The Corporate & Commercial Law Society Blog, HNLU

Category: MSMEs

  • Bar of Limitation on Arbitral Proceedings under the MSMED Act

    Bar of Limitation on Arbitral Proceedings under the MSMED Act

    By sudipta choudhury and arnav singh, fourth-year students at nalsar, hyderabad

    Introduction

    The applicability of the Limitation Act, 1963 (‘Limitation Act’) to certain statutes has been a contentious issue in India. One aspect of this issue was recently settled by the Supreme Court in the case of M/s. Silpi Industries etc v. Kerala State Road Transport Corporation &Anr. (2021) where the Court addressed the applicability of the law of limitation on arbitration proceedings initiated under section 18(3) of the Micro, Small and Medium Enterprises Development Act, 2006 (‘MSMED Act’). In holding that the Limitation Act would be applicable to the said arbitral proceedings, the Court upheld and endorsed the reasoning of the Kerala High Court in this regard, dismissing the appeal against it. This article aims to analyse the judgment and unpack its implications.

    Legal Issue

    The Court in the present case was faced with a two-fold question. Firstly, whether the Indian Limitation Act would be applicable to arbitration proceedings under section 18(3) of the MSMED Act, and secondly, whether it would be possible to maintain a counter-claim in such arbitration proceedings. This article deals with the first issue and attempts to break it down in the context of precedents surrounding it. 

    The Apex Court’s Findings


    On the question of applicability of the law of limitation to arbitration proceedings initiated under the MSMED Act, the Court noted that a perusal of the provisions of the MSMED Act indicates that in the event of a dispute arising out of a sale agreement between parties, the same shall be referred to the MSME Facilitation Council under sections 17 and 18 of the MSMED Act which lay down the ‘recovery mechanism’. Once such reference is made, it was noted that the MSME Facilitation Council is conferred with the power to initiate arbitration or conciliation or refer the matter to any other alternative dispute resolution body or institution, under sections 18(2) and (3) of the MSMED Act. In any case, the Apex Court observed that such an arbitration or conciliation arising out of the MSMED Act shall be governed by the Arbitration and Conciliation Act, 1996 (‘Arbitration Act’), as though initiated in accordance with an arbitration agreement between the parties, under section 7(1) of the Arbitration Act, or in case of conciliation, it would be applicable as though initiated under part III of the Arbitration Act.

    In addition to this, in the case of Andhra Pradesh Power Coordination Committee & Ors. v. LancoKondapalli Power Ltd. & Ors. (‘AP Power’).  the Supreme Court held that the arbitration proceedings conducted under the MSMED Act fall within the scope of the Limitation Act. The reasoning of the Court in the aforementioned case is in consonance with a plain reading of section 43 of the Arbitration Act which lays down that the Limitation Act shall apply to arbitrations, in the same manner as it applies to court proceedings. With due regard to this, the Court in the present case opined that section 43 shall survive in its operation and applicability to arbitration proceedings within the MSMED Act and accordingly, the Limitation Act will apply. Thus, the assailed judgment of the Kerala High Court was upheld, insofar as it placed reliance on the Apex Court’s reasoning in AP Power, and interpreted the impugned provisions of the three Acts to hold that the Limitation Act would be applicable to the proceedings initiated under the MSMED Act.

    Analysis

    It is important to note that despite the MSMED Act is silent about the applicability of limitations on disputes referred to MSME Facilitation Councils, the Court’s reasoning is largely hinged upon the arbitration proceedings being governed by the Arbitration Act, and thus, being subject to the operation of the Limitation Act. However, it is also pertinent to not be remiss of the fact that section 2(4) of the Arbitration Act bars the application of the Limitation Act under section 43 to proceedings initiated under an enactment. The MSMED Act, being one such enactment, gives way to a plethora of questions and confusion. The question of applicability of the Limitation Act to the arbitration proceedings under the MSMED Act has thus been mired in ambiguities that have been addressed by the Courts in a catena of decisions.

