MSME
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This article has been written by Mehreen Garg.

Introduction

As the World Health Organisation (WHO), on 11th March 2020 announced the COVID’19 crisis to be a global pandemic, there has been a high alert worldwide in order to contain the widespread of the disease. The unprecedented disruptions caused globally due to the Coronavirus outbreak (COVID’19), not only affected our social environment but also our political and economic environment. According to Aljazeera, over 188 countries have been confirmed to have been massively affected by the outbreak.[1] Like these affected countries, India has been far from untouched by this pandemic.  At the time of writing in November 2020, COVID’19 has wreaked havoc worldwide with over 58,229,138 confirmed cases and approximately 1,382,106 deaths.[2] The outbreak has unquestionably been unnerving for not just human life but also global economics. Due to this tragedy, a massive number of countries have suffered through a lockdown period where most of the social life and economic activities in the country were brought to a halt in order to prevent a community spread of the disease. India too was shut down due to this outspread through the government’s Notification No. 40-3/2020-DM-I(A) as passed on 24th of March 2020.

The halt of social and economic activities worldwide subsequently had a direct effect on companies in almost every economic sector. This global lockdown (or also called the Great Lockdown) has not just affected global commerce chains but has also led to a collapse in the financial markets and commodity prices worldwide.[3]  Businesses over the last few months have had to resort to making extremely tough financial decisions as they suffered the impact of this unforeseen calamity. The pandemic has proven difficult the profit earning capacity whereas with regards to numerous companies, even the mere survival of most businesses to be of utmost difficulty. This crisis has led to massive disruption in the daily workings and activities of enterprises, from setting up remote operations reorganizing supply chains which has led to the contractual parties failing to meet their obligations. Fortunately, it can be said failure to meet one’s contractual obligation during this tragic crisis can be counted under Force Majure.[4] In furtherance of the ongoing global crisis, following the announcement of the finance minister of India as on 24th March 2020 under “Atma Nirbhar Bharat Abhiyaan”[5], to ease the companies during this highly distressed time, the Ministry of (MCA) issued a circular announcing multiple required measures for Indian Companies.

These measures included relaxation in independent director meetings, relaxation in holding board meetings, allowing delayed fillings for a certain time period and other miscellaneous provisions to be implemented by companies in India.[6] According to a United Nations Economic and Social Council (ECOSOC) report, small and medium enterprises have endured the worst effect of the pandemic.[7] After the agricultural sector, the Micro, Small and Medium Enterprises (MSME) are the largest generator of employment in India and play a key role in supporting and uplifting the business environment in the country. Despite 16 years of the MSMED Act regulating MSMEs, these industries still face huge obstacles on a daily basis due to lack of adequate infrastructure, inadequate financial literacy and various other reasons.[8]

This paper aims to discover and analyse the impact of COVID’19 on companies in different  Micro Small Medium Enterprises in India while also including the various amendments and the changes introduced in the Insolvency and Bankruptcy Code, 2016 during the pandemic.

Research Question

Are the measures that were taken by the Indian government during the initial period of the lockdown due to COVID’19, enough to save the micro small medium enterprises not just from short term impacts but also from the long term ripple effects which are predicted to occur due to the fall of the economy during the pandemic.

Impact of COVID’19 on the Micro, Small Medium Enterprises (MSME) in India

According to the World Health Organisation’s updates, India has had  over 9,139,865 confirmed cases along with approximately 133,738 deaths.[9] This shows how massive the impact of COVID’19 has been on the health of the large population in the nation. In a country such as India, which has a massive population of daily wage and migrant workers, the COVID’19 pandemic has proved to affect the MSME the worst as these stranded workers all over the country proceed back home to escape the cruelty of the lockdown on their daily life. Given the nature of the MSMEs, the imminent threat of insolvency is constantly hovering over these MSEMEs. Before the pandemic the MSMEs already had a variety of survival issues to concern themselves with, such as the capacity utilization and generation of revenue effectively declining.[10] 

Steps taken to protect MSMEs in India during COVID’19

Amendment to Section 4 of the IBC– Increasing the threshold limit for CIRP from One Lakh to One Crore:

