In a bid to keep out errant promoters and wilful defaulters, Section 29A was introduced in the Insolvency and Bankruptcy Code in 2017. But given the challenges faced by micro, small and medium enterprises (MSMEs), certain provisions of the section were eased up for MSMEs in 2018.
In other words, promoters of an MSME could be allowed to buy back their assets, provided they are not wilful defaulters. Given that in small and niche businesses existing promoters may be the only ones interested in acquiring it, the idea behind easing up Section 29A provisions for MSMEs was to widen the pool of eligible bidders.
But the narrow definition of MSMEs laid down in the Micro, Small and Medium Enterprises Development Act 2006 (MSMED Act) has been a key stumbling block for well-intentioned promoters to buy back their assets.
Under the MSMED Act, medium, small and micro manufacturing enterprises are defined based on their investments in plant and machinery; for a medium enterprise the threshold is up to ₹10 crore, while for a small unit it is ₹5 crore.
Many MSMEs fail to meet this low threshold and, hence, are unable to qualify for relief under Section 29A.
“There has been a proposal to shift the criteria for classifying an entity from the present one based on investment in plant and machinery to turnover criteria. There was a proposal to bring all entities with turnover up to ₹75 crore under the MSMED Act. Under the Companies Act 2013, it is possible to classify a company as a small company if the turnover is up to ₹100 crore.
“A review is urgently needed to allow the promoters of MSMEs to make use of the relaxation provided under the code,” says KS Ravichandran, Managing Partner, KSR & Co Company Secretaries LLP.
Eligible bidders
In 2017, Section 29A was inserted in the code to keep out errant and wilful defaulters from buying back assets. But in its initial avatar, multiple layers of ineligibility entwined into various clauses under the section, and was a concern. This was subsequently streamlined in 2018 to widen the pool of eligible bidders.
For instance, the amendment exempted pure-play financial entities from the ambit of Section 29 A, such as Asset Reconstruction Companies and Alternate Investment Funds, as given their nature of business they may be related to companies that are classified as NPA. It also offered a three-year dispensation to bidders who acquired an NPA account due to acquisition of corporate debtors under IBC. The intent was to widen the base of eligible bidders.
Following the recommendations of the Insolvency Law Committee in March 2018, yet another tweak was made on the applicability of Section 29A. The report had stated that since only promoters of MSMEs are likely to be interested in acquiring it, applicability of Section 29A may be restricted only to disqualify wilful defaulters from bidding for MSMEs.
Subsequently, Section 240A was inserted in the Code, which stated that certain provisions of Section 29 A would not apply to the resolution applicant in respect of the Corporate Insolvency Resolution Process (CIRP) of MSMEs.
Ineligible bidders
Section 29A lays down several ineligible bidders – undischarged insolvent, wilful defaulter, convicted for any offence punishable with imprisonment, promoters of companies whose accounts are classified as NPA for one year or more, and executed (a guarantee) in favour of a creditor in respect of a corporate debtor against which an application for insolvency has been admitted under the Code, among others. Under Section 240A, the latter two do not apply to MSMEs.
In other words, a defaulting promoter can bid in the resolution process provided he is not a wilful defaulter nor does he suffer from any other ineligibility except the one arising from NPA and executing a guarantee.
But the narrow definition of MSMEs under the MSMED Act 2006 is deterring promoters from acquiring back their assets and making use of the leeway provided under Section 240 A.
“There is an urgent need to address this issue, because small and medium enterprises may not have the requisite competitiveness or innovativeness for attracting bids essential for the success of the Corporate Insolvency Resolution Process,” adds Ravichandran.