Govt amends insolvency law; introduces pre-packaged resolution process for MSMEs

The government has amended the insolvency law to provide for a pre-packaged resolution process for micro, small and medium enterprises.

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 Micro, Small and Medium Enterprises (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 pre-packaged route to genuine and viable cases, to ensure least business disruption.

"While modelled on debtor-in-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.

IBC provides for a market-linked and time-bound resolution of stressed assets.