CENTRE ISSUES ORDINANCE TO INTRODUCE PRE-PACKAGED INSOLVENCY FOR MSMES

The IBC Amendment Ordinance has made available pre packaged insolvency process for Micro Small and Medium Enterprises (MSME). There are a little over 6 lakh MSMEs in the country.

The IBC Amendment Ordinance 2021 (“Ordinance”) 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 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. The ability of the committee of creditors to require dilution of promoter shareholding/ control, in cases resolution plans submitted by the corporate debtor provides for impairment of any claims owed by such corporate debtor, should also be a significant deterrent against unreasonable terms in resolution plans, said Soumitra Majumdar, Partner J Sagar Associates

“As we had seen in the past, contractual restructurings are fraught with major co-ordination problems, which should get adequately redressed by this route. Protecting the process from competing litigations and co-ordinating the consent process, this approach should solve issues arising from fragmented credit arrangements. As with any legislation, this Ordinance will also need to evolve, as it goes along to address implementation issues which will arise. Illustratively, the payment/ restructuring terms to dissenting creditors may have to be dealt with soon, especially in light of the recent Supreme Court judgement. In summary, this is a welcome move, aimed at flexible, timely and viable resolutions, with the sanctity of a statutory process,” Majumdar said.

MSME’s contribute significantly to India’s economy and also are the largest employers cumulatively. The pre packaged insolvency process will quicken the process of resolution of MSME’s.