvency commencement date, submit to the resolution professional the list of claims along with the details of he respective creditors, their security interests and guarantees, updated as on that date and a preliminary information memorandum containing information relevant for formulating a resolution plan.
    8. Termination of pre- packaged insolvency resolution process: Where the resolution professional files an application with the Adjudicating Authority, the Adjudicating Authority shall, within thirty days of the date of such application, by an order terminate the pre-packaged insolvency resolution process and provide for the manner of continuation of proceedings initiated for avoidance of transactions under Chapter III or proceedings initiated under section 66 and section 67A.
    9. Initiation of corporate insolvency resolution process: The committee of creditors, at any time after the pre-packaged insolvency commencement date but before the approval of resolution plan by a vote of not less than sixty-six per cent. of the voting shares, may resolve to initiate a corporate insolvency resolution process in respect of the corporate debtor, if such corporate debtor is eligible for corporate insolvency resolution process under Chapter II.
  • Insertion of new provision Section 67 A relating to Fraudulent management of corporate debtor during pre-packaged insolvency resolution process:

On and after the pre-packaged insolvency commencement date, where an officer of the corporate debtor manages its affairs with the intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may, on an application by the resolution professional, pass an order imposing upon any such officer, a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

  • Insertion of a new provision on Punishment for offences related to pre- packaged insolvency resolution process.

 

Case BriefsSupreme Court

Supreme Court: The bench of Ashok Bhushan and R. Subhash Reddy*, JJ has held that the Micro, Small and Medium Enterprises Development Act, 2006, being a special Statute, will have an overriding effect vis-à-vis Arbitration and Conciliation Act, 1996, which is a general Act. Hence, even if there is an agreement between the parties for resolution of disputes by arbitration, if a seller is covered by Micro, Small and Medium Enterprises Development Act, 2006, the seller can certainly approach the competent authority to make its claim. Further, if the counter-claim made by the buyer in the proceedings arising out of claims made by the seller is not allowed, it may lead to parallel proceedings before the various fora.

The Court, held,

“When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

Scheme of the Acts

  • As per Section 18(3) of the 2006 Act, when the conciliation initiated under sub-section (2) of Section 18 of the said Act is not successful, the Council shall either itself take up the dispute for arbitration or refer to any institution for arbitration.
  • Further, Section 18(3) of the said Act also makes it clear that the provisions of 1996 Act are made applicable as if there is an agreement between the parties under sub-section (1) of Section 7 of the 1996 Act.
  • The obligations of the buyer to make payment, and award of interest at three times of the bank rate notified by Reserve Bank in the event of delay by the buyer and the mechanism for recovery and reference to Micro and Small Enterprises Facilitation Council and further remedies under the 2006 Act for the party aggrieved by the awards, are covered by Chapter V of the 2006 Act.
  • The provisions of Section 15 to 23 of the Act are given overriding effect notwithstanding anything inconsistent therewith contained in any other law for the time being in force.
  • From the Statement of Objects and Reasons also it is clear that it is a beneficial legislation to the small, medium and micro sector.
  • The Arbitration and Conciliation Act, 1996 is a general law whereas the Micro, Small and Medium Enterprises Development Act, 2006 is a special beneficial legislation which is intended to benefit micro, small and medium enterprises covered by the said Act.
  • The Act of 2006 contemplates a statutory arbitration when conciliation fails. A party which is covered by the provisions of 2006 Act allows a party to apply to the Council constituted under the Act to first conciliate and then arbitrate on the dispute between it and other parties.

Fundamental differences in the settlement mechanism under the 2006 Act and the 1996 Act

  • The Council constituted under the 2006 Act to undertake mandatory conciliation before the arbitration which is not so under the 1996 Act.
  • In the event of failure of conciliation under the 2006 Act, the Council or the centre or institution is identified by it for arbitration. The 1996 Act allows resolution of disputes by agreed forum.
  • In the event of award in favour of seller and if the same is to be challenged, there is a condition for pre-deposit of 75% of the amount awarded. Such is not the case in the 1996 Act.

Why the counter-claim should be allowed?

“When Section 18(3) makes it clear that in the event of failure by the Council under Section 18(2) if proceedings are initiated under Section 18(3) of the 1996 Act, the provisions of 1996 Act are not only made applicable but specific mention is made to the effect as if the arbitration was in pursuance to an arbitration agreement referred to in sub-section (1) of Section 7 of the 1996 Act. When there is a provision for filing counter-claim and set-off which is expressly inserted in Section 23 of the 1996 Act, there is no reason for curtailing the right of the respondent for making counter-claim or set-off in proceedings before the Facilitation Council.”

