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Suspension of IBC & its Alternative Remedies during COVID-19 Pandemic

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Newly implemented Section 10(A)[1] in Insolvency and Bankruptcy Code, 2016( hereinafter referred IBC) provided that no application shall be filled for initiating Corporate Insolvency Regular Process ( hereinafter referred CIRP) for a period of six months for any default committed after 25th of March 2020. Given the fact that IBC is no longer applicable, secured creditors and MSMEs can recover their debt under given provisions.

The SARFAESI Act allows banks and other financial institutions, in the capacity of secured creditors, to auction residential or commercial properties of borrowers to recover loans. The Act defines Non-Performing Asset as to the borrower who has made a default in payment of instalment for a period of 90 days. Secured creditors have the capacity to take into possession the property of the borrower in case he made default in payment of instalment. The SARFAESI Act is applicable only for a Non-Performing Asset loan with an outstanding of Rupees One Laky and security to be enforced is not agricultural land. 

Following the default in payment, banks can serve a notice in writing to the defaulting borrower requiring it to discharge its liabilities within 60 days. Failure to comply with notice gives a right to the creditor to take possession, sell or lease the property of the borrower. Under the act secured creditors are empowered to enforce securities without going to court. The guidelines for enforcement of securities and other procedures are laid down by the Reserve Bank of India. Secured creditors take the assistance of the District Magistrate for completing the process. Aggrieved parties can approach the Debt Recovery Tribunal in case the bank misuses its powers. Moreover, an appeal is also maintainable against the order, within the time limit of 3o days at Appellate Tribunal. 

Recently in Pandurang Ganpati Chaugale v. Vishwasrao Patil Murgud Sahakari Bank Ltd, 2020 SCC Online SC 431 Supreme Court held that

“The cooperative banks under the state legislation and multi-state cooperative banks are ‘banks’ under section 2(1) (c) of Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002,” the judgment said. The recovery is an important a part of banking; intrinsically, the recovery procedure prescribed under section 13 of the SARFAESI Act, legislation relatable to Entry 45 List I of the Seventh Schedule to the Constitution of India, is applicable.”

With this judgment, state and multi-state cooperative banking societies can now seize and sell assets to recover their dues. The top court bench in its judgment also held that state and multi-state cooperative banks will fall under the definition of banks under the provisions of the Banking Regulation Act.

The COVID – 19, pandemic has affected the various small and large businesses. As per new definition – “micro-units can have up to Rs 1 core investments and turnover of up to Rs 5 core while businesses with an investment of up to Rs 10 core and turnover of up to Rs 50 crore will be classified as small and company with up to Rs 50 core investments and up to Rs 250 core turnover is assessed as a medium enterprise”.

Micro, small and medium enterprises (MSMEs) plays a pivotal role in the development and shaping the economy of the country. The government has taken various steps for the development and growth of MSMEs. To provide protection and strength with the functioning of MSMEs the giver has enacted the Micro, Small and Medium Enterprises Development Act (hereinafter referred to as MSMED Act), 2006. The MSMED Act, 2006 contains provisions of Delayed Payment to Micro and little Enterprise. The act fixes the liability of the buyer to make payment. The buyer shall make payment to the MSME within 45 days from the day of acceptance or the day of deemed acceptance as agreed between MSME and buyer[2]. Moreover, in the event when the buyer fails to make payment of the amount to the supplier, the buyer shall be liable to pay compound interest on the said amount to the supplier[3]. Section 20 and 21 lays down the rules for State Governments to determine Micro and little Enterprise Facilitation Council (MSEFC) for settlement of disputes on getting references/filing on Delayed payments. For any delayed payment MSMED Act, ensures that such cases are disposed of by Micro and Small Enterprise Facilitation Council (MSEFC) within 90 days of filling. In case of Appellant (not being the supplier) wants to file an appeal, no application for setting aside any decree or award by the MSEFC shall be entertained by any court unless the appellant (not being supplier) has deposited with it, the 75% of the award amount.

 MSMEs can look for recovery of debt under the MSMED Act, 2006. The act ensures timely recovery of dues and also provides for interest in case of delay in payment.

 A blanket suspension of IBC has created concerns in global insolvency circles. But, after the introduction of IBC, the secured creditor’s interest in some sense has been compromised. As compared to IBC, 2016 SARFAESI provides for a better mechanism to recover debt for secured creditors. Under the IBC, once a CIRP is initiated, the Moratorium is applicable to any action to foreclose, recover or enforce any security interest created by the corporate debtor in respect of its property, including any action under the SARFAESI Act. Therefore, while IBC, 2016 is suspended, secured Creditors can recover their debt under SARFAESI Act, 2002. Though IBC was well suited for both MSMEs (Operational Creditors under IBC). Given the fact, IBC might remain suspended for a year. MSMEs can look for recovery of debt under MSMED Act and prevent themselves from any financial distress.

 Endnotes

[1] Section 10A: Notwithstanding anything contained in Sec. 7, 9 & 10, No application for initiation of CIRP 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.

[2] Section 15 of MSMED, 2006.

[3] Section 16 of MSMED, 2006

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Abhinandan Sharma

Student, Symbiosis Law School NOIDA

Abhinandan is Zealous and Optimistic person and is curious about exploring different dimensions of law. For any query, clarifications or doubt you can reach him at abh1nandansharma447@gmail.com

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