02 Jul 2021 Ankit Chadha

Insolvency and Bankruptcy Code: The Gamut of MSME Insolvency Under it

MSME Insolvency | TRC Corporate Consulting

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:

  • It has not undergone any prepackaged MSME insolvency resolution process in the three years before the Start Date,
  • it has not been involved in any MSME insolvency process.
  • There is no mandate that requires its liquidation.
  • It is approved according to section 33;
  • It is entitled to submit a MSME resolution plan in accordance with Section 29A;
  • The corporate debtor's financial creditors (who are not related parties and who represent the specified number and form) have proposed the liquidator's name. This liquidator would be appointed as a specialist to conduct the corporate debtor's pre-designed bankruptcy resolution process. Financial Creditors  (other than its related parties, representing at least sixty-six per cent of the value of the financial debt owed to the creditors) have consented to the proposal in the manner indicated.
  • The corporate debtor's partners may have made a statement in the manner indicated.
  • The corporate debtor's partners have agreed to a special resolution ( at least three-quarters of the total number of shareholders)
  • The corporate debtor has made a resolution requiring the filing of an application to initiate the pre-prepared MSME Insolvency proceedings

Here are a few ways in which the proposed IBC amendment for MSMEs will help.

  1.  The sponsor is an integral part of their business. Therefore, any attempt to transfer the business to someone else without the participation of the existing owner means that the acquirer may lose important intellectual property rights and knowledge of the organization's operating ecosystem. This will hinder the process of solving the problem.
  2. It's hard to ascribe entrepreneurs for failure- MSMEs are a part of a larger product ecosystem hosted by large original equipment manufacturer (OEM). Therefore, the company's productivity and sustainability depend on the condition of the original equipment manufacturer. We have seen many small, medium and micro enterprises go bankrupt due to poor management or outdated technology and manufacturing practices of many large companies (including many listed companies). In this case, blaming entrepreneurs for reasons beyond their control amounts to false intervention.
  3. MSMEs need breathing space to adapt to the changing environment: the prevalence of NPA cannot be explained by a single factor. The lack of agility and absence of right advise at the right moment may hurt the business. The global operating environment and rapidly changing technical elements play an important role in The functioning of MSMEs. They must have the opportunity to adapt to changing realities. This will become a risk management tool for SMEs because it creates opportunities for policy adjustments.
  4. The service industry is very delicate: to successfully resolve debt hangovers, very delicate handling is required. Promoters are an important part of the company.No matter how cheap the solution package is, the company's severe shortage of physical assets or minimal availability will not attract new investors. The prosperity of the service industry mainly depends on the intangible possibilities considered by developers. The proposed reforms will pave the way for the renewed hope of many and lead to an early resolution.

With a panel of more than 15 IBBI registered insolvency professionals operating at a PAN India level, TRC Corporate Consulting offers MSMEs in-house expertise for tackling all significant activities related to the Liquidation process. These include Compliances, Transactions, Operations, Supervision and Resolution. Contact us to know more about our services.