The Court hence, noticed that if the counter-claim made by the buyer in the proceedings arising out of claims made by the seller is not allowed, it may lead to parallel proceedings before the various fora.

“When such beneficial provisions are there in the special enactment, such benefits cannot be denied on the ground that counter-claim is not maintainable before the Council.”

On one hand, in view of beneficial legislation, seller may approach the Facilitation Council for claims, in the event of failure of payment by the buyer under provisions of 2006 Act, at the same time, if there is no separate agreement between the parties for any arbitration in a given case, buyer may approach the civil court for making claims against the seller, or else if there is an agreement between the parties for arbitration in the event of dispute between the parties, parties may seek appointment of arbitrator. At the same time if the seller is covered by definition under micro, small and medium enterprises, seller may approach the Facilitation Council for making claims under the provisions of Micro, Small and Medium Enterprises Development Act, 2006. In such event, it may result in conflicting findings, by various forums.

“If any agreement between the parties is there, same is to be ignored in view of the statutory obligations and mechanism provided under the 2006 Act. Further, apart from the provision under Section 23(2A) of the 1996 Act, it is to be noticed that if counter-claim is not permitted, buyer can get over the legal obligation of compound interest at 3 times of the bank rate and the ―75% pre-deposit contemplated under Sections 16 and 19 of the MSMED Act.”

Further, when the provisions of Sections 15 to 23 are given overriding effect under Section 24 of the Act and further the 2006 Act is a beneficial legislation, even the buyer, if any claim is there, can very well subject to the jurisdiction before the Council and make its claim/ counter claim as otherwise it will defeat the very objects of the Act which is a beneficial legislation to micro, small and medium enterprises.

Even in cases where there is no agreement for resolution of disputes by way of arbitration, if the seller is a party covered by Micro, Small and Medium Development Act, 2006, if such party approaches the Council for resolution of dispute, other party may approach the civil court or any other forum making claims on the same issue.

“If two parallel proceedings are allowed, it may result in conflicting findings.”

[Silpi Industries v. Kerala State Road Transport Corporation, 2021 SCC OnLine SC 439, decided on 29.06.2021]

*Judgment by: Justice R. Subhash Reddy

Know Thy Judge| Justice R. Subhash Reddy

For appellants: Senior Advocates V. Giri, P.B. Suresh

For Kerala State Road Transport Corporation: Aishwarya Bhati, ASG

For Respondent: Basava Prabhu Patil

Case BriefsHigh Courts

Delhi High Court: A Division Bench of D.N. Patel, CJ and Prateek Jalan, J., held that as and when any advocate approaches the Court with regard to the inclusion of “Advocates” in the definition of “Professionals” under the Micro, Small and Medium Enterprises Development Act, 2006, the same could be entertained on merits.

A Public Interest Litigation was filed wherein the grievance was the non-inclusion of the advocates in the definition of the word “professionals” under the Micro, Small and Medium Enterprises Development Act, 2006.

Purpose of the petition was the welfare of the advocates as a class so that the benefits which flow from the inclusion under the Act, 2006 are made available to them as well.

Bench declined to entertain the petition.

Adding to its decision, Court stated that such PIL for the benefit of a class of persons can be preferred if the affected persons are unable to access the courts, e.g. the poorest of the poor, illiterates, children, and other classes of people who may be handicapped by ignorance, indigence, illiteracy or lack of understanding of the law.

Advocates are capable enough to approach the Court, if aggrieved.

Hence, as and when any advocate approaches the Court, decision on merits could be taken.[Abhijit Mishra v. UOI, 2020 SCC OnLine Del 927, decided on 29-07-2020]

Business NewsCOVID 19Hot Off The PressNews

Background:

Amidst the Corona crisis, PM announced  a special economic package with a new resolution. This economic package will serve as an important link in the ‘AtmaNirbhar Bharat Abhiyan” (Self Reliant India Campaign)‘.

What the Prime Minister said about the package?

