FISME to Nirmala Sitharaman: Include MSME dues under IBC in CIRP costs
Parul January 7, 2020
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As per news reports, the Federation of Indian Micro and Small & Medium Enterprises (FISME) in its pre-budget presentation to the finance minister pointed out that the recovery of money owed to the micro, small and medium enterprises (MSMEs) by corporate debtors should be brought in the ambit of corporate insolvency resolution process (CIRP) costs.
The FISME also pointed out in the presentation briefing that as operational creditors, the MSMEs were not able to recover dues and the protection to that under the MSMEs Development (MSMED) Act had been undermined.
FISME quoted, “the current recovery process under the IBC is one-sided. The MSMEs are classified as operational creditors. They get nothing if their buyer undergoes CIRP. This is against the letter and spirit of the MSMED Act, which guarantees recovery of the dues along with interest.”
As per the FISME assessment, about 25,000 MSMEs are affected and 75,000 MSMEs are more likely to be affected. However, as per the IBBI data, if a solution is found to repay their dues, the burden on the financial creditors would be minimal and decline to 1.18-1.33 per cent.
According to reports, FISME also proposed that the payments due to MSMEs from corporate debtors before and during the CIRP process will be included in the ‘insolvency resolution process costs’ as provided for under section 5(13) of the IBC read with regulation 31 of the Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate Persons) Regulations, 2016. FISME has also stated that the recoveries of the financial creditors will remain unaffected as the dues of MSMEs would be treated as part of the insolvency process cost, while at the same time it would ensure substantial recoveries of dues for micro and small enterprises.
Meanwhile, on the insolvency process of MSMEs under the IBC, it said that partnership or proprietorship firms were excluded from its ambit and around 97 per cent MSMEs fell in that category, thereby not allowing their bankruptcy and insolvency proceedings in the NCLT.
FISME quoted, “the IBC 2016 is a comprehensive legislation and provides for a framework for resolution of insolvency and bankruptcy for all types of entities. But the ‘rules’ have been framed for body corporates/companies only. Thus, partnership/proprietorship firms and individuals are excluded. As 97 per cent of MSMEs are partnership/proprietorship firms and even when they are registered as companies, because of involvement of their personal guarantees, the IBC Rules don’t provide them any relief,” the FISME further added.
It has also urged for the formation of a committee for framing rules for insolvency proceedings of partnership and proprietorship firms.