MSMEs supply materials and services to larger companies (Mint file)
MSMEs supply materials and services to larger companies (Mint file)

MSME suppliers want better settlement of dues when investors rescue companies

  • The demands from MSMEs have prompted the MCA to take a fresh look at the way dues are settled when companies are rescued under the watch of bankruptcy tribunals
  • The Centre had earlier this year amended the IBC to restore secured lenders’ rights over that of operational creditors

New Delhi: Micro, small and medium enterprises (SMEs), which supply materials and services to larger companies and are their operational creditors, seek a better settlement of dues when new investors put money on the table to rescue businesses that are on the verge of shutting down.

The demands from MSMEs have prompted the ministry of corporate affairs to take a fresh look at the way dues are settled when companies are rescued under the watch of bankruptcy tribunals. Industry observers said delayed payments to MSMEs by their corporate clients and negligible pay out, in case the client ends up in a bankruptcy tribunal, are among the reasons for the stress among small businesses that have been fighting a liquidity crunch for several months.

MSMEs have made representations to the government saying that in many cases which are resolved under the Insolvency and Bankruptcy Code (IBC), the share of dues operational creditors get is very less or negligible which is very damaging as they cannot bear a deep haircut that institutional lenders can get away with, said a person privy to the development, who spoke on condition of anonymity.

The Economic Times reported on Tuesday quoting people with knowledge of the matter that the government was looking at a formula for distributing the proceeds of insolvency resolution among financial and operational creditors in a fixed proportion. The idea is to specify in the law that a certain minimum amount has to be given to operational creditors in case of bankruptcy resolution.

Operational creditors get access to the committee of creditors, which decide on the corporate rescue package by voting, only if they are large enough. Even then, they only get to attend the committee’s meetings, but do not enjoy any voting rights as the IBC was designed primarily as a tool to address industrial sickness and the toxic assets in the banking sector.

The government had earlier this year amended the IBC to restore secured lenders’ rights over that of operational creditors on the proceeds of sale or liquidation of the defaulting company after a court ruled that operational creditors have to be treated on a par with financial creditors at the time of settling claims. (ends)

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