In the recent past economic announcements made by the government related to the Corona crisis, which were the decisions of the Reserve Bank. The economic package that is being announced today, if added, comes to around Rs. 20 lakh crores. This package is about 10 percent of India’s GDP. With this various sections of the country and those linked to economic system will get support and strength of 20 lakh crore rupees. This package will give a new impetus to the development journey of the country in 2020 and a new direction to the Self-reliant India campaign. In order to prove the resolve of a self-reliant India, Land, Labor, Liquidity and Laws all have been emphasized in this package.

This economic package is for our cottage industry, home industry, our small-scale industry, our MSME, which is a source of livelihood for millions of people, which is the strong foundation of our resolve for a self-reliant India. This economic package is for that labourer of the country, for the farmers of the country who are working day and night for the countrymen in every situation, every season. This economic package is for the middle class of our country, which pays taxes honestly and contributes to the development of the country. This economic package is for Indian industries, which are determined to give a boost to the economic potential of India. Starting tomorrow, over the next few days, the Finance Minister will give you detailed information about this economic package inspired by the ‘Self-reliant India campaign’.

First press conference on the decoding Rs 20 Lakh Crore Package held today.

LIVE UPDATES

  • Focal point: Liquidity, Labour, Law and Land.
  • 6 Major steps for MSMEs
  • Collateral free Automatic Loans upto Rs 3 lakh Crores
  • 100 % credit guarantee
  • Additional Funds for MSME revival
  • Loans to be given till October 31st
  • Rupees 20 Crore for stressed MSMEs
  • 50,000 Crore equity to be infused for viable and potential MSMEs
  • New Definition of MSMEs — Investment can be upto 1 Cr and turnover upto 5 Crore
  • Global tender to be allowed upto Rs 20 Crores
  • Other interventions for MSMEs
  • Rs 2500 crores EPF support for businesses and Workers for 3 months
  • EPF contribution reduced for Business and Workers for 3 months — Rs 6750 Crores
  • Rs 30,000 crores liquidity facility for NBFC/HCs/MFIs
  • Rs 45,000 Crores Partial Credit Guarantee Scheme 2.0 for NBFC
  • Rs 90,000 CR liquidity injection for DISCOMs
  • Relief to contractors
  • Extension of registration and completion date of real estate projects under RERA; No individual applications needed; Suo Moto be done; Registered projects expiring on or after 25th March
  • Rs 50,000 crores Liquidity through TDS/TCS reductions till March 2021
  • Tax filing due date extended to 30th November, 2020
  • Pending refunds to charitable trusts and non-corporate businesses & professions including proprietorship, partnership, LLP and Co-operatives shall be issued immediately.
  • Due date of all income tax return for FY2019-20 extended from 31st July, 2020 & 31st October, 2020 to 30th November, 2020 and Tax audit from 30th September, 2020 to 31st October, 2020.
  • Date of Assessments getting barred on 30th September, 2020 extended to 31st December, 2020 and those getting barred on 31st March, 2021 will be extended to 30th September, 2021.
  • Period of Vivad se Vishwas Scheme for making payment without additional amount will be extended to 31st December, 2020
COVID 19Op EdsOP. ED.

Amid the outbreak of Novel Coronavirus or COVID-19, the Government of India on 24-3-2020, announced a nationwide lockdown. The Ministry of Home Affairs, Government of India vide Order dated 24-03-2020 issued certain directions which ensued the closure of majority of Government and private offices and other commercial establishments barring a few essential services. As a result of this country wide lockdown, many Micro, Small and Medium Enterprises (MSME) faced the imminent threat of going out of business. To curtail the panic among the MSME sector and alleviate the imminent threat of insolvency, a slew of measures have been taken to provide a cushion to the companies likely to face the downturn. Among these measures were the increased threshold of invoking insolvency to Rs 1,00,00,000 (Rupees one crore only) from the earlier amount of Rs 1,00,000 (Rupees one lakh only) and exclusion of the lockdown period from the 330-day timeline prescribed under the Insolvency and Bankruptcy Code, 2016 (hereinafter referred to as “IBC”) for completion of the insolvency process.

Section 4(1) of IBC provides for the threshold limits for triggering the insolvency proceeding. Section 4(1) of the IBC reads as follows: 

“4. (1) This Part shall apply to matters relating to the insolvency and liquidation of corporate debtors where the minimum amount of the default is one lakh rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one crore rupees.”

Exercising the powers conferred upon it under Section 4 of IBC, the Central Government vide Notification dated 24-03-2020 in the Official Gazette of India [1], has increased the minimum amount of default for the purpose of initiating a proceeding under IBC to Rs 1 Crore , which is the maximum threshold limit that the Central Government is empowered to prescribe.