Days after the announcement of the lockdown, Smt. Nirmala Sitaram, the Union Finance Minister of India announced that the government will be working on incentives to overcome the challenges and setbacks faced by the businesses in the country due to the pandemic.[11] One such incentive by the MCA was the amendment of Section 4 of The Insolvency and Bankruptcy Code (IBC) of 2016 vide Notification No. REGD.NO.D.L-33004/99 where the limit to initiate the resolution process of corporate insolvency was altered to one crore rupees from the initial amount of one lakh rupees, taking effect from the 23rd of March 2020.[12]  The same was recommended by the 3rd Annual Insolvency Law Committee Report in order to reduce the number of insolvency cases pending in the NCLT due to the pandemic. The issue that arises with this particular application is that in case the IBC fails to equally help the corporate creditors recover their dues from the corporate debtors due to the raised threshold, these creditors are in lieu of becoming debtors themselves. This results in an endless cycle of litigation and financial distress for the corporate creditors in order to obtain their dues and make them incapable of returning dues owed by them to their creditors.[13] 

In case this happens, it becomes against the objective of the IBC. Another issue that arises here is that there was no mention of the order having a retrospective effect in this notification. This means that the new threshold amount will not be applicable for those applications seeking commencement of Corporate Insolvency Resolution Process (CIRP) before 24th of March 2020 and they will instead have to follow the previous threshold for Rupees One Lakh.[14] Whereas those applications filed after the announcement of this notification will have to adhere to the new threshold of Rupees One Crore.

Addition of Section 10A to the IBC- Suspension of Section 7, 9 and 10 of the IBC for a period of one year

Analysing this amendment to the Section 4 of the IBC, we see that there is a direct effect on Section 7Section 9 and Section 10 of the IBC which focus on the application filings before the addition of Section 10A to the Insolvency and Bankruptcy Code of 2016 which suspends the application of Section 7, 9 and 10 for a period of one year:

“10A. Suspension of initiation of corporate insolvency resolution process.

Notwithstanding anything contained in Sections 7, 9 and 10, no application for initiation of corporate insolvency process of a corporate debtor shall be filed, for any default arising on or after 25th March, 2020 for a period of 6 months or such further period, not exceeding 1 year from such date, as may be notified in this behalf:

Provided that no application shall ever be filed for initiation for corporate insolvency resolution process of a corporate debtor for the said default occurring during the period.

Explanation: For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25th March, 2020.”[15]

Insertion of Section 40C to the IBC- Excluding the period of lockdown from the CIRP timeline of 330 days:

Another provision added to the IBC as a measure to protect small businesses during the pandemic is Notification No. IBBI/2019-20/GN/REG059 which was announced on 29th of March 2020.[16] This Notification provides for the insertion of Section 40C in the IBC to exclude the period of lockdown during the pandemic from the timeline for the insolvency resolution process of 330 days as mentioned in Section 12(3) of the IBC.[17] The notification reads as:

“40C. Special provision relating to time-line. Notwithstanding the time-lines contained in these regulations, but subject to the provisions in the Code, the period of lockdown imposed by the Central Government in the wake of COVID19 outbreak shall not be counted for the purposes of the time-line for any activity that could not be completed due to such lockdown, in relation to a corporate insolvency resolution process.”[18]

In furtherance of this amendment to the IBC, the National Company Law Tribunal passed two orders through a Suo Moto – Company Appeal (AT) (Insolvency) No. 01 of 2020 on 30th of March 2020 upheld the decision of the IBC in its first order order:

“(1) That the period of lockdown ordered by the Central Government…shall be excluded for the purpose of counting of the period for ‘Resolution Process under Section 12 of the Insolvency and Bankruptcy Code, 2016, in all cases where ‘Corporate Insolvency Resolution Process’ has been initiated and pending before any Bench of the National Company Law Tribunal or in Appeal before this Appellate Tribunal.”[19]

This blanket ban has been deemed to be extremely helpful to small businesses and corporate debtors. However, it must also be noted that the government with this provision overshadowing Section 12(3) of the IBC and not mentioning a retrospective effective, failed to identity that corporates already going through the Corporate Insolvency Resolution Process will suffer huge monetary crises and will be expected to follow the given legal time frame of 330 daysWe must also keep in mind the overburdening and massive rush of application and cases that will follow through after the uplifting of this blanket ban.  The provision, by removing the time binding factor for the maximisation of the value of the assets of the creditors seems to raise a question on the validity and fundamentality of the principles that the IBC is founded upon.

