SMEs' claims may get higher priority in liquidation cases

NEW DELHI: The government is looking at a proposal to give higher priority to the claims of small operational creditors in cases of liquidation under the bankruptcy code, an official said.

This comes after representations that small and medium enterprises (SMEs), which are suppliers of goods or services to a defaulting company, face huge losses during bankruptcy proceedings, pushing them towards bankruptcy in some cases and also leading to job losses for those employed with them.

"In a few cases which are presently under liquidation, it has been pointed out that SMEs face the brunt, putting them under severe stress," said the government official cited earlier. "We are examining the issue," the person said.

Under the recovery of balance dues, in terms of waterfall mechanism as set out in Section 53 of the Bankruptcy Act, the order of priority for operational creditors comes under unsecured creditors. Experts say there is a case for moving them up in the priority list. "Claims of SMEs should be brought on par with debt paid to financial creditors," said Mukesh Mohan, a resolution professional.

He said liquidation proceedings generally triggers a chain reaction. "It is like a vicious cycle," Mohan said. "Most of these MSMEs
(micro, small and medium enterprises) have taken loans and generally get late payments. If they don't get anything under liquidation, their risk of default is the highest."

The National Company Law Tribunal have all over the country admitted around 300 bankrupt SMEs and their resolution processes have started. A senior bank executive said with the government's focus on increasing credit growth towards MSME sector, giving such firms higher priority in bankruptcy proceedings can be looked at, but added that this should be done with stringent conditions.

"It should not be the case that some big suppliers are operating through smaller companies and getting benefitted over secured creditors," the banker said on condition of anonymity.