Blog

In an extraordinary step of providing relief for corporate debtors and alleviating and/or abating their affliction caused by the coronavirus pandemic, the Government of India would soon be making an unprecedented decision of amending the insolvency law and in effect suspending, for upto one year, the provisions that trigger insolvency proceedings against defaulters. Subject to the amendment, Section 7, 9 and 10 of the IBC would be suspended for six months and such period can be extended up to one year. 

In the wake of the extant situation, it is abstruse and incomprehensible for most corporate entities (especially for Micro and Small Enterprises) to assess and analyse their legal approach – which is as expeditious and inexpensive as insolvency proceedings under the IBC code – towards recovering the debts from the defaulters. Since the promulgation of the IBC code, the creditors (operational) as well as the litigators have been reaping the benefits associated with the strict timelines incorporated in the IBC code (Section 12) with regard to completion of the Corporate Insolvency Resolution Process as close to half of the claims are settled under IBC as no Corporate Debtor would want commencement of the Insolvency Proceedings and admission of the Insolvency applications under the Insolvency and Bankruptcy (Adjudicating Authority) Rules, 2016. However, in view of the decision taken by the Government of India to provide relief to the Corporate Debtors by suspending the operation of the IBC provisions triggering insolvency proceedings, it has become expedient to delve into the legal alternatives available to the Creditors (especially the micro and small enterprises) for recovery of debt.

I. MICRO AND SMALL ENTERPRISE FACILITATION COUNCIL

Any Creditor being a Micro or Small enterprise having a valid Udyog Aadhar may apply to the Micro and Small Enterprise Facilitation Council (MSEFC) of the State under the Micro, Small and Medium Enterprise Development (MSMED) Act, 2006 which contains provisions  of Delayed Payment to Micro and Small Enterprise (Section 15 – 25 of the MSMED Act). The provisions in the MSMED Act enunciates the procedure to be followed by the MSEFC in resolving the claims submitted by the enterprises before it and stipulates that the disputes to the MSEFC shall be settled within 90 days from the date of referring the same. 

What are Micro, Small & Medium Enterprises?

Micro, Small & Medium Enterprises often abbreviated as MSME, are small-sized business enterprises defined in terms of their investment. Section 2(e) of MSMED Act defines an “enterprise” as “an industrial undertaking or a business concern or any other establishment, by whatever name called, engaged in the manufacture or production of goods, in any manner, pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951 or engaged in providing or rendering of any service or services.”

According to the provisions (as on 13.05.2020) of Micro, Small & Medium Enterprises Development  (MSMED) Act, 2006 they are classified into two classes:

1. Manufacturing Enterprises
2. Service Enterprises

A.  Manufacturing Enterprises:

The Manufacturing Enterprise is defined in terms of investment in Plant & Machinery:

B.  Service Enterprises:

The Service Enterprise is defined in terms of investment in equipment:

E-filing – MSME SAMADHAAN

Ministry of Micro, Small and Medium Enterprises has taken an initiative for filing online applications by a Micro or Small Enterprise supplier unit against the buyer of goods/services before the concerned MSEFC of his/her State/Union Territory. These will be viewed by MSEFC Council for their actions. Any Micro or small enterprise having valid Udyog Aadhar(UAM) can apply and hence registration of a micro or small enterprise is a requirement to be fulfilled by the enterprises seeking resolution of their disputes.

The complete procedure of Udyog Aadhar Registration can be undertaken online, on the website of the Government Of India, Ministry of Micro, Small & Medium Enterprises (www.udyogaadhaar.gov.in) or on the app of the Government (https://my.msme.gov.in/MyMsme/Reg/Home.aspx). The registration process is hassle free and an enterprise (Micro and Small) can, after undergoing such registration, submit its claims before the MSEFC on the e-portal of the Government of India entitled MSME SAMADHAAN. The Government of India has enumerated several points for the ease of registration:

• Ministry of MSME has not appointed any Agency /Representative / Franchise for Udyog Aadhaar Memorandum Registration.
• Udyog Aadhaar Memorandum should be filed on its own, using the Aadhaar No./ Mobile No./ Email.
• Ministry of MSME does not charge any fee for Udyog Adhaar Memorandum registration.
• If some one charges a fee from MSME enterprise to file Memorandum, it amounts to cheating and the enterprise can file a complaint to police.

PERKS ENJOYED BY THE SUPPLIER BEFORE MSEFC

• The Law of limitation is not applicable. However, there should not be any delay or latches on the part of the supplier in providing the goods and services as promised by the supplier to the buyer. (FAQs on the website of the Government Of India, Ministry of Micro, Small & Medium Enterprises)

• There is a ninety day period available to the MSEFC for completion of both the conciliation and arbitration proceedings.

• There is an obligation on the buyer to pay for the goods within 45 days of the transaction otherwise the defaulting buyer is liable to pay compound interest on the principal or interest which is three times the bank rate specified by the Reserve Bank of India. 

