Amendment in the Insolvency and Bankruptcy Code- a breather for MSMEs

IBC amendments

The Hon’ble Prime Minister’s announcement to the nation, of the Rs. 20 lakh crore fiscal package to deal with the COVID-19 pandemic looks at turning the “crisis into an opportunity” for the Indian economy. Since the Prime Minister’s emphasis is on self-reliance, dependence on other countries shall decrease, which will greatly boost the Micro, Small and Medium Enterprises (MSME) sector in the country.

In the above package, the government has given a great impetus to the MSME sector. The MSME sector is the fulcrum of the Indian economy since it plays a pivotal role in providing large-scale employment and is the engine of industrialization of the rural and backward areas.

 Apart from the financial stimulus, the government also promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance to deal with the unprecedented hardship faced by the MSME sector on 05.06.2020.  Article 123 of the Constitution of India vests in the President of India, the power to promulgate ordinances, except when both Houses of the Parliament are in session, if “The President is satisfied that circumstances exist which render for him to take immediate action”.  

The following are the highlights of the ordinance:

1. Suspension of sections 7, 9, 10 of the Insolvency and Bankruptcy Code, 2016 (“IBC”) in case of defaults which have arisen on or after 25.03.2020 that deal with financial creditors, operational creditors and corporate applicants respectively.  
2. Time period in which suspension of Corporate Insolvency Resolution Process (“CIRP”) would be effective is yet to be notified by the government. As per the ordinance, the suspension is for a minimum of 6 months and could be extended up to a maximum of 1 year. 
3. Applications seeking to initiate CIRP for corporate debtors are however allowed in case the following conditions are satisfied: 

i.    The default arose before 25.03.2020
ii.    The amount of default is greater than Rs. 1 crore

The interpretation here is that in case a default arises on or after 25.03.2020 for a period of 6 months or any further period, an application, which initiates the Corporate Insolvency Resolution Process, of a corporate debtor, cannot be filed. While this further period has not been specified, as per the ordinance, it can be extended up to a maximum of 12 months, i.e. until 24.03.2021. 

The ordinance, thus, endeavors to provide some relief to those corporate debtors especially the MSME sector who are directly affected due to the COVID-19 pandemic which has led to widespread disruption of business operations across the nation. It primarily attempts to prevent corporate persons who are experiencing distress on account of this unprecedented and unfortunate pandemic, from being dragged into insolvency proceedings under the IBC for some time, thus giving them a breather to revive their business.  Earlier the Ministry of Corporate Affairs had, vide notification S.O. 1205 (E) dated 24.03.2020 as per the powers conferred to the central government by the proviso to Section 4 of the IBC, specified Rs. 1 crore as the minimum amount of default instead of the then existing amount of Rs. 1 lakh. The primary motive of doing so was to prevent the triggering of proceedings under the IBC against the small and medium enterprises that were facing a huge brunt due to the Covid-19 outbreak. 

These moves by the central government would definitely aid small businesses in their plight caused due to the COVID-19 lockdown. The Hon’ble Finance Minister had also announced in March earlier this year that debts relating to COVID-19 will be excluded from default under the Insolvency and Bankruptcy Code up to one year with a special insolvency framework also being notified under Section 240-A of the IBC. Presently, this has been increased by six months as per the aforesaid ordinance. This proposed amendment will indeed provide respite to the MSME Sector which as mentioned earlier has been badly affected by the pandemic.

The share of MSME Sector in India’s GDP was 30.3 per cent in the financial year of 2019. Small businesses and non-banking final companies are critical to the economy and liquidity will provide a great fillip to this sector by ensuring their solvency which is extremely vital for employment and job retention. Moreover it will also help the MSMEs in tackling the acute financial crisis faced by this sector amid this global pandemic to the government.

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