Special insolvency relief framework for Covid-hit MSMEs in the works

Such firms may be allowed to opt for pre-packaged deal

With the suspension of the Insolvency and Bankruptcy Code (IBC) coming to an end, the government is preparing a special relief framework for medium and small enterprises that are still grappling with the pandemic crisis.

Under this, the Centre is planning to introduce in the code special provisions that could be part of the relief framework for micro, small, and medium enterprises (MSMEs).

The provisions under consideration include allowing MSMEs to opt for pre-package deals by which promoter and creditor can reach out-of-court settlements on debt resolution. At present, there is no legal framework for this. Those will give powers to firms and even creditors to reach debt resolutions without any public bidding for assets.

Second, even if a company files for insolvency, the management shouldn’t be superseded and a resolution professional will be appointed to supervise activities.

Currently, the board is superseded soon after a company files for bankruptcy.

Besides, the government is deliberating on lowering the default threshold for these firms if the applicant belongs to the MSME category.

During the pandemic, the government raised the threshold to Rs 1 crore from Rs 1 lakh for initiating proceedings under the IBC.

“We are working on a couple of provisions that may be introduced under Section 240 A (dealing with MSMEs’ exemptions), to ease the burden of small firms which have been under distress. We have been deliberating and weighing such provisions with the ministry, departments and stakeholders like banks concerned to finalise the terms for these firms,” said a senior finance ministry official privy to the discussion.

It will be finalised in a week and expected to be announced before March 24, he added.

The government in December had extended the suspension of the IBC till March owing to stress in various sectors. Earlier, it was done for six months from March 24, 2020. It is learnt that suspension may not be extended because, to do so, the government will need to amend the Act, which requires parliament’s nod. 

Sources said besides the relief package, the government will likely introduce pre-packs, an alternative resolution mechanism that would cover most of the companies, with a special mention of MSMEs with a separate criterion.

A pre-pack is an agreement on a distressed company’s debt resolution between secured creditors and investors instead of a public bidding process, as under the Corporate Insolvency Resolution Process (CIRP) of the IBC.

However, there are challenges with the pre-pack, which are at the discussion stage even for the MSMEs, the official highlighted.

Explaining the bit, he said that getting both lender and shareholder consent for initiating pre-packs would be lengthy. Also that requires approval from the National Company Law Tribunal.

Second, there is a question on expanding the scope for restructuring under pre-packs, which is limited as compared to the insolvency process.

“Pre-packs are an effective tool and ideal in the initial stage of stress. However, it requires full participation and concerted efforts both from promoters and controlling stakeholders,” said Pavan Vijay, founder, Corporate Professionals.

The Ministry of Corporate Affairs had last year, formed a committee led by M S Sahoo, chairperson of the Insolvency and Bankruptcy Board of India, to look at including pre-packs as a resolution mechanism under the IBC. Many developed economies like the UK, Canada, France, and Singapore have adopted this framework. 

“Given their special nature, it is important that adequate flexibility is provided for their restructuring with a possibility for the existing promoter to participate. It is important that the procedure is efficient and streamlined so that viable businesses can be rescued from pandemic impact,” said Dhananjay Kumar, partner, Cyril Amarchand Mangaldas.