The Micro, Small, and Medium Enterprises (MSME) sector plays a key role in the GDP of our country. The sector provides for second largest employment opportunity after agriculture in India and plays a backbone role in the economy. The sector contributes nearly 30 percent in the economy and is expected to reach a high of 40% by 2025. The government in order to protect the interests of these MSMEs, introduced the Micro Small and Medium Enterprises Development Act, 2006 (hereinafter referred to as ‘Act’) MSMED act of 2006. The primary objective of this Act was to promote MSMEs and provide protection to them against the buyers who delay their payments and turn into non-performing assets (NPAs). In accordance with the Act, the buyer is obligated to pay the supplier on or before the date agreed upon in writing by the parties and if no such agreement is reached, the buyer must pay within 45 days of the date of the acceptance of the goods or services, provided no exception lies in the matter concerned. If the buyer does not pay the supplier within the specified time frame, the buyer is responsible for paying the overdue amount as well as the compound interest with monthly rests on the delayed amount at three times the Reserve Bank of India’s declared bank rate (RBI). A bank rate of 4.25 percent indicates that an unpaid provider has the right to collect the delayed payment plus interest at a rate of 12.75 percent per year on the late amount.
HOW DOES THE COUNCIL WORK?
All state governments are required to establish the Micro and Small Enterprises Facilitation Council (“MSEFC”) u/s 20, popularly referred to as the ‘MSME Court.’ The MSEFC serves as an arbitrator in the event of a payment dispute between MSME units. The MSEFC will investigate the complaint filed by the supplier MSME unit for late payment and then assist the buyer unit in paying the required amount plus punitive interest.
In the event of a dispute, any party may submit an application “Offline” with the MSEFC in its jurisdiction or “Online” through the web site “MSME Samadhaan,” wherein the application gets immediately transmitted to the appropriate MSEFC online. The buyer does not need to be given any kind of legal notice before the application is submitted to the Council. A district in which no district council exists falls under the authority of the State Council.
The Vendor must log in to the online site using their Udyam Aadhaar Memorandum (UAM) number and then submit documents such as work orders, invoices, delivery challans, etc. to support their claim against the defaulter buyer. Claimants may also seek to recover advance deposits, statutory deposits and earnest money deposits, as well as any other money that has been paid in advance.
Resolution Process –
- Section 18(1) of the Act states that when a party to a dispute files an application with the MSEFC, an intimation is provided to both parties. The application becomes actionable by the relevant MSEFC when the 15 days deadline for submitting the same has passed. The Council either rejects or converts the actionable application into a case based on the documents and statements presented by the Claimant. Payment received by an applicant from the respondent prior to case conversion is viewed as amicable settlement between the parties.
- MSEFC conducts conciliation u/s 18(2) of the Act between disagreeing parties after the conversion of the application to a Case. An award is given in the event of successful conciliation. The decree issued by the Facilitation Council may be used to carry out the directives of the council. Only after the Appellant has paid 75% of the award sum in accordance with the court’s instructions would a court consider the Respondent’s request to have the Council’s decree or award set aside on appeal.
- A disagreement may be submitted to arbitration if the Council’s conciliation efforts are unsuccessful or if the parties cannot agree on a settlement. The Arbitration and Conciliation Act, 1996 will apply to the dispute, and the issue must be concluded within 90 days.
THIRD PARTY FINANCING: A SAFEGUARD FOR SMALL BUSINESSES
India is one of the fastest growing economies in the world with increasing foreign investments. However, with the pandemic coming, a new wave of litigation has emerged. Given the widespread economic hardships, parties to such conflicts may find themselves unable to endure the hefty expenses of litigation or arbitration. Therefore, putting back the emphasis on the asset class being third party financing. Shortage of resources induced by the COVID-19 has already made commercial operations for sectors particularly burdensome. Businesses are facing diminishing bank balances and unexpected decrease in the available credit. These factors might create prospects for litigation financing and for funders to assist firms pursue their lawsuit claims via the Third-Party Funding method.
PPIRP is a pre-packaged insolvency resolution procedure (“PPIRP”) for corporations designated as micro, small and medium companies (MSMEs), and it must be completed within 90 days from its promulgation under the Insolvency and Bankruptcy Code Amendment Ordinance, 2021. Due to the shorter time frame, it would be important to make swift judgments about determining and taking appropriate measures in relation to avoidance proceedings where litigation financing from specialists might be beneficial. The second issue is that the MSME sector has enormous debts to the bigger corporations, and many MSMEs have had poor recoveries from the CIRPs of these major corporations. Even when a resolution plan has been approved by the Adjudicating Authority (AA), this has resulted in litigation and public uproar, delaying execution. MSMEs may be able to recover their debts even if they are not in the midst of bankruptcy procedures via litigation financing.
Such funding helps the businesses to outsource their risk and find resources for a fair chance in the pursuit of getting their claims from the other party. These fundings are non-recourse funding, where the plaintiff is only liable to pay the funder when the compensation is received by them. No amount is owed by the plaintiff if there is no compensation.
CONCLUSION
MSME being one of the most important sectors in our country, is protected by the act. The procedure is enforceable, time-bound, and includes the collection of punitive interest in addition to the defaulted amount. The settlement process is also made easier to follow since each State Government has established various Facilitation Councils at the district and state levels. Furthermore, the procedure requires a deposit of at least 75% of the award sum before any appeal for setting aside the decision is accepted in any Court. The COVID-19 pandemic has had a significant effect on the MSME sector in the Indian economy. The financial constraint and lack of liquidity that MSMEs are experiencing during the lockdown forced them to shut down their operations, and as a result, output ceased, resulting in their insolvency. Lawsuits brought on by the financial crisis placed a hardship on small and medium-sized businesses. To revitalize these businesses, Litigation Financing or Third-Party Financing may provide funding to recover valid claims that have been stalled in legal challenges.
LegalPay is India’s only data-driven and tech-enabled alternative-investments platform specialising in legal and debt financing assets. We provide our massive investor network with access to flexible and innovative investment products to modernise their portfolio by including asset-backed alternatives. Our products democratise such investment opportunities through low ticket entry points making it accessible to a larger audience.
(The author is Mr. Kundan Shahi, cofounder, LegalPay, and the views expressed in this article are his own)