    A perusal of the initial judgments in the area shows that the Courts were faced with the question of applicability and the prevalent argument was that there were two remedies under the MSMED Act: one, before the MSME Facilitation Council and another, before a civil court. Thus, for the sake of consistency in proceedings, it was argued that if the Limitation Act is applicable in court proceedings, it shall also apply to disputes before the MSME Facilitation Councils.

    This came up before the Bombay High Court squarely in the case of Delton Electricals v. Maharashtra State Electricity Board, along with the question of section 2(4) of the Limitation Act explicitly excluding arbitration proceedings arising out of an Act from its ambit. On the first question, the Court took note of the availability of two separate trajectories under the MSMED Act, and observed that if one resolution mechanism before the civil court is subjected to the Limitation Act, while another resolution mechanism before the MSME Facilitation Council is not, it will lead to an “incongruous situation.” On the question of express exclusion of statutory arbitration, the High Court noted that the provisions of the Arbitration Act are made applicable to arbitral proceedings arising out of the MSMED Act, and no specific exception is made therein for section 43 of the Arbitration Act which lays down that the Limitation Act shall be applicable to arbitrations in the same manner as it applies to court proceedings. Thus, it was held that the provisions of the Limitation Act would be applicable to arbitrations under section 18(3) of the MSMED Act, in the same manner as they would apply to arbitrations arising out of an arbitration agreement between parties under section 7(1) of the Arbitration Act.

    Further, in AP Power, the Apex Court dealt with a dispute arising out of the Electricity Act, 2003, which provides for statutory arbitration before the Electricity Commission. The issue that arose before the Court was whether, in the absence of a limitation provision in the Electricity Act, the same had to be presumed in order to ensure uniformity with arbitral or civil court proceedings. This was so because otherwise the parties concerned stood a chance of getting enriched in a manner, not contemplated in the pursuance of an ordinary suit, due to the operation of the bar of limitation. Further, the Court noted that no right was vested through the Electricity Act that could permit claims otherwise barred by limitation. Therefore, such a claim will not survive because it is not recoverable as an ordinary suit owing to being time-barred. The Court, placing reliance on the object and the intent of the Electricity Act, further observed that “not only because it appears to be more just but also because unlike Labour laws and Industrial Disputes Act, the Electricity Act has no peculiar philosophy or inherent underlying reasons requiring adherence to a contrary view” (para 29)

    Thus, a primary view of the Court’s reasoning points to its inclination to examine the legislative intent behind an Act, in addition to the rights it seeks to confer, and the “philosophy” it follows, indicating a purposive and well-rounded interpretation of the enactment.

    In consonance with the Court’s rationale in AP Power, it is submitted that the legislative intent and the philosophy of the MSMED Act should also be taken into account while considering whether it should be subjected to the Limitation Act. A perusal of the MSMED Act’s Statement and Objects reveals that it is aimed at the expeditious resolution of disputes and legislative intervention is intended to secure an efficacious remedy for timely payment. Thus, the MSMED Act should be interpreted in a manner which allows it to facilitate timely payment to suppliers. The author submits that instead of recognising new rights which are not expressly conferred by the statute, the MSMED Act should be interpreted in a manner which allows the facilitation of timely payment to suppliers. This is in consonance with the principle that disallows claims from ordinary suits on account of being time barred, unless it is explicitly allowed in the statute. 

    Thus, it is submitted that the present case, in so far as it addresses the first issue, correctly applies the rationale laid down in the AP Power, and places due reliance on the legislative intent behind the MSMED Act, effectively bringing its objects to full fruition by ensuring that there is uniformity in the adjudication proceedings across civil courts and arbitration tribunals. It has done so by engaging in a purposive reading of the statute that allows the applicability of the Limitation Act to arbitration proceedings arising out of the MSMED Act.

