PROMOTERS OF Medium, Small and Micro Enterprises (MSMEs) will be able to retain control of their companies, even as they undergo insolvency proceedings, under a special insolvency framework for MSMEs, according to government officials.
Finance and Corporate Affairs Minister Nirmala Sitharaman had recently said the Corporate Affairs Ministry was finalising a special resolution framework for MSMEs under Section 240(A) of the Insolvency and Bankruptcy Code (IBC). The proposed framework for MSMEs will follow a “debtor in control” model for insolvency proceedings, while ordinarily the corporate insolvency resolution process follows a “creditor in control” system.
Only MSMEs themselves will be able to apply to initiate bankruptcy proceedings through this mechanism, meaning that lenders and operational creditors will not be able to initiate insolvency under this framework. The Corporate Affairs Ministry has already suspended initiation of insolvency proceedings by lenders, operational creditors and corporate debtors under Sections 7,9 and 10 of the IBC, respectively, till September 25 to protect companies impacted by the COVID-19 pandemic from insolvency proceedings.
“This framework will minimise disruption in the operations of such distressed MSME as the management will remain in controls throughout the process,” a senior government official told The Sunday Express, noting that in normal insolvency proceedings, an insolvency professional is appointed to manage the company who then hands over control to a successful resolution applicant, if any.
“When an IP takes over control it takes time for them to learn about the business and then begin delivering results and then control is handed over again to the successful applicant”, said the official, adding the key intent behind the framework was to allow promoters to retain control, protect jobs and prevent MSMEs from going into liquidation. Experts have noted that a lack of interest among bidders for distressed MSMEs has contributed to a large number of these companies having to undergo liquidation proceedings.
The official noted that financial creditors and operational creditors would not be able to initiate insolvency proceedings under the new framework and there may also be some other relaxations under the new framework.
Section 240(A) of the IBC also exempts MSMEs from Section 29(A) of the IBC, which prevent any party with a history of default – including the promoters of the company undergoing insolvency proceedings – from bidding for the company.
Experts said the move would likely speed up insolvency proceedings and that it would help promoters negotiate a reduction in liabilities with creditors, while continuing to manage their businesses.
“It is like a pre-packaged insolvency process, the owners will negotiate a restructuring or reduction of liabilities with lenders,” said Manoj Kumar, partner at law firm Corporate Professionals, adding: “This process could be faster and because the existing management knows the nuances of the company it is easier to ensure the continuation of the business while promoters try to find an investor or money to revive the company and negotiate with creditors.”
Kumar also said that while lenders and suppliers could not currently initiate insolvency proceedings against companies under the IBC, they could try other recovery methods such as debt recovery tribunals, the SARFAESI Act or seek to invoke personal guarantees. He added some MSMEs may prefer initiating insolvency proceedings under the proposed special resolution framework.
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