Only debtors can trigger their own bankruptcy process under the special insolvency resolution framework for micro, small and medium enterprises (MSMEs), which the government and the regulator are working on, sources told FE.
However, to be able to do so, a stressed MSME will require the approval of unrelated financial creditors who account for at least 25% of outstanding claims. If creditors want to initiate bankruptcy proceedings against MSMEs, they would need to go through the usual Corporate Insolvency Resolution Process (CIRP) under the extant rules, the sources said.
As part of its measures to soften the Covid-19 blow, the government had last year proposed to bring in a special framework for these small businesses. It will form a part of the Insolvency and Bankruptcy Code (IBC).
Given that MSMEs have limited wherewithal to go through a long and rigourous insolvency process, the time limit for the resolution will be drastically reduced. Market participants will get 90 days to submit resolution plans and the National Company Law Tribunal will have another 30 days to approve them. The IBC currently stipulates a maximum of 270 days for the completion of the entire CIRP. However, the default threshold to trigger this process will remain unchanged at Rs 1 crore.
Promoters of MSMEs, who are not wilful defaulters, can continue to bid for their toxic assets. In fact, they will get to submit resolution plans first, which will then be placed before other potential suitors under a Swiss challenge. The resolution plan needs to be endorsed by financial creditors having at least 66% of the voting power. Some of these features are in sync with those of the so-called pre-pack insolvency scheme that the government has proposed to bring in. Also, promoters will continue to run the MSMEs, unlike in the CIRP where the resolution professional gets to run the affairs with guidance from financial creditors.
Similarly, several procedural requirements on issues, such as claims of creditors, may be simplified to make the entire process less rigorous. This is aimed at reducing the cost as well as time required for stress resolution.
Firms with annual turnover less than Rs 250 crore or investments less than Rs 50 crore will be covered under the new mechanism. This is in step with the new definition of MSMEs, based on turnover and investment criteria, which the government announced last year.
Commenting on the need for such a special mechanism for small businesses, Insolvency and Bankruptcy Board of India (IBBI) chairman MS Sahoo recently said: “MSMEs are different from other companies in many ways for the purpose of resolution. They generally have loans from informal sources, which do not have access to resolution frameworks as available to banks. Many of them do not have stamina to sustain a full-fledged CIRP-style resolution process.”
Similarly, the value of an MSME often lies in informal arrangements, making it difficult for a third party to harness value through a resolution plan. “The market for resolution plans for an MSME firm is local, while the entire globe is the market for a bigger firm; etc. In recognition of their uniqueness, a special framework, tailor-made for resolution of MSMEs is under consideration,” Sahoo added.
According to the data compiled by the insolvency regulator, as many as 1,942 cases were in the resolution process as of September 2020. Since MSMEs typically account for the largest chunk of these cases, a special framework will help them resolve stress better and faster, analysts reckon.
Team – Intellex Strategic Consulting Pvt Ltd
Venturestreets.com, Intellexconsulting.com, Economiclawpractice.com
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