    Conclusion

    The Supreme Court has laid the matter to rest by discerning the scope of the Limitation Act vis-à-vis arbitration proceedings under the MSMED Act. It has ensured that claims under MSMED Act would be subject to limitation, like any other commercial claim, while also effectuating the legislative intent of the MSMED Act, which is aimed at providing a speedy redressal of disputes. Although a welcome development, the matter remains to be a subject for debate as the question of the extent of applicability of the Arbitration Act, especially in the event of clashes with the MSMED Act, remains ambiguous. For instance, section 18(5) of the MSMED Act lays down that every reference shall be decided within 90 days, in contrast with the Arbitration Act, which stipulates the time period for passing an award as twelve months from the date of completion of pleadings under section 23(4).

    However, the Court’s reasoning in subjecting the proceedings to the bar of limitation is in consonance with the larger intent of the MSMED Act, and fits with the scheme of other civil and arbitral proceedings. Thus, it largely remains successful in settling the dispute and interpreting the provisions involved.

  • The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

    The Three Musketeers of Pre-Packaged Insolvency – Transparency, Administration, and Role of the Courts

    By abhigyan tripathi and anmol mahajan, fourth-year students at rgnul, patiala

    Introduction

    One of the primary objectives of the Insolvency and Bankruptcy Code,  2016 (“IBC”) is to facilitate the rescue of the Corporate Debtor (“CD”) as a going concern. In furtherance of fulfilling the IBC’s legislative intent, MS Sahoo was appointed to chair a sub-committee and recommend a regulatory framework for Pre-packaged Insolvency Resolution Process (“PPIRP”). The President, on the basis of the sub-committee’s suggestions, promulgated the IBC (Amendment) Ordinance, 2021 which allows MSMEs to go for PPIRP.

    One of the ways of rescuing a corporate entity is through the PPIRP wherein the objective is to establish a balance between the creditors’ interests and the business and assets of the Corporate Debtor (“CD”). PPIRP is an insolvency procedure involving a smooth transition of its assets by the CD to the prospective buyer prior to the appointment of a Resolution Professional who facilitates the corporate restructuring. The aim of this piece is to engage in a cross-jurisdictional analysis of the aforementioned Ordinance and test its efficacy in the Indian market scenario on the basis of three parameters, i.e., transparency, debtor-in-possession methodology, and the role of the adjudicating authority.

    I. Analysing the Pre-packaged Insolvency Framework in the United Kingdom

    Following the suggestions put forth by the Cork Report, the United Kingdom (“UK”) introduced its first wave of insolvency reforms in 1986 which envisaged the concept of ‘Corporate Rescue’.[i] The second wave of these reforms was introduced when Part 10 of the Enterprise Act, 2002 revised and improved the Insolvency Act of 1986. Even though the bare texts of both aforementioned statutes do not make a mention of “pre-packaged insolvency”, the UK always has had a Debtor-in-Possession based insolvency procedure, namely the Company Voluntary Arrangement (“CVA”). The CVA is analogous to PPIRP in the sense of the same being an informal and voluntary method of going through the insolvency process. Keeping in mind the pandemic situation, the UK has made even further attempts to make the insolvency framework more “debtor-friendly” by introducing the Corporate Insolvency and Governance Act, 2020. Since a company availing the CVA is required to couple it with the formal Administration procedure for a court-ordered moratorium, it cannot be used as a tool of financial restructuring. Therefore, this Act aims at providing financially riddled enterprises a chance at informal restructuring through a standalone moratorium on adverse creditor action.

    1.1 Transparency

    Ms. Teresa Graham, CBE, an Advisor to the UK Government and a renowned accountant, was given the responsibility to carry out a review of the PPIRP practice in the UK in 2013. As a result of the same, ‘The Graham Review of 2014’ was released. As was anticipated, the review was in favour of PPIRP practice in the UK but highlighted the lack of transparency as a major concern specially for unsecured creditors. A set of voluntary measures were suggested by the review to counter the transparency issue.