Measures taken by governments to cope with the impact of COVID’19 on MSME Internationally

According to Winslow Sargeant, Ph.D, Incoming President of ICSB, “Micro-, Small and Medium-Sized Enterprises (MSMEs), the core of each economy”.[20] MSME represents over 70% of the world’s employment as well as 50% of the global GDP.[21] Keeping this significance in mind, the United Nations General Council (UNGA) recognizes the role MSME’s play in creating employment opportunities and acting as the backbone of the world’s economy.[22]  To create awareness amongst the public about the role of MSME in the development and growth of the economy and the vulnerable sectors on a wide scale, the UNGA declared the 27th of June as the MSME Day globally.[23]

United States of America

As recorded by the World Health Organisation’s COVID’19 tracker, the United States of America has had around 11,972,556 confirmed cases and 253,931 deaths.[24] According to a report on the state of small businesses in the United States of America collected by Facebook in april 2020 for small business owners or managers, it is evident that the SME in the States have taken a huge hit due to the COVID’19 pandemic.[25] Facebook conducted this survey for over 86,000 such people and came to the conclusion that approximately 31% of the MSME in the United States have been forced to shut down due to lack of finances or lack of consumer demands. This pandemic proved to be worse for those owning personal businesses and services such as hotels, restaurants, fitness etc.[26] 

Due to these significant losses faced by small companies due to te pandemic, the President of USA at the time, Donald Trump on 27th of March 2020 passed the Coronavirus Aid, Relief, and Economic Security (CARES) Act to provide aid and shelter to Americans from the health and economic ill effects on the pandemic.[27]

Under this Act, the U.S. Small Business Administration (SBA) with support from the Department of the Treasury introduced certain programmes to aid these enterprises.[28] Some such  major programmes were:

  1. Paycheck Protection Program: Under this scheme, the SBA will forgive loans in order to aid Small Business and Non Profit Organisations in paying their employees. [29] Only companies employing less than 500 people can apply for this program. However, in case a small business avails the benefit of this loan, it cannot further enjoy the perks of employee retention tax credits or social security taxes.[30] Moreover, this amount will be counted in the gross income.
  2. Economic Injury Disaster Loan: The scheme was designed to grant to assist micro and small businesses in overcoming losses in their revenues due to the pandemic.[31] 
  3. Employee Retention Tax Credits: This programme is applicable to the small businesses who have suffered heavy negative impacts of the pandemic and were forced to either temporarily or permanently shut down due to government orders. However, businesses which have been granted the PPP loan are not applicable to apply for this programme.

France

Similarly, on 23rd of March 2020 the government of France decided to adopt certain schemes and regulations under “Emergency law to cope with the Covid 19 epidemic” in pursuit of coping with the distress caused to MSMEs during the COVID’19 pandemic and helping them retain their businesses during this stressful situation. These regulations are ‘n° 2020-320’ and ‘2020-318’[32] dated 25th of March 2020 with the objective of adapting the rules regarding corporate meetings, approvals and filings of accounts or managerial documents to better fit the ill circumstances.[33]

new legal draft

Singapore

In order to aid the citizens and businesses of Singapore during this unprecedented time of the pandemic, Singapore introduced a new act on the 7th of April 2020 called the ‘COVID’19 (Temporary Measures) Act 2020’.This Act was introduced to specifically assist those unable to oblige with the terms of their con//tracts and agreements. Singapore has also, similar to India, increased the insolvency threshold and has also increased the time limit to satisfy the statutory demand from 21 days to 6 months.[34]

Conclusion

It is fairly evident that this unprecedented situation brought upon by the COVID’19 pandemic has pushed nations and governments into taking excessive steps in order to protect the safety of the people as well as the economy. MSMEs play an extremely important role in upholding and running the economic environment of any nation. Thousands of MSMEs in India have been forced to close shop and shut down due to the lack of finances and demand during the pandemic regime. It is necessary for the governments to especially focus on this section of the economy in order to ensure a smooth functioning and well-backed economic situation in the coming years. Despite various notifications and orders provided by the government for Insolvency during the pandemic, there exist multiple ambiguities and confusions regarding the application of these orders in accordance with the existing laws.

One ambiguity that rises with respect to this is that in order to protect the MSMEs from various economic consequences the government passed various orders altering the application of the Insolvency and Bankruptcy Code of 2016, however, there was no involvement of section 240A of the IBC which specifically focuses on the application of the IBC on MSMEs, despite the Finance Minister Nirmala Sitharaman announced that a special insolvency framework will be introduced under his this section. These orders also fail to identify the nature and time period of defaults by a corporate debtor i.e. whether the default was caused directly due to and during the pandemic crises. Another confusion that has been created by these orders is the time period for the applicability of these orders. Although it has been announced that these orders and notifications are pertinent for a temporary term, the stretch and duration of this temporary period is still unclear.

