Ease of Doing Business for MSMEs: The Central government has introduced an ordinance for a pre-packaged insolvency resolution method for micro, smaller and medium enterprises (MSME) beneath the Insolvency and Bankruptcy Code, 2016 (IBC).
The MSME sector got badly hit due to the Covid-19 pandemic placing them in a stressed circumstance.
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The rationale for promulgating the IBC amendment ordinance has been to supply an option 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 method enables the promoters and the management of the firm to produce an informal program for debt resolution with its creditors.
In that sense, it is a positive step that presents the firm’s promoters an option to the usual drawn-out (it requires at least six months) and high priced Corporate Insolvency Resolution Process (CIRP) exactly where the productive assets are liquidated to spend the creditors.
“The ordinance is a step in the right direction and should help in restructuring the stressed assets of MSMEs quickly,” stated Ashok Saigal, Co-chaiman, CII National MSME Council and Managing Director, Frontier Technologies. He added that this mechanism enables the management of the firm to be a portion of the restructuring physical exercise, providing them an additional possibility to course-right and continue operating the enterprise.
With the Ordinance, when MSMEs default, they now have a mechanism to propose their personal base resolution program and with the consent of 66 % of their unrelated economic creditors initiate a prepackaged insolvency resolution method themselves. Once the method begins, the National Company Law Tribunal (NCLT) will appoint a resolution experienced. Unlike the CIRP method exactly where the resolution experienced requires charge of the firm, in this case, she or he will act as a facilitator and assist boost the base program or invite a competitive program from possible resolution applicants, if necessary. “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,” stated Misha, Partner at law firm Shardul Amarchand Mangaldas.
If the affairs of the firm are carried out fraudulently or grossly mismanaged, the committee of creditors by means of the resolution experienced, apply to the NCLT to shift the handle and management of the firm to the resolution experienced.
The professionals really feel the Ordinance will advantage MSMEs that are floating adrift but will not be capable to assistance 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,” stated 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 for the duration of the period 2015-16, there have been 633.88 lakh MSMEs in the nation. “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,” stated Misha.
Another significant drawback is that the framework of the chapter does not lessen the function and involvement of NCLTs incredibly considerably. “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 stated.