Recent changes in the Insolvency and Bankruptcy Code (IBC), raising the threshold for invoking insolvency to Rs 1 crore from Rs 1 lakh, is among one of the reasons MSMEs are finding it difficult to recover their dues from large corporates. Even as government departments have started clearing up dues of MSMEs with the Finance Ministry stressing timely clearance of funds, many micro and small firms are stuck with pending payments of more than Rs 3 lakh crore with large firms with no easy legal recourse.
Industry sources said the IBC had empowered many small companies with dues of — say Rs 40-50 lakh — to get their dues cleared by threatening to take bigger companies to NCLT for non-payment. This gave them a negotiating lever in early clearance of their dues, because a company being dragged to National Company Law Tribunal can have adverse ramifications. On March 24, the government decided to raise “the threshold of default under Section 4 of the IBC 2016 to Rs 1 crore” due to emerging financial distress for most companies. While the intention was to provide some breathing space to companies facing distress due to pandemic, it had an unintended effect of slowing down payments by big corporates to smaller firms.
“Even a small company doing a monthly billing of Rs 1 crore usually has pending payments of Rs 30-40 lakhs. Now they are stuck. They can request for clearance of dues, stop partial supplies but cannot use the IBC,” said KE Raghunathan, convener of the Consortium of MSME associations. The threshold for invoking insolvency could have been raised 10 times to Rs 10 lakh instead of it being raised 100 times to Rs 1 crore, as that would prevent most frivolous cases being filed under the law, he said. MSMEs used this legal provision as a bargaining tool to get their dues on time and it worked in many cases.
As per a recent Brickwork Ratings study, MSMEs have nearly Rs 3.3 lakh crore of their funds stuck with strong large corporates in form of receivables. “The liquidity crunch being faced by MSMEs is on account of two key issues, including the lack of a funding line from the banking system and stretched working capital because of low bargaining power with large corporates to have payments released,” it said.
The pandemic has led to large corporates being on a much stronger footing financially compared to smaller firms especially since April who have lost bargaining power to claim dues. Reduction in days for which dues are pending would substantially improve liquidity conditions for MSMEs. While banks have started disbursing funds to MSMEs under the 100 per cent Emergency Credit Line Guarantee Scheme announced by government last month, credit availability remains a challenge for stressed firms.
Till March, 2020, 157 corporate insolvency resolution plans were withdrawn under Section 12A of the IBC, of which 64 cases involved amounts less than Rs 1 crore, as per data from the Insolvency and Bankruptcy Board of India. The reasons for early withdrawal of cases were full settlement with the applicant and other settlement with creditors.
“The IBC law is working as a deterrent as many times debtors settle the case on receipt of a notice for repayment. In many cases, we have observed that dues are recovered after an application is filed but before it’s admitted by the NCLT bench. Settlement prior to admission of the case cost effective for both parties and it works well for smaller companies,” said a Delhi-based lawyer. Even for banks and financial institutions, IBC has resulted in higher recoveries compared to other platforms.
As a percentage of claims, banks recovered on average 42.5 per cent of the amount filed through the IBC in 2018-19, against 14.5 per cent through the SARFAESI, 5.3 per cent through Lok Adalats and 3.5 per cent through Debt Recovery Tribunals, as per latest available RBI data.
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