The government needs to make sure that it provides an equal footing to both corporate creditors and debtors instead of tilting the scales towards the debtors. Unless these confusions are cleared by the government soon, it falls upon the country’s tribunals and courts to interpret the solution to these ambiguities and provide us with some relief. We can also see that some of these leeways and orders for insolvency provided for by the government during this unprecedented time of crises are contradictory to the core principles upon which the Insolvency and Bankruptcy Code is based and need to be altered or dealt with fairly after the pandemic.

References

 

[1] Al Jazeera. (2020, September 19). Coronavirus: Which countries have confirmed cases? News | Al Jazeera. https://www.aljazeera.com/news/2020/01/countries-confirmed-cases-coronavirus-200125070959786.html.

[2] WHO Coronavirus Disease (COVID-19) Dashboard. covid19.who.int/.

[3] The Great Lockdown: Worst Economic Downturn Since the Great Depression. IMF Blog. (2020, April 21). https://blogs.imf.org/2020/04/14/the-great-lockdown-worst-economic-downturn-since-the-great-depression/.

[4] Trilegal. “COVID-19 – Key Issues Faced In The Technology Sector – Coronavirus (COVID-19) – India.” Welcome to Mondaq, Trilegal, 5 May 2020, www.mondaq.com/india/litigation-contracts-and-force-majeure/927986/covid-19–key-issues-faced-in-the-technology-sector.

[5] IBC Laws. “The IBC 2016 & MSMEs: What the Future Holds? – By Nandani Anand.” IBC Laws, 5 July 2020, ibclaw.in/the-ibc-2016-msmes-what-the-future-holds-by-nandani-anand/.

[6] Lam, Niloufer. “CoVID 19: MCA Relief Package For Indian Companies – Corporate/Commercial Law – India.” Welcome to Mondaq, ZBA, 28 July 2020, www.mondaq.com/india/directors-and-officers/969838/covid-19-mca-relief-package-for-indian-companies.

[7] United Nations, “Responding to the socio-economic impacts of COVID-19”, March 2020

 https://www.un.org/sites/un2.un.org/files/sg_report_socio-economic_impact_of_covid19.pdf

[8]  IBC Laws. “The IBC 2016 & MSMEs: What the Future Holds? – By Nandani Anand.” IBC Laws, 5 July 2020, ibclaw.in/the-ibc-2016-msmes-what-the-future-holds-by-nandani-anand/.

[9] “India: WHO Coronavirus Disease (COVID-19) Dashboard.” World Health Organization, World Health Organization, covid19.who.int/region/searo/country/in.

[10] Sahu, Kailash Kumar, and Pushkar Dubey. “(PDF) MSMEs in COVID-19 Crisis and India’s Economic Relief Package: A Critical Review.” ResearchGate, Unknown, 16 Aug. 2020, www.researchgate.net/publication/343682950_MSMEs_in_COVID-19_Crisis_and_India’s_Economic_Relief_Package_A_Critical_Review.

[11] Parwani, Ashish. “IBC Amendments And Its Impact In The Wake Of Covid-19 – Coronavirus (COVID-19) – India.” Welcome to Mondaq, Rajani Associates, 8 June 2020, www.mondaq.com/india/operational-impacts-and-strategy/949132/ibc-amendments-and-its-impact-in-the-wake-of-covid-19-.

[12] Ministry of Corporate Affairs, Notification_28032020, March 2020

 http://www.mca.gov.in/Ministry/pdf/.pdf

[13] Seemanh, Anvit  “Suspension of IBC during COVID-19: A Mere Mask While What Is Needed Is a Vaccine- By Anvit Seemansh.” IBC Laws, 26 May 2020, ibclaw.in/suspension-of-ibc-during-covid-19-a-mere-mask-while-what-is-needed-is-a-vaccine-by-anvit-seemansh/.

[14] Kumar, Rahul. “Impact of COVID-19 on Insolvency and Bankruptcy Code, 2016: Relief(s) & Implication(s) – By Rahul Kumar.” IBC Laws, 10 July 2020, ibclaw.in/impact-of-covid-19-on-insolvency-and-bankruptcy-code-2016-reliefs-implications-by-rahul-kumar/.

