MSME promoters likely to stay in charge during resolution process

However, all key decisions will have to be finalised by CoC; govt is also considering amending IBC to bring in the pre-packed scheme for all stressed companies

The special insolvency framework for micro, small, and medium enterprises (MSMEs) is likely to allow the insolvent debtor to retain possession of the company till a resolution is reached but all important decisions will have to be finalised by the committee of creditors, Insolvency and Bankruptcy Board of India Chairman M S Sahoo said on Friday.

“The current framework requires the company to go from promoter to interim resolution professional to the resolution professional and then to the resolution applicant. For a small company, this is a lot of business disturbance,” Sahoo said.

The move will not require any change in the law and will be enabled under the provisions of the Insolvency and Bankruptcy Code (IBC).

Union Finance Minister Nirmala Sitharaman had announced, as part of the Covid relief package, there would be a special framework for stressed MSME.

The government is also considering amending the IBC to bring in the pre-packed scheme for all stressed companies.

“The (insolvency law) committee is considering the framework for pre-packaged scheme and it will give its report by the end of this month. It will require a change in the law,” Sahoo said.

Pre-packaged resolution plans, popular in the United States and United Kingdom, involve an agreement by the stressed company and its creditors with a buyer before initiating insolvency proceedings.

“Pre-packed insolvency resolution was not getting finalised because of control remaining with the existing management, non-transparency and bidding that was not competitive. But due to the Covid crisis, the government is considering its implementation after the IBC becomes operational again,” said Manoj Kumar, partner, Corporate Professionals. 

Speaking at the seminar organised by Assocham, Sahoo said that suspending the corporate insolvency resolution process under the IBC for a certain period was a “keyhole surgery”. He said what was suspended was microscopic and done in the interests of viable firms.

“Law has to be firmly grounded in the realities of the market. The closure of a company in these times would mean loss of livelihood for many ... Not being able to liquidate an unviable firm is a mistake that can be corrected in the next quarter but the opposite can never be overturned,” Sahoo said. Former finance secretary Subhash Garg disagreed. He said the decision to suspend the IBC and give a moratorium was not business- or bank-friendly and it should have been left to the lenders.

“This extreme position in policy shift is not appropriate ... Banks have become risk-averse as a result of access to the IBC being denied,” Garg said. He also said entrepreneurs were forced to sell their businesses outside the IBC for much less since there was no auction-driven model.