A special provision, namely, Regulation 40-C has also been inserted in the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 to exclude the lockdown period from the timelines prescribed under the IBC vide Notification dated 29.03.2020 [2] which reads as follows:

“40-C. Special provision relating to time-line.— Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”

Thus, the present timeline of 330 days prescribed in the proviso to Section 12(3) of the IBC for the insolvency resolution process would not include the lockdown period of 21 days.

In a suo motu action, taking a cue from the Supreme Court, the National Company Law Appellate Tribunal (“NCLAT”) vide order dated 30-03-2020 in Suo Motu – Company Appeal (AT) (Insolvency) No. 01 of 2020 [3] held the following:

“(1) That the period of lockdown ordered by the Central Government and the State Governments including the period as may be extended either in whole or part of the country, where the registered office of the corporate debtor may be located, shall be excluded for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal or in appeal before this Appellate Tribunal.

(2) It is further ordered that any interim order/stay order passed by this Appellate Tribunal in anyone or the other appeal under Insolvency and Bankruptcy Code, 2016 shall continue till next date of hearing, which may be notified later.”

IMPLICATIONS OF INCREASED THRESHOLD LIMIT

It is pertinent to note that Section 7(1) of the IBC envisages initiation of Corporate Insolvency Resolution Process (“CIRP”) against a corporate debtor by a financial creditor either by itself or jointly with other financial creditors. The Explanation to Section 7(1) of the IBC provides that for the purpose of financial creditors, the default would include a default in respect of a financial debt owed not only to the applicant financial creditor but to any other financial creditor of the corporate debtor. Such an explanation is significantly absent from Section 8 of the IBC, which lays down provisions for operational creditors. Section 8(1) of the IBC provides that an operational creditor may, on the occurrence of a default, deliver a demand notice of unpaid operational debtor copy of an invoice demanding payment of the amount involved in the default to the corporate debtor in such form and manner as may be prescribed. In absence of a provision of joint action by operation creditors, the increased threshold limit of Rupees one crore  would essentially drive out the operational creditors from the realms of IBC as most of the operational debts would fail to meet the one crore mark individually, especially with respect to MSME.

It is further pertinent to note that the Notification dated 24-03-2020 deals with Part II of the IBC which is concerned with Insolvency Resolution and Liquidation for Corporate Persons. The threshold limits pertaining to personal guarantors specified under PartIII of the IBC, namely, Insolvency Resolution and Bankruptcy for Individuals and Partnership Firms have been left untouched. The provisions of Part III of the IBC so far as they are applicable to personal guarantors to corporate debtors were brought into force from 1-12-2019 [4]. Section 78 of the IBC which provides for threshold limit for triggering insolvency and bankruptcy proceedings against individuals reads as under:

“78. Application.- This Part shall apply to matters relating to fresh start, insolvency and bankruptcy of individuals and partnership firms where the amount of the default is not less than one thousand rupees:

Provided that the Central Government may, by notification, specify the minimum amount of default of higher value which shall not be more than one lakh rupees.”

The minimum amount of default for initiation of insolvency resolution against personal guarantors of corporate debtors continues to be pegged at Rs. 1000 (Rupees one thousand). Consequently, while the revised threshold limits have made it difficult to initiate insolvency proceedings against an MSME, the applications for initiation of insolvency proceedings against the personal guarantors of such MSME might witness an increase in numbers.

EFFECTS ON PENDING AND FUTURE CASES

The said Notification dated 24.03.2020 does not provide for retrospective application of the revised limits. Therefore, the earlier threshold of Rupees one lakh would continue to apply to cases that are pending. The new applications seeking commencement of CIRP would necessarily have to meet the revised criterion of default of minimum Rupees one crore by the corporate debtor.

