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Saturday, May 08, 2021

Providing relief to MSMEs

Recent amendments to IBC will help ease MSMEs pain, but is likely to face initial hurdles

New Delhi |
Updated: April 9, 2021 6:38:33 pm
Providing relief to MSMEsThe IBC (amendment) ordinance, inter alia, introduces an entirely new facet of insolvency jurisprudence in India — the pre-packaged insolvency resolution process. (Express File/Gurmeet Singh)

Written by Arush Khanna

With the object of providing an efficient alternative insolvency resolution process for MSMEs, the central government promulgated the IBC (Amendment) Ordinance, 2021. The ordinance, inter alia, introduces an entirely new facet of insolvency jurisprudence in India — the pre-packaged insolvency resolution process.

With this, India now joins the ranks of other jurisdictions like US, UK, Singapore and France where this procedure has largely been a success.

Unlike the corporate insolvency resolution process (CIRP), which is initiated at the instance of financial or operational creditors, the pre-packaged insolvency resolution process is more like consensual restructuring. Under this regime, the corporate debtor, along with the unrelated financial creditors, holding 66 per cent or more of the total financial debt agree on a resolution plan before making an application for pre-packaged insolvency.

The ordinance introduces Chapter III A which lays down a detailed procedure on pre-packaged insolvency. It is worth noting here that only corporate debtors, that is, companies and Limited Liability Partnerships are covered under the ordinance. Other forms of MSMEs such as the Hindu Undivided Family, proprietorships and partnership firms are excluded from seeking refuge under the ordinance.

The ordinance is conspicuously silent on whether a corporate debtor requires prior registration under the Micro, Small and Medium Enterprises Development Act for taking recourse under the pre-packaged regime. Since the issue regarding whether the registration of MSMEs is mandatory has received contrary views from various high courts, this point may need clarification.

Strict timelines are the essence of this ordinance. A corporate debtor is required to submit a base resolution plan within 90 days from the pre-package insolvency commencement date, failing which the proceedings would stand terminated. The adjudicating authority (NCLT) is required to approve or reject the plan within a further period of 30 days.

With over 86 per cent of the total cases under the IBC pending beyond the prescribed statutory period (330 days), one would have to wait and see whether the tight timelines prescribed under the ordinance are adhered to.

One notable departure from the conventional corporate insolvency resolution mechanism is the fact that under the pre-package regime, the board of the corporate debtor does not get suspended and shall continue to manage the affairs of the company as a going concern.

Given the vast powers and responsibilities vested with the Resolution Professional under the newly-introduced Section 54F, there is scope for disharmony between the management and the Resolution Professional, which may lead to delays in decision making. Whether it’s outside the courtroom or within the boardroom, the pre-packaged regime is not likely to be less conflict-prone.

To ensure asset value maximisation and in the interest of equity, the amendment provides that if the base resolution plan submitted by the corporate debtor is to the prejudice of its operational creditors then the same would be put to competitive bidding through the Swiss Challenge.

This would require the Resolution Professional to invite other prospective resolution applicants (third parties) who shall submit their resolution plans. In the event the resolution plans submitted by these third parties meet the criteria prescribed under the Code, the corporate debtor would then either have to match or improve its resolution plan to meet the challenge or else shall have to make way.

This new insolvency law is surely a step in the right direction. Considering its possible impact on the MSME sector, the prospects of this ordinance are keenly awaited. However, like most new regimes, this, too, is likely to face initial hurdles. There are serious questions on whether our existing court infrastructure is equipped to handle the slew of cases that are likely to be filed under this new provision.

The option to have separate dedicated tribunals dealing with pre-packaged insolvency must be considered. Further, the government must also extend the benefits of this ordinance to other forms of juristic entities, such as HUFs and proprietorship firms. These account for a significant portion of micro and small enterprises in India.

Considering that the MSME sector has been struggling since the outbreak of the pandemic, one hopes that the ordinance is implemented in letter and spirit.

The writer is a partner at Numen Law Offices

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