Pre-packaged insolvency process under Indian bankruptcy code is positive but limited in its scope, feel experts

Ease of Doing Business for MSMEs: The Central government has introduced an ordinance for a pre-packaged insolvency resolution process for micro, small and medium enterprises (MSME) under the Insolvency and Bankruptcy Code, 2016 (IBC).

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The MSME sector got badly hit due to the Covid-19 pandemic putting them in a stressed situation.

Read More: Insolvency scheme: Govt, regulator finalising pre-pack framework, MSME scheme

The rationale for promulgating the IBC amendment ordinance has been to offer an alternative resolution mechanism to MSMEs that is “quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.” The pre-packaged insolvency process allows the promoters and the management of the firm to create an informal plan for debt resolution with its creditors.

In that sense, it is a positive step that offers the firm’s promoters an alternative to the usual drawn-out (it takes at least six months) and expensive Corporate Insolvency Resolution Process (CIRP) where the productive assets are liquidated to pay the creditors.

“The ordinance is a step in the right direction and should help in restructuring the stressed assets of MSMEs quickly,” said Ashok Saigal, Co-chaiman, CII National MSME Council and Managing Director, Frontier Technologies. He added that this mechanism allows the management of the firm to be a part of the restructuring exercise, giving them another chance to course-correct and continue running the business.

With the Ordinance, when MSMEs default, they now have a mechanism to propose their own base resolution plan and with the consent of 66 percent of their unrelated financial creditors initiate a prepackaged insolvency resolution process themselves. Once the process starts, the National Company Law Tribunal (NCLT) will appoint a resolution professional. Unlike the CIRP process where the resolution professional takes charge of the company, in this case, she or he will act as a facilitator and help improve the base plan or invite a competitive plan from potential resolution applicants, if required. “Given that the company itself initiates its resolution with a base plan with the approval of 66 percent of financial creditors consent to initiate the process, makes it a faster and more efficient,” said Misha, Partner at law firm Shardul Amarchand Mangaldas.

If the affairs of the company are carried out fraudulently or grossly mismanaged, the committee of creditors through the resolution professional, apply to the NCLT to shift the control and management of the company to the resolution professional.

The experts feel the Ordinance will benefit MSMEs that are floating adrift but will not be able to support sinking ships. “The reason is that the 120 days time frame is too less a time frame for firms to settle the final resolution plan, especially for firms that are facing deeper issues with debt,” said Daizy Chawla, Senior Partner at law firm Singh & Associates.

Also, the scope of the Ordinance is limiting as it covers only the MSME sector. As per the NSSO survey during the period 2015-16, there were 633.88 lakh MSMEs in the country. “There should have been an enabling provision in The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 to implement the pre-packed insolvency framework to all companies in the near future. By limiting it to the MSME sector, it seems more like a special mechanism for the sector rather than a holistic pre-packaged mechanism that is introduced into the IBC,” said Misha.

Another major drawback is that the framework of the chapter does not reduce the role and involvement of NCLTs very significantly. “Given that this process can be initiated only by the companies with the consent of 66 percent of its unrelated financial creditors, it is hoped that the disputes would be minimal allowing the process to run more efficiently than the normal CIRP,” she said.