The financial distress may also pose difficulties for companies undergoing CIRP to complete the process within the period of 330 days prescribed in the proviso to Section 12(3) of the IBC even after the exclusion of the lockdown period. Section 12(3) of the IBC which read as follows:

“Provided further that the corporate insolvency resolution process shall mandatorily be completed within a period of three hundred and thirty days from the insolvency commencement date, including any extension of the period of corporate insolvency resolution process granted under this section and the time taken in legal proceedings in relation to such resolution process of the corporate debtor:”

In this regard, it is pertinent to refer to the judgement in Committee of Creditors of Essar Steel India Ltd. Through Authorised Signatory v. Satish Kumar Gupta [5], whereby the Supreme Court struck down the word “mandatorily” used in the abovesaid proviso as being manifestly arbitrary under Article 14 of the Constitution of India and as being an excessive and unreasonable restriction on the litigant’s right to carry on business under Article 19(1)(g) of the Constitution and held as follows: (SCC OnLine para 108)

“108. …The effect of this declaration is that ordinarily the time taken in relation to the corporate resolution process of the corporate debtor must be completed within the outer limit of 330 days from the insolvency commencement date, including extensions and the time taken in legal proceedings. However, on the facts of a given case, if it can be shown to the Adjudicating Authority and/or Appellate Tribunal under the Code that only a short period is left for completion of the insolvency resolution process beyond 330 days, and that it would be in the interest of all stakeholders that the corporate debtor be put back on its feet instead of being sent into liquidation and that the time taken in legal proceedings is largely due to factors owing to which the fault cannot be ascribed to the litigants before the Adjudicating Authority and/or Appellate Tribunal, the delay or a large part thereof being attributable to the tardy process of the Adjudicating Authority and/or the Appellate Tribunal itself, it may be open in such cases for the Adjudicating Authority and/or Appellate Tribunal to extend time beyond 330 days…”

Furthermore, in view of the uncertainty caused by the pandemic, the companies that are presently undergoing the CIRP would possibly find it difficult to attract resolution applicants. In cases where a resolution plan has been submitted by the resolution applicant and is pending approval of the Committee of Creditors or the Adjudicating Authority, the resolution applicant might seek modification of the resolution plans already submitted or cancellation of the process of submission/finalisation as the valuations and viability of businesses is likely to be severely affected due to the COVID-19 outbreak. Although there is no provision in the IBC that allows the resolution applicant to modify or withdraw a resolution plan which is pending approval of the Adjudicating Authority, the National Company Law Tribunal, Mumbai has vide order dated 27.09.2019 in State Bank of India v. Metalyst Forgings Ltd.[6] allowed the prayer of the resolution applicant seeking cancellation of the process of submission of the resolution plan and held as follows:

“72. The IBC neither confers the power or jurisdiction on the Adjudicating Authority to compel specific performance of a plan by an unwilling resolution applicant. The letter and spirit of the IB Code mandate the acceptance of only a viable and lawful resolution plan being implemented at the hands of a willing resolution applicant. Absence of these factors renders the Section 31 application liable to be rejected. The IB Code envisages a scheme whereby the corporate debtor is taken over by the successful resolution applicant. This scheme must contain a provision for its implementation and supervision under Section 30(2)(d) and as required by the proviso to Section 31(1).

73. At this point, it is fit to refer to the sub-section (4) of Section 30 of the IB Code as it lays down the basis on which a resolution plan would be approved by the Committee of Creditors. For the sake of reference, the said clause is reproduced below:

“(4) The committee of creditors may approve a resolution plan by a vote of not less than sixty-six per cent of voting share of the financial creditors, after considering its feasibility and viability, and such other requirements as may be specified by the Board.”

74. Thus, a resolution plan is to be approved by the CoC only after being satisfied that it is feasible and viable. This clearly implies that if a resolution plan is not viable and found unfit for implementation or does not have proper provisions for its successful implementation or is based on incorrect assumptions which would lead to failure of the resolution plan and eventual, inevitable death of the corporate debtor, then the CoC ought to reject such a resolution plan. Regulation 38(3) of the IBBI (Insolvency Resolution Process for Corporate Persons) Regulations, 2016 provides that the resolution plan shall demonstrate with (a) it addresses the cause of default, (b) it is feasible and viable, (c) it provides for effective implementation, (d) it provides for approvals required and the time lime for the same, and (e) the resolution applicant has the capability to implement the resolution plan.”

(emphasis in original)

The National Company Law Appellate Tribunal vide order dated 07-02-2020 in Committee of Creditors of Metalyst Forging Ltd. v. Deccan Value Investors LP [7] upheld the order dated 27-09-2019 passed by the NCLT, Mumbai Bench in State Bank of India v. Metalyst Forgings Ltd. (supra) and observed that the IBC does not confer any power and jurisdiction on the Adjudicating Authority to compel specific performance of a plan by an unwilling resolution applicant.

