Govt amends IBC to give relief to MSMEs
NEW DELHI: The government has amended the insolvency law to provide for a pre-packaged resolution process for micro, small and medium enterprises (MSMEs).
An ordinance was promulgated to amend the Insolvency and Bankruptcy Code (IBC) on April 4, according to a notification.
The latest move comes less than two weeks after the suspension of certain IBC provisions ended. The suspension — wherein fresh insolvency proceedings were not allowed for a year starting from March 25, 2020 — was implemented amid the coronavirus pandemic disrupting economic activities.
As per the ordinance, it is considered necessary to urgently address the specific requirements of MSMEs relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures.
According to the ordinance, it is considered expedient to provide an efficient alternative insolvency resolution process MSMEs to ensure a quicker, cost-effective and value maximising outcomes for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.
“... in order to achieve these objectives, it is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises,” it added.
Soumitra Majumdar, Partner at J Sagar Associates, said the IBC Amendment Ordinance 2021, makes available the prepackaged route to genuine and viable cases, to ensure least business disruption.
“While modelled on debtorin-possession approach, it vests significant consent rights to the financial creditors, such that the mechanism cannot be mis-used by errant promoters.
“Further, adopting the plan evaluation process akin to Swiss Challenge, it retains competitive tension such that promoters propose plans with least impairment to rights and claims of creditors,” Majumdar noted.
THE LATEST MOVE COMES LESS THAN TWO WEEKS AFTER THE SUSPENSION OF CERTAIN IBC PROVISIONS ENDED
“In pre-pack, it gives you a platform where you can do a resolution in debtor in possession rather than creditor in control under Resolution professional. That’s the major distinction. The company under debtor in possession is able to arrive at a solution. In the IBC, bulk of the litigation is by promoters which creates roadblocks for the resolution,” said Ajay Shaw, partner, DSK Legal.
Businesses can voluntarily file for pre-pack scheme by adopting a special resolution by the board or by a resolution by three-fourth of the total number of partners. The scheme stipulates that though the control stays with the management (directors or partners), it has to make “make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern.”
The IBC provides for a market-linked and time-bound resolution of stressed assets.