No recovery against MSMEs without attempt at revival as provided by law.
No recovery against MSMEs without attempt at revival as provided by law.
Mathews J Nedumpara
Economists believe that in a decade or two India is going to be the world’s third largest economy. Our country, once starved for foreign exchange, now probably attracts more foreign exchange than any other country. The reason is the demographic advantage we have. Most of the developed world, Europe, Japan, China, are aging. We are the youngest country in the world in the sense that 60% of the population is within the ages of 20 to 60, the work force.
However, many economists are not as optimistic as others. The reason is that the majority of the population in the range of 20-60 which constitutes 80 crores are either unemployed or partially employed. That is the reason our per capita income is among the lowest in the world. The only way to retrieve the country from property and bring in growth is to provide employment. The focus therefore, ought to be on two sectors, namely, education and small and medium enterprises. Education because unless we have developed skill our youth will not be able to find meaningful employment in an era where aging countries like Japan and China are finding modern technology as a substitution for manpower.
The Government of India realizing that big corporations and technology-oriented enterprises will not be able to absorb the millions of employable youth, enacted the MSMED Act of 2006. The focus of the Act is to provide MSMEs with easy access to credit facilities, protect them from incipient stress, from harsh recovery proceedings. Besides that, the Act intends to secure recovery of the money due to MSMEs from debtors without recourse to the ordinary, time-consuming recovery proceedings. It also entitles MSMEs to recover interest at 3 times the bank rates. However, in so far as the protection against coercive recovery proceedings by banks and financial institutions, till date, the Act and the notifications which the Central Government has enacted, so too the guidelines of the RBI, remain a dead letter. The reason is that the MSMED Act did not contain any mechanism for redressal of the grievance of the MSMEs where the Banks and financial institutions have blatantly failed to give effect to the Act and the notification.
The notification dated 29.5.2015 mandates that no recovery proceedings can be initiated or continued except in the manner contemplated in paragraph 5(4)iii thereof. The said Paragraph empowers the Committees contemplated under the notification to permit recovery as also decide the mode of recovery. The notification mandates that an account of an MSME shall not be classified as NPA without the constitution of a committee for the resolution of stress by the Board of Directors of the Bank and a reference to the committee so constituted is made. It is for the committee to permit classification of the account as NPA.
The committee contemplated under the notification is a judicial tribunal. It has as its Chairman, the regional/zonal head of the bank concerned, officer in charge of the MSMED department of the Bank concerned, a subject expert and a representative of the State Government as members. The committee titled as “Committee for stressed micro, small and medium enterprises” is a judicial tribunal without any of the trappings of a court or tribunal. Its job is to prevent an MSME from falling sick and where it has fallen sick, to revive it, and where revival is not feasible, to allow the unit to be liquidated. Its decisions are final, binding and authoritative, subject to correction by review as expressly provided in Paragraph 15 of the notification.
The notification came into effect on 29.5.2015. it was placed before both houses of Parliament and received its assent. But not a single bank or financial institution ever constituted a committee which is a judicial tribunal akin to BIRF(since repealed)/NCLT. The reason is not far to seek. The RBI’s own studies reveal that the financial illiteracy among MSMEs is to the tune of 92%. MSMEs, though lakhs in numbers are not united, weak and uninformed. In our constitutional scheme where instrumentalities of state like Banks and financial institutions blatantly violate a statutory scheme like the MSME notification and the guidelines of the RBI which are mandatory, our courts and tribunals should have come to their rescue. However, that did not happen.
MSMEs, particularly, micro and small units, faced extreme difficulties during covid and thereafter. The banks were duty bound to constitute a committee and make an effort for the resolution of stress. But, to repeat, not a single bank or financial institution in this country constituted such a committee. The banks and financial institutions, invoking SARFAESI and IBC took forceful possession of units and properties, even residential homes, of thousands of MSMEs. Thousands were rendered homeless, the notification which was intended to protect MSMEs from such calamity was never given effect to.
While matters stood thus, the Supreme Court in Pro Knits v. Board of Directors of Canara Bank which was decided on 1.8.2024 wherein the author appeared for the MSME, was pleased to hold that the notification dated 29.5.2015 issued by the Central Government and the circulars issued by the RBI are statutory and binding on banks and financial institutions. The Supreme Court judgment was a huge victory in so far as it brought an end to the denial of justice to the MSMEs. The Court did not invent or discover anything, it only undid a great wrong which the banks and financial institutions committed willfully. I am certain that the MSMEs who are rendered homeless, whose factories were shut down, will be able to successfully ask for restoration of possession, and compensation. When a court declares something to be illegal, the consequence is that whatever has been done in violation of the law is null and void ab initio. The clock is liable to be put back and I am sure it will be, provided the MSMEs, the backbone of the nation’s economy, fight for their rights without losing hope.