How MSMEs Can Initiate Insolvency Proceedings Against Their Defaulting Buyers

Insolvency Proceedings Against MSMEs' Defaulting Buyers

As seen in our previous post, to protect Micro, Small and Medium Enterprises (MSMEs) from the vicious cycle of delayed payments, the MSME Ministry has now interlinked the Delayed Payment Monitoring Portal – MSME Samadhaan with National E-Governance Service Ltd. (NeSL)’s Information Utility (IU).

With this new mechanism in place, MSMEs can now directly obtain a Record Of Default (RoD) from NeSL IU against their defaulting buyer. Since NeSL IU generates a RoD only when a defaulting buyer does not dispute his MSME supplier’s debt claim after multiple reminders, a RoD is legally treated as an admissible prima facie piece of evidence of the buyer’s admission of default.

Using the RoD obtained from NeSL IU, an aggrieved MSME can approach the National Company Law Tribunal (NCLT) to file an application to initiate insolvency proceedings against the defaulting buyer.

In this post, we will elaborate on the end-to-end process and the steps involved in invoking insolvency proceedings against a defaulting buyer.

Step 1

If not already registered on NeSL IU’s portal, register with MSME UAM (Udyog Aadhaar) or Digital Signature.

Step 2

Log in to NeSL’s IU portal and confirm and complete the information that was shared on the Samadhaan portal. Using this information, the MSME can click on option to generate ‘Demand Notice’ and this will be sent by NeSL IU to the defaulting buyer.

Further, as per IBC procedure, NeSL IU will automatically send three reminders to the defaulting buyer to accept or dispute the MSME supplier’s debt claim.

Step 3

If the buyer fails to respond to the notice and reminders sent in respect of debt claim, NeSL IU automatically triggers a ‘Default Alert’ and broadcasts it to all lenders of the defaulting buyer. 

Step 4

Download the ‘Record of Default’ (RoD) and the Demand Notice generated through NeSL IU and attach the same with the application before the Adjudicating Authority (NCLT) for initiating a Corporate Insolvency Resolution Process (CIRP) against the defaulting buyer under Section 9 of the IBC.

Step 5

NCLT scrutinizes the CIRP application and if there is no pre-existing dispute it accepts the same within 14 days of the application date.

Step 6

If the CIRP application is accepted, NCLT appoints an Interim Resolution Professional (IRP) who takes over the management control of the defaulting buyer.  

Usually, upon being given a notice of the filing of insolvency application in NCLT, the fear of admission of the case and the consequent loss of Company control often pressurizes defaulting buyers to settle the claim. Several thousand cases have been withdrawn from NCLT as a result of this and benefited Operational Creditors to recover their unpaid dues.

To Sum It Up

The Insolvency and Bankruptcy Board of India (IBBI)’s regulations for ‘Insolvency Resolution Process for Corporate Persons’ stipulate that the entire Corporate Insolvency Resolution Process (CIRP) must be completed within 180 days from the date of admission of application to the Adjudicating Authority, with a provision for extension by 90 days if deemed necessary by the NCLT.

With IBBI’s stringent mandates for a time-bound resolution and new initiatives like interlinking Samadhaan and NeSL IU, MSMEs no longer have to worry about their unpaid dues. 

Please feel free to call our Toll Free Number 1800 599 2345 or email us at msmehelp@nesl.co.in if you have any queries or need any further information.

Regards,

Team NeSL.