Insolvency and Bankruptcy code (IBC 2016)- Morale booster for SMEs in India

Many SMEs in India have suffered distress situation and eventual failure due to delayed payment by the OEMs. The new law has empowered them to challenge high and mighty of Indian business.

Recently news report is an eye opener for the entire business community including SMEs in India. It is reported as below:

BHEL slapped with first ever notice for delayed payment under IBC, MSMEs say much more to be done

In line with the frequent cases of delayed payments to the Micro, Small and Medium Enterprises (MSMEs) by the PSU’s, Bharat Heavy Engineering Limited (BHEL) was served the first notice under Section 9 of IBC by NCLT in response to the plea filed by an MSME regarding pending payment for over 11 years.

Talking to KNN, Shishir Gupta, Director, Teknow Consultants & Engineers Pvt Ltd, the MSME that have taken the case against BHEL explained the scenario.

Gupta informed that it is not new that a PSU is observed denying payment to the MSME, there are thousands of such cases that already exists in the country wherein the MSME is denied its payment. However, it is for the first time in the country that the plea of an MSME is heard and a legal notice is served by the National Company Law Tribunal (NCLT) to the PSU giant.


Insolvency and Bankruptcy Code signals arrival of new trade regime:

It has sent the shock waves across the business community and indicates that none can be spared from strong long arm of law.

We have witnessed the struggles and tribulations of many vendors whose dreams are ruined at the altar of large corporations by delaying the payment to vendors or denying them altogether when the company faces headwinds in their market or simply chose to divert the money for unproductive investment. 

There are countless SMEs in India which have to endure the loss or face the spectre of liquidation of all their assets due to recovery action from the banks wherein the real culprit is large corporate houses who have intentionally or unintentionally delayed the payment.

In the past Govt took many initiatives like seeking disclosures in the books of accounts about the pending payment to SMEs and RBI asking banks to seek disclosures from the large corporate customers about outstanding payment to SMEs during the appraisal for credit limits.

Also, Companies act has enabling clause seeking liquidation of companies who default suppliers.

Public sector undertakings are no exception to it:

The above trend is not just limited to private corporate.  Indian Business history is replete with instances of public sector undertakings causing irreparable damage to many SMEs 

Recently I came across a business man who had been a supplier for once reputed PSU in Bangalore. The PSU later got closed and many SMEs suffered huge losses as the dues from the PSU is not paid. Still, they are fighting for the recovery even after 20 years.

The dream of many such entrepreneurs ended in tragic disaster. Many jobs were lost and few entrepreneurs had to endure facing litigations from labour related issues apart from experiencing loss of business.

The fact of the matter is fault lies elsewhere.

IBC 2016- A morale Booster:

So far entrepreneurs are enduring the lingering fear of default as there is no good remedy to seek recovery of the dues under any law. The extant guidelines were not effective to deal with recalcitrant corporates.

As such payment risk is major risk faced by SMEs in India. The new law effectively fill the gap to deal with this risk. SMEs in India can breathe easy and work with buyers more confident than ever.

We had published a blog on how Insolvency and Bankruptcy code when it was enacted by the Parliament. Please read:

We have explained the details on how Insolvency and Bankruptcy code operated in another blog. Please read:


On the flipside, the Insolvency and Bankruptcy code holds threat for those SMEs who are habitual in delaying payment. The Rules & Regulations are in the offing to cover the partnership and proprietorship firms.  It will expose them to the same risk of recovery action as much as they can use to recover their dues.

Secondly, the entrepreneurs must give attention to supplying the goods & services to specifications and avoid dispute. Because the disputed bills are not admissible under Bankruptcy code.

Contributes to Ease of Doing Business:

In the sphere of ease of doing business, India is witnessing structural change. Implementation of the bankruptcy code is one such initiative of Govt.

Insolvency and Bankruptcy code is first comprehensive law to deal with cases of defaults in the trade transactions. In the evolving scenario, the SMEs role in manufacturing ecosystem set to grow than ever. The laws like IBC 2016 will accelerate the proliferation of SMEs in business ecosystem going forward. It will make India a truly manufacturing hub along with other positives like skilled manpower and improving logistics.     

Present Trend in cases under the new law:

The close reading of cases filed under the new law (IBC 2016) reveals that there are many operational creditors have sought relief under the law to recover their dues. Till recently the operational creditors (Suppliers to companies) are the major percentage of litigants. Of course, the recent decision of Govt to put many stressed Corporates under the code have crowded the space.

Going forward it is expected that many more SMEs will seek recovery of dues under the law.

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SMEs in India are going to see the better operating environment and lesser stress in doing business with the implementation of IBC 2016.


We thankfully acknowledge the contribution of Sri K V Subramanya, Insolvency Professional based in Udupi, Karnataka. He can be reached at [email protected].