    One such solution proposed was setting up a group of experienced business people called ‘pre-pack pool’. This group shall be responsible to carry out an independent scrutiny of the pre-pack sale and suggest improvements to the same. Another solution to tackle the issue of transparency, as suggested by the Review, was the Statement of Insolvency Practice (SIP) 16 that may be understood as guidance for Insolvency Practitioners to conduct Insolvency Administrations. SIP16 provides for disclosure to be made by the Insolvency Practitioners to the creditors explaining and justifying the reasons for which a pre-packaged sale was undertaken.  

    An enterprise can still go through with a pre-pack deal even if a pre-pack pool member issues a negative statement, though the same has to be reflected as per the SIP16 requirements. In case the pre-pack member issues a positive statement, it would also be referred to in the SIP16 statement. The Insolvency Practitioners’ Association adopted these voluntary measures in November, 2015.

    1.2 Administration of the CD

    In the UK, the management of the debtor company rests with an administrator who is appointed for this purpose. Such an appointment can be made (a) by the Court, (b) by the holder of the floating charge, or (c) by the company or its directors. The administrator has the primary objective to rescue the debtor company as a going concern.

    1.3 Role of the Courts/Tribunals

    The role of courts can be looked at from both a positive and negative prism. The positive aspect of court involvement will not only protect the interests of the unsecured creditors but also will act as a grievance redressal mechanism. The final stamp of the court will also provide a credible authority to the procedure. However, the negative aspect is that such an intervention of the courts is discretionary and time taking which defeats the basic purpose of a pre-packaged insolvency.

    The UK has a mixed solution to this, on one hand where the insolvency practitioner is entrusted with finalizing the pre-pack transaction, on the other hand the creditors can approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway.

    II. Analysing the Pre-packaged Bankruptcy Regime in the United States

    The United States insolvency regime provides for three kinds of proceedings: pre-packaged bankruptcy proceedings, pre-arranged bankruptcy proceedings, and pre-plan sales. These procedures are an amalgamation of both out-of-court and formal mechanisms. It is therefore necessary to gauge the three procedures on the basis of the following criterion:

    2.1 Transparency

    The provisions of the US Bankruptcy Code, 1978, have been able to ensure a substantial amount of transparency through its provisions since they require approval of any resolution/reorganization plan within Chapter 11 by all the classes of creditors for bankruptcy proceedings to move forward. As per section 1123(a)(4) of the Code, every interested party in a class of creditors is required to be treated equally through the reorganization plan envisaged by the CD. To avail the benefits of flexibility within the ambit of Chapter 11, a CD has to ensure that the interested stakeholders are on board at every step and therefore cannot ignore the rights of even unsecured creditors as per section 1129(a).

    Even pre-plan sales under section 363 of the US Bankruptcy Code, though not requiring approval from all the interested stakeholders, need to be approved by the requisite Bankruptcy Court.[ii][1] In the context of section 363 sales, a bidder used to set the purchase price floor for other prospective buyers to know the minimum bidding amount is termed as the ‘stalking-horse’. The stalking-horse bidding, which is often engaged in by the debtors, helps in ensuring a proper due-diligence by the interested buyers. This has resulted in highly successful restructurings since the creditors are able to reap the benefits of high-value sale of the CD’s assets.[iii]

    2.2 Administration of the CD

    The pre-packaged/pre-arranged bankruptcy regime in the United States does not involve an automatic appointment of a Trustee (analogous to RP or Administrator in the UK) since the CD assumes the role of a debtor-in-possession and performs restructuring responsibilities while being in control of its assets under Chapter 11. A debtor remains in possession till the approval of the reorganization, dismissal of the same and subsequent liquidation proceedings (under Chapter 7) or the appointment of a court appointed trustee.

    2.3 Role of the Courts/Tribunals

    In both the pre-packaged and pre-arranged bankruptcy proceedings, the CD is required to file a Chapter 11 petition with the concerned bankruptcy court after having completed the procedure associated with voting and negotiation upon the reorganization plans. Even the section 363 pre-plan sales require the court’s stamp over the validity of asset sale. 

