By- R Sumedha
Insolvency and Bankruptcy Code, 2016 (IBC) is an important insolvency reform, which is an Act enacted for reorganization and insolvency resolution of corporate persons, partnership firms and individuals with a time constraint for maximization of the value of assets of such persons. IBC was bought with an intent to tackle the bad loan problems that were affecting the banking system.
The Code has undergone various amendments till date. Corporate persons governed by the IBC, 2016 also includes the Micro Small and Medium Enterprises and this section governing MSMEs in particular have also undergone amendments in order to favour them too.
What is IBC?
The Insolvency and Bankruptcy Code, 2016 (IBC) helps in consolidating the existing framework/design by creating a single law for insolvency and bankruptcy related issues. Certain provisions of the Code have come into force from 5th August and 19th August 2016. The bankruptcy code is useful for resolving insolvencies which was previously a long process that did not offer an economically viable arrangement. The code aims to protect the interests of small investors and to ease the process of business.
The Insolvency and Bankruptcy Board of India
The Insolvency and Bankruptcy Board of India was established on 1st October, 2016 under the Insolvency and Bankruptcy Code, 2016 (Code). The board is responsible for implementation of the Code which consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals, for promoting entrepreneurship, availability of credit and balance the interests of all the stakeholders. 
It writes and enforces rules for processes, namely, corporate insolvency resolution, corporate liquidation, individual insolvency resolution and individual bankruptcy under the Code.
What are MSMEs?
The Government of India has enacted the Micro, Small and Medium Enterprises Development (MSMED) Act, 2006 in terms of which the definition of micro, small and medium enterprises is specified. As per the revised classification issued by the government in July 2020,
Micro companies are those Manufacturing enterprises or Enterprises rendering services whose investment in Plant and Machinery or Equipment is not more than Rupees 1 crore and their annual turnover is not more than Rupees 5 crore.
Small companies are those Manufacturing enterprises or Enterprises rendering services whose investment in Plant and Machinery or Equipment is not more than Rupees 10 crore and their annual turnover is not more than Rupees 50 crore.
Medium companies are those Manufacturing enterprises or Enterprises rendering services whose investment in Plant and Machinery or Equipment is not more than Rupees 50 crore and their annual turnover is not more than Rupees 250 crore.
Position of MSMEs under the Insolvency and Bankruptcy Code, 2016
The Insolvency and Bankruptcy Code, 2016 was enacted in the year 2016 to provide a comprehensive consolidating legislation with regard to insolvency and bankruptcy issues in India. Section 29A was inserted through the 2018 amendment to the Code, which laid down the provisions with regard to individuals who are not eligible to submit a resolution plan. However, this newly inserted provision was scrutinized and criticized on the grounds that Section 29A has enlarged the scope of disqualification to the extent of reducing the prospective resolution applicants on the basis of what could be categorized as generalized criteria for disqualification. The insertion of this section has also caused various difficulties for MSME’s since these enterprises are highly labor intensive small business units which could not attract much interest from bidders thereby leading to liquidation. The importance of the Micro, Small and Medium Enterprises in the Indian economy was also discussed in the Insolvency Law Committee Report, 2018.
Inferences from the Insolvency Law Committee Report, 2018
The Ministry of Corporate Affairs, formed a committee to make recommendations to the Government on issues arising from the implementation of the IBC, 2016. In the report, the Committee recognised the importance of the MSME’s in the Indian economy, stating that it forms the foundation of the Indian economy, and are key drivers of employment, production, growth in economy, entrepreneurship and financial inclusion.
The committee made some observations with regard to MSMEs. Recommendations of the Committee was with regard to the provisions of the Code regarding the manner in which MSMEs are treated.. The report identified two major problems that was faced by the MSMEs. The report stated that due to large business organizations undergoing insolvency process in accordance with the Insolvency and Bankruptcy Code, MSMEs which are generally operational creditors to such large businesses are suffering in two ways:
- Large business organizations which are undergoing the CIRP (Corporate Insolvency Resolution Process) process have led to a temporary credit disruption for the MSMEs, leading to their liquidation.
- In the CIRP where MSMEs are operational creditors, the liquidation value guaranteed to them is negligible.
Keeping in view of the first issue, the report concluded that MSMEs are important in the Indian economy, and the intent is not to push them into liquidation and affect the livelihood of employees and workers of MSMEs. The report suggested that MSMEs being a Corporate Debtor should be granted exemptions, by permitting a promoter, who is not a willful defaulter, to bid for the MSME in insolvency. The idea behind such relaxation is that Micro,Small and Medium Enterprises attract interest mainly from a promoter and may not be of much use to other resolution applicants.
With regard to the second issue, the report stated that the key operational creditor which normally includes the important MSMEs usually get paid over the liquidation value, owing to their importance in the operations of the corporate debtor undergoing CIRP.
Impact of the Insolvency and Bankruptcy Code(Second amendment) Ordinance, 2018 on MSMEs
The Insolvency and Bankruptcy Code (Second Amendment) Ordinance, 2018 has been of great help to the Micro Small and Medium Enterprises (MSME) . It has made some relaxations on the applicability of the provisions of Section 29A with respect to the submission of a resolution plan in case of such entities in their favor. It is a significant amendment under the Insolvency and Bankruptcy Code and has a wide impact on the whole insolvency resolution regime.The MSME sector is one of the major employment generating factor in the country’s economy and thus a very politically and economically sensitive matter.
It was understood that it is difficult for the resolution applicants (unwillful defaulters) to file a resolution plan, the Government has now introduced certain exemptions from the applicability of the provisions of Section 29A as regards MSME. Section 240A was introduced in the amendment, which specifically dispenses the applicability of Section 29A clause (c) to (h) in case the Corporate Debtor is a Micro, Small or Medium Enterprise.
The disqualifications for Resolution Applicants have been brought down especially with respect to the way of amending clauses (d) & (e) of Section 29A. Firstly, the disqualification for conviction is limited only for the offences mentioned in the newly inserted 12th schedule of the Code, that too if the punishment exceeds for more than 2 years. Secondly, the persons who have served imprisonment of two years will not considered to be exempted as resolution applicant after the expiry of two years from the date of release. Lastly, convictions would not disqualify an applicant if the conviction is in respect of a connected person. These amendments reduce the scope of disqualifications. It also makes sure that a genuine resolution applicant is not withheld from exercising his/her rights. This was the main issued sought by Tata Steel in the Bhushan Power matter. The NCLT (National Company Law Tribunal) in the case of RBL Bank Ltd. V. MBL Infrastructures Ltd. (18 Dec 2017) stated that the object of Section 29A was to not announce all promoters ineligible to be resolution applicants. The objective of the Code is to promote an efficient and speedy insolvency procedure, however, the introduction of Section 29A proved to be contrary to the set objectives of the Code.
The Insolvency and Bankruptcy Code though being in its initial stages of operation, there has already been a lot of confusion in its implementation due to continuous changes. The due protection and preservation of rights in case of MSMEs will encourage entrepreneurs to enter and continue with their business by reducing their fear of being targeted by fraudulent people, thereby benefiting the economy. The introduction of Section 29A has brought a change in the corporate insolvency resolution process and, it has also brought within its view various aspects having economic effects.