CONCLUSION

The exclusion of lockdown period and the increased threshold limit are welcome steps taken by the legislature to ensure that the Micro, Small and Medium Enterprises have enough cushion to recover from the financial distress caused by the COVID-19 pandemic and would also declutter the cases under IBC by filtering out the frivolous ones. The low threshold of Rupees one lakh was hitherto criticised for potentially pushing an otherwise strong enterprise into liquidation for a default of a small amount at the instance of a single operational creditor. The critiques of the earlier threshold limit have hailed the revision as a positive move as it curtails the expansive powers of trigger-happy operational creditors who were more interested in recovery rather than resolution. It is ought to be remembered that the operational creditors do not stand to benefit in case a company undergoes liquidation as they are below the financial creditors in the line of proportionate repayment. The  IBC is only a measure of last resort for the operational creditors. However, in cases where there is a personal guarantee, mostly given by the promoters/directors, it might still be used as a mechanism for recovery as the limit for initiation of the proceedings has not proportionately been increased and could possibly be a route that may be used to put pressure on the companies.

Nevertheless, in the times of the unprecedented downturn being experienced on account of the COVID-19 pandemic, the aforesaid measures would prove to be beneficial for resurrection of the enterprises facing the heat. After all, the key objective of the IBC is to ensure that the corporate debtor keeps operating as a going concern.

*Abhinav Shrivastava, Partner, GSL Chambers

**Sana Kamra, Associate, GSL Chambers

[1] https://www.ibbi.gov.in/uploads/legalframework/48bf32150f5d6b30477b74f652964edc.pdf

[2] https://ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf

[3] Suo Motu, In re, 2020 SCC OnLine NCLAT 206

[4] https://ibbi.gov.in//uploads/legalframework/1fb8c2b785f35a5126c58a2e567be921.pdf

[5] 2019 SCC OnLine SC 1478

[6] CP 1555(IB)/MB/2017, https://nclt.gov.in/sites/default/files/Interim-Order-pdf/SBI%20vs%20Metalyst%20Judgement%20CP%201555-2017%20NCLT%20ON%2027.9.2019.pdf

[7] Company Appeal (AT) (Insolvency) No. 1276 of 2019, https://nclat.nic.in/Useradmin/upload/8392498195e4106c6488b1.pdf

Business NewsNews

Electronic bill exchanges are the latest match-making venues for lenders seeking new clients and small entities desperate for capital. The fledgling exchanges, opened under the Trade Receivables Discounting System (TReDS), have attracted a host of lenders otherwise shy of financing companies with low credit ratings, since the new system allows them to find creditworthy clients and build new relationships. System gives small firms access to cash, helps banks find new creditworthy customers.

Typically, micro, small and medium enterprises (MSMEs) that supply products or services to larger companies raise their bills (or trade receivables) but have to wait long to be paid, resulting in a shortage of working capital. Under TReDS, the MSME uploads the same bill on a TReDS bill discounting exchange, where lenders bid to buy the bill, depending on the creditworthiness of the bigger company. The selected lender which offers the lowest discount or margin pays the MSME, and later receives the payment from the larger company. It’s a win-win situation for both the MSME (which gets immediate cash) and the lender (which find new creditworthy customers, though with less risk due to the payment due from the larger company). Joining TReDS has helped new MSME clients get access to priority sector lending-compliant loans and build stronger portfolios.

The benefit of such collaborations is that the exposure is on a stronger entity and banks get opportunity to build a relationship with both the large companies as well as MSMEs. Also, availability of more authentic data due to GST will enable banks to do better due-diligence and help give more credit to MSME. The state-owned lender has tied up with all three TReDS exchanges licensed by the Reserve Bank of India in November 2015. According to bankers, goods and service tax (GST) has brought many companies under the tax umbrella, making banks confident of lending to them. MSMEs are usually capital-starved because of limited access to bank credit. One of the key reasons is lack of documentation and skills to predict future cash flows, weak account maintenance, and non-compliance with taxation rules. Additionally, demonetization had impacted their finances, which were already stretched because of delays in payments by large companies at least by over a quarter. Apart from TReDS, other announcements too are likely to boost credit demand to the sector. Separately, RBI on 7 February, 2018, gave additional time for loan repayment to certain MSMEs affected by GST, without getting their accounts classified as non-performing. This facility is available only to those firms whose aggregate loans are less than Rs 25 crore. These steps may prompt more lenders to register themselves on these platforms.

[Source: Livemint]