[15] Insolvency and Bankruptcy Code, 2016

[16] Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) (Third Amendment) Regulations, 29 March 2020.

 https://www.ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf

[17]  Insolvency and Bankruptcy Code, 2016

[18]  Insolvency and Bankruptcy Board of India (Insolvency Resolution Process for Corporate

Persons) (Third Amendment) Regulations, 29 March 2020.

 https://www.ibbi.gov.in/uploads/whatsnew/be2e7697e91a349bc55033b58d249cef.pdf

[19] Insolvency and Bankruptcy Board of India. ibbi.gov.in/uploads/order/0fd02d6fd104fcdd63936eb4cb23021b.pdf.

[20] International Council for Small Business, “ Annual Global Micro-, Small and Medium -Sized Enterprises Report”, 27 June 2020

[21] MSME Day 2020: the COVID -19 Pandemic and Its Impact on Small Business, 26 June 2020, www.ilo.org/empent/whatsnew/WCMS_749275/lang–en/index.htm.

[22] “Micro-, Small and Medium-Sized Enterprises Day.” United Nations, United Nations, www.un.org/en/observances/micro-small-medium-businesses-day.

[23] United Nations General Assembly. Resolution Adopted by the General Assembly on 6 April 2017. 11 Apr. 2017, undocs.org/A/RES/71/279.

[24] “United States of America: WHO Coronavirus Disease (COVID-19) Dashboard.” World Health Organization, World Health Organization, covid19.who.int/region/amro/country/us.

[25] Facebook, “ Small Business Report”, 2020

https://about.fb.com/wp-content/uploads/2020/05/SMBReport.pdfhttps://about.fb.com/wp-content/uploads/2020/05/SMBReport.pdf

[26] Chacs, Benjamin. “Small Business Challenges During COVID-19 (+ How to Overcome Them).” Later Blog, 22 June 2020, later.com/blog/small-businesses-challenges/.

[27] The Coronavirus Aid, Relief, and Economic Security (CARESAct, 2020

[28] COVID-19 Resources for Small Businesses, www.sba.gov/blog/covid-19-resources-small-businesses.

[29] Paycheck Protection Program, www.sba.gov/funding-programs/loans/coronavirus-relief-options/paycheck-protection-program.

[30] Henrik Patel Richard Smith Edward So Hagai Zaifman Matt Reznick. “Help on the Way: CARES Act Benefits Small Businesses.” White & Case LLP, 4 Apr. 2020, www.whitecase.com/publications/alert/help-way-cares-act-benefits-small-businesses.

[31] Economic Injury Disaster Loans, www.sba.gov/funding-programs/loans/coronavirus-relief-options/economic-injury-disaster-loans. 

[32] “Report to the President of the Republic Relating to Ordinance No. 2020-320 of March 25, 2020 Relating to the Adaptation of the Deadlines and Procedures Applicable to the Establishment or Modification of an Electronic Communications Installation in Order to Ensure the Operation of Electronic Communications Services and Networks.” Rapport Au Président De La République Relatif à L’ordonnance n° 2020-320 Du 25 Mars 2020 Relative à L’adaptation Des Délais Et Des Procédures Applicables à L’implantation Ou La Modification D’une Installation De Communications Électroniques Afin D’assurer Le Fonctionnement Des Services Et Des Réseaux De Communications Électroniques, 26 Mar. 2020, www.circulaires.gouv.fr/jorf/id/JORFTEXT000041755884.

[33] “Coronavirus (COVID 19) and Corporate Law: Two Regulations (Ordonnances) Adapt the Rules Governing the Corporate Life of the Companies to the Sanitary Crisis Following Coronavirus: Perspectives: Reed Smith LLP.” Coronavirus (COVID 19) and Corporate Law: Two Regulations (Ordonnances) Adapt the Rules Governing the Corporate Life of the Companies to the Sanitary Crisis Following Coronavirus | Perspectives, www.reedsmith.com/en/perspectives/2020/04/coronavirus-covid19-and-corporate-law-two-regulations.

[34]  Seemanh, Anvit  “Suspension of IBC during COVID-19: A Mere Mask While What Is Needed Is a Vaccine- By Anvit Seemansh.” IBC Laws, 26 May 2020, ibclaw.in/suspension-of-ibc-during-covid-19-a-mere-mask-while-what-is-needed-is-a-vaccine-by-anvit-seemansh/.


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