    There are various bankruptcy-specific courts in the United States which analyze the reorganization plans in an expedited manner. They ensure that there is no gross discrimination against any impaired class of creditors while clamping-down upon the minority dissenting creditors if the reorganization plan is fair and equitable as per the requirements of the Bankruptcy Code under section1129(b).

    Such flexible structures and procedural guidelines ensure that restructurings are successfully wrapped within two and four months for pre-packaged and pre-arranged bankruptcy proceedings as compared to 11 months for traditional Chapter 11 proceedings. Pre-plan sales under section 363 take only as much time as the auction process and the courts only require the CD to have successfully served the notice of asset sale to all stakeholders.[iv]

    Conclusion and Analysis

    Insolvency in India and the rules governing it are still at a nascent stage of development. The COVID-19 pandemic led to a complete standstill of the framework since the Central Government paused all fresh filings of insolvency proceedings. Hence, the introduction of pre-pack insolvency comes as a breath of fresh air.

    Firstly, with respect to transparency, concerns surrounding transparency in the process have not yet been addressed but the analysis of the UK and US models of pre-pack above gives valuable input. The introduction of a pre-pack pool as seen in the UK regime can be a game changer in this regard. Not only will this make the process more transparent but will also help in the corporate rescue of the debtor. Additionally, the pre-pack pool might have been even more effective in the UK, if referral to the same was mandatory. The authors believe that mandatory referral to a similar body may have been conducive for medium and large enterprises in India.

    Secondly, with respect to the administration of the CD, the recent ordinance provided for the debtor-in-possession regime, wherein unlike the CIRP, the CD is responsible for protection of its assets so that the position of the creditor is not jeopardized. One important advantage of this regime is that it will minimise the obstacles to business during PPIRP since the CD is empowered to continue running its business operations, with the express objective of working in the best interests of the creditors. It is essential to derive insight from the UK framework and mould the Indian model in a manner which lets the Insolvency Resolution Professional proceed with the implementation of the plan while giving the creditors a right to approach the court if they have any grievance with either the administrator or the transaction via a complaints gateway as is done by the UK.   

    Thirdly, as far as the role of NCLT is concerned, the procedure requires an initial application for moving forward with PPIRP before the NCLT under section 54A(1) by a CD which falls under the category of MSME. Thereafter, the NCLT has 14 days to either reject or accept the same. Furthermore, the approval of a resolution plan requires a 66% vote by value in its favour by the creditors, post which it is submitted to the NCLT for consideration. Therefore, the highly overbearing role of NCLT as per the procedure defined by this ordinance might possibly help in reducing the problem of delays and discretion which already plagues CIRP.  Therefore, the NCLT needs to adopt a fast-track approach which is similar to the one adopted by Courts in the US. Sub-tribunals specialized in dealing with insolvency matters in a more efficient fashion (as compared to the current regime) may be instituted which can make sure that restructuring plans, if in accordance with equity and fairness envisioned by the IBC, are approved and applied to successfully rescue the CD.

    Despite the Ordinance having been passed to counter the adverse effects of COVID-19 on insolvency, the expedite nature of PPIRP can potentially benefit the Indian insolvency regime as a whole. It should also be kept in mind that maximising returns from this PPIRP framework requires a great amount of transparency during the entire process to ensure that certain categories of creditors do not partake in backdoor negotiations, which might result in a win-lose position between the concerned stakeholders. The authors are of the opinion that PPIRP framework for MSMEs is a first step in a series of reforms and if implemented properly, goes a long way towards ease of doing business in India as a whole.

     

    [i] Cork Report of the Review Committee, Insolvency Law and Practice, (Cmnd 8558, 1982), para 198.

    [ii] Bo Xie, Pre-pack Approach in Corporate Rescue (Edward Elgar Publishing, 2016), 205-206.

    [iii] Ben Larkin et al, Restructuring Through US Chapter 11 and UK Prepack Administration, para 8.51.

