Amid a growing perception that the three-year-old insolvency resolution system of India has not been completely productive in protecting businesses and helping lenders in recovering their assets, the Indian government has now amended the Insolvency and Bankruptcy Code (IBC) with an Ordinance to offer a pre-pack insolvency for MSME that is Micro, Small and Medium Enterprises. This is a great IBC Amendment for MSME Insolvency
Analysts believe that the scheme where only the debtor can initiate the MSME Insolvency process can yield much agile resolution in comparison to the existing corporate resolution process (CIRP). This can also help in cutting costs. Moreover, the new process can result in reduced litigation and help thousands of MSMEs who're struggling to deal with the aftermath of the COVID-19 Pandemic
The IBC Amendment for MSME Insolvency India comes within two weeks of lifting a one-year suspension of insolvency proceedings against Covid-related defaults, given the increased chances of an increase in bad credit losses.
The debtor needs the approval of independent financial creditors, who make up at least 66% of the instalments. Honest promoters can submit the MSME resolution plan for processing, which is then put through a bidding process as part of a Swiss tender.
However, in cases where business creditors are not required to perform the cut, the promoter's plan, backed by financial creditors with at least 66% of the voting rights, may be submitted to the National Court of Company Law (NCLT) for approval. In contrast to CIRP, where the settlement expert is responsible for handling matters under the guidance of the financial creditors.
Since MSMEs have limited resources to go through a long and rigorous MSME insolvency process, the settlement period has been drastically reduced. MSME resolution plans have to be submitted in just 90 days, and the NCLT has an additional 30 days to approve them. MSME under IBC currently have maximum of 270 days to complete the entire CIRP.
A new lower default threshold (currently '1 crore') could be communicated soon to trigger the pre-pack insolvency for MSME process. Interestingly, the removal of a pre-pack application versus the CIRP application for the same MSMEs as in sections 7, 9 and 10 has been emphasized the IBC under certain conditions. However, if CIRP applications are already pending, NCLT must dispose them before the pre-pack insolvency for MSME request for relevant debtors is considered, analysts say.
Amidst its measures to cushion the Covid-19 strike, the government proposed last year to create a special framework for these small businesses, based on the report of a panel led by the President of India's Bankruptcy and Insolvency Committee MS Sahoo. According to IBBI data, there were 1,942 cases in the settlement process in September 2020. Since MSMEs usually represent most of these cases, the ready-made package helps them resolve stress better and faster.
The ordinance stipulates that an application for the initiation of ready-made insolvency proceedings against a corporate debtor can be made under the following conditions:
Here are a few ways in which the proposed IBC amendment for MSMEs will help.
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