• Even if there is an arbitration agreement between the parties, the institutionalised arbitration by the facilitation council will have an overriding effect.

• No application for setting aside of the decree, order or award passed by the MSEFC shall be entertained by any court unless the supplier(appellant) deposits 75% of the amount stated in the decree, order or award passed by the MSEFC.

II. COMMERCIAL COURTS

The Creditors would also have recourse to the Courts for recovery of the debt owed to them by their Debtors. With the coming into force of the Commercial Courts Act, 2015 providing for various mechanisms including Pre-Institution Mediation and Settlement under Section 12A for expeditious disposal of the disputes between parties to a suit, where the value of the subject matter of the suit fulfils the requirement enshrined under the Act, the institution of suits in case of a commercial dispute of a “specified value” has become an inexpensive and expeditious means of resolution of commercial disputes between the parties to a commercial suit. 

Section 12A of the Act further evinces that unless an urgent interim relief is being claimed by the Plaintiff in the suit, the Plaintiff would have to first exhaust the remedy under the section pertaining to Pre-Institution Mediation and Settlement and only upon failing to resolve the disputes through mediation is when the parties may proceed with the suit. The Section also prescribes a time limit of three months which may be extended by a further period of two months, with the consent of the parties, for completion of the process of mediation.

The Commercial Courts Act, 2015 as well as Order XI, XIII-A and XV-A of the Amended Code of Civil Procedure, 1908 provide for stricter timelines to be followed by parties for conduct of cases to ensure speedy resolution of commercial disputes. A party failing to comply with the timelines accentuated in the provisions referred to above will now face serious consequences. A highlight of the timelines enumerated are as follows:

• Pre-Institution Mediation and Settlement (Section 12-A of the Commercial Courts Act, 2015): The Mediation authority shall complete the process of mediation within a period of three months from the date of application made by the plaintiff.

• Written statement (Order V of CPC): must be filed by the Defendant within 30 days from the date of receipt of the suit summons. However, where the defendant fails to file the written statement within the said period of thirty days, he shall be allowed to file the written statement on such other day and on payment of such costs as the Court deems fit, but which shall not be later than one hundred twenty days (120 days). On expiry of one hundred twenty days (120 days) from the date of service of summons, the defendant shall forfeit the right to file the written statement and the Court shall not allow the written statement to be taken on record.

• Inspection (Order XI of CPC): All parties shall complete inspection of all documents disclosed within thirty days (30 days) of the date of filing of the written statement or written statement to the counterclaim, whichever is later. The Court may extend this time limit upon application at its discretion, but not beyond thirty days in any event.

• Admission and denial (Order XI of CPC): Each party shall submit a statement of admissions or denials of all documents disclosed and of which inspection has been completed, within fifteen days of the completion of inspection or any later date as fixed by the Court.

• Judgment (Order XX of CPC): The Commercial Court, Commercial Appellate Court, Commercial Division, or Commercial Appellate Division, as the case may be, shall, within ninety days of the conclusion of arguments, pronounce judgment and copies thereof shall be issued to all the parties to the dispute through electronic mail or otherwise.

• Appeals (Section 13 of the Commercial Courts Act, 2015): The Commercial Appellate Court and the Commercial Appellate Division shall endeavour to dispose of appeals filed before it within a period of six months from the date of filing of such appeal.

• Summary Disposal (Order XIII-A of CPC) and Case Management (Order XV-A of CPC): Orders XIII-A and XV-A have been included by the amendment of CPC. Order XIII-A provides for stricter timelines for disposal of applications for summary judgments whereas Order XV-A provides for a novel mechanism entitled “Case Management” hearings which are to be held within 30 days of the submission of the affidavit of admission or denial of documents by all parties to the suit. The orders passed during the Case Management hearings include (Rule 2 of Order XV-A):

1. framing the issues between the parties in accordance with Order XIV of the Code of Civil Procedure, 1908 (5 of 1908) after examining pleadings, documents and documents produced before the Court and on examination conducted by the Court under Rule 2 of Order X, if required;
2. listing witnesses to be examined by the parties;
3. fixing the date by which affidavit of evidence to be filed by parties;
4. fixing the date on which evidence of the witnesses of the parties to be recorded;
5. fixing the date by which written arguments are to be filed before the Court by the parties; 
6. fixing the date on which oral arguments are to be heard by the Court; and
7. setting time limits for parties and their advocates to address oral arguments.

The case management hearings enable the commercial court to fix timelines for disposal of suits in such a way that the final arguments are concluded within 6 months from the date of the first Case Management Hearing. 

CONCLUSION

The legal alternatives discussed above may be employed by the Micro, Small and Medium Enterprises in recovering their dues from their debtors in the wake of the tough but necessary decisions taken by the Government of India. These mechanisms are already in place for the benefit of these Micro, Medium and Small enterprises. Although, their mechanism for resolution of disputes is not akin to that employed by the National Company Law Tribunal, it is effective, inexpensive and provides expeditious disposal of disputes between the parties.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.