    [iv] Ibid.

  • IBC Ordinance: A Double-Edged Sword for MSMEs

    IBC Ordinance: A Double-Edged Sword for MSMEs

    BY JUBIN MALAWAT AND BHAVYA KALA, SECOND-YEAR STUDENTS AT RGNUL, PUNJAB

    Introduction

    CoVID-19 has created worst ever recessional conditions in the markets worldwide leaving everyone in distress. In light of the prevalent market conditions and the anticipated future contraction in the market, the government of India has introduced a few stabilizing and corrective measures keeping in mind the vulnerability of the Micro, Small and Medium Enterprises (‘MSMEs’) in these challenging times. One of the best examples of the measures adopted by the Union Government is the vision of making India self-reliant, ‘Atmanirbhar Bharat’. The government has also introduced a few changes in the Insolvency and Bankruptcy Code, 2016 (‘IBC’) with an intent to safeguard the MSME sector from the leash of CoVID-19 and improve the ease of doing business.

    Although the intent of the government behind the promulgation of ordinance dated 5th June 2020 was to amend the IBC to provide some breathing space to the MSME sector, the measures have had some unintended effects on the sector. This piece analyses the impact of the recent ordinance to amend the IBC on the MSME sector and highlights the gaps which are to be bridged. Bridging of these gaps would not only make MSMEs sustainable in the times of economic downturn but also help India become ‘Atmanirbhar’. 

    Highlights of the ordinance introducing sec. 10A to the IBC:

    1. Suspension of S. 7, 9 and 10 of the IBC for default arising on or after 25.03.2020 till 25.09.2020 and extendable up to 25.03.2021.
    2. No new application shall be allowed to initiate fresh CIRP from 25.03.2020 for a minimum period of 6 months extendable up to 12 months as and when notified.
    3. No application shall ever be filed for the initiation of CIRP of a corporate debtor concerning any default arising during disruption period starting from 25.03.2020.
    4. An application seeking initiation of fresh CIRP shall be allowed only if the following two conditions are fulfilled:
      • The default arose before 25.03.2020.
      • The said default amount is greater than Rs.1 Crore. 

    Impact on MSME Sector

    Micro, Small and Medium Enterprises, as defined in S. 7 of MSMED Act 2006, contribute significantly to the economy of the nation. It employs around 111 million people and accounts for approximately 48% and 28% of the nation’s export and GDP respectively. Hence, it is clear the MSME sector remains the backbone of the nation’s economy and deserves to be protected in these unprecedented times. The legislators with a similar intent promulgated an ordinance amending the IBC but the letter didn’t seem to match to the authority’s intent.

    Recent changes in the IBC, including the rise in the default threshold under S. 4, suspension of S. 7, 9, and 10, and insertion of the proviso in S. 10A providing blanket protection to the debtors defaulting during the disruption period starting from 25th March have raised debates as to whether the ordinance helps MSMEs or harms them. Owing to the recent ordinances, MSMEs have been impacted in two ways, i.e. being a creditor and being a debtor.

    MSMEs being the Operational Creditors

    As per the study by the Brickwork Ratings, MSMEs have approximately Rs.303 lakh crore of their funds stuck with large corporates in the form of receivables. Hence, it can be asserted that MSMEs play a vital role in the economy being operational creditors to the large corporate houses. In the times of CoVID-19 when the whole economy is struggling to escape from the rippling effect over the economy, it becomes all the more important to ensure that the smaller firms contributing to the nation’s economy on such a large scale are duly paid back.

    • Suspension of S. 9 adding to the plight of MSMEs

    The un-amended IBC framework facilitated negotiating leverage to the smaller firms against the mighty corporates as the MSMEs could enforce S. 9 of the IBC to recover their dues in a time-bound manner. But the recently introduced ordinance, although passed to provide breathing space to the distressed firms, has made the MSME firms helpless by disabling them to invoke insolvency proceedings for the recovery of their dues. In numerous cases, it has been that the corporate houses, fearing wide-ranging ramifications, settled their debts against the smaller firms after the application for insolvency proceeding was filled but before the same was taken up by the tribunals.

    According to the data provided by the Insolvency and Bankruptcy Board of India, up to March 2020, 157 applications for corporate insolvency resolution process were withdrawn under S. 12A of the IBC, of which 64 cases involved amounts less than Rs.1 crore. The reasons for early withdrawal of cases were full settlement with the applicant and other settlement with creditors.

    Now under the garb of amended IBC framework, the corporates who earlier feared harsh consequences of the insolvency proceedings would now fearlessly strong-arm the smaller firms by defaulting the repayment of their dues. Furthermore, the redressal forums other than NCLT fail to provide timely redressal adding to the plight of the creditors.

    • Proviso incentivizing corporate debtors to default

    Apart from the above-stated problems, the proviso in the newly introduced S.10A has placed the MSMEs in a vulnerable position by allowing complete amnesty to the corporate debtors who default during the disruption period. The expression “no application shall ever be filed” has opened the flood gates of varied interpretation.

    Recently, the Hon’ble National Company Law Tribunal, Chennai Bench in Siemens Gamesa Renewable Power Private Limited v. Ramesh Kymal interpreted the proviso to S. 10A and held that there shall be no insolvency proceedings ever against the defaults which arise after 25.03.2020. This interpretation allows an exemption to the defaulting debtors whether or not such default has arisen due to the economic downturn in the times of the pandemic.

    If such an interpretation is taken up, it would incentivise the non-payment of dues by the corporates and would lead to the MSMEs turning up into non-performing assets. In these trying times when the economy is struggling to move out of the rippling effect, fall of MSME sector would adversely impact the nation’s economy. Among other things, a decline in MSME sector would cause a steep rise in the unemployment rate and set off India’s ambition of becoming self-reliant. 

    MSMEs being the Corporate Debtors

    Objectives of IBC include maximization of the value of assets, to promote entrepreneurship, availability of credit and balance the interests of the stakeholders. In consonance with the objectives, S.10 facilitates an exit route to a corporate debtor wherein the loss-making business is transferred to a prospective resolution applicant based on a resolution plan to revive the sick enterprise. The resolution plan is sanctioned by the adjudicating authority keeping in mind the interests of all the stakeholders.

    Blanket suspension of S.10 defeats the core objective of the IBC to revive and not to liquidate the enterprise. Suspension of the section would lead to a slow death of the business enterprises which could be revived with a prospective plan. The ordinance would not only deprive the corporate debtor of rehabilitating the business but also force him to continue the distressed business. This would not only deplete the value of assets rather than maximizing them but also lead to the winding-up of a potentially viable business.

    Conclusion

    In the testing times of this pandemic, although the government has tried to modify the provisions of the IBC with a bonafide intention to provide safeguard to the MSMEs, it has ended up worsening the situation for them. The recent ordinance adding S. 10A in the IBC and the notification has created loopholes which would act against the interest of the MSMEs. These would make the smaller businesses vulnerable in the hands of larger corporates.

    Furthermore, these additions and modifications to the IBC would act as a barrier for MSMEs to pull off under the government’s “Atmanirbhar Bharat” initiative. The liquidity crunch faced by the MSMEs owing to the suspension of S. 7 and 9 of IBC would compel the MSMEs to avoid further payments of their debtors and undergo unnecessary litigation which would certainly raise the burden of the MSMEs in the near future. Moreover, blanket suspension of S. 10 of IBC will destroy every hope of reforming viable MSMEs.

    Keeping in mind the flickering market conditions and the upcoming competition in domestic as well as international market, more focused actions are called for on the part of the authorities. As pointed out by the Hon’ble Finance Minister in her press note, a special insolvency framework needs to be introduced under S. 240A of IBC accompanied with other focused initiatives. This would not only provide leverage to the MSMEs against the powerful corporates but also help India holdup its ambition of self-reliance.