Insolvency Procedure For MSMEs?

Insolvency Procedure For MSMEs?

The Insolvency and Bankruptcy Code provides a market oriented and time bound resolution of the stressed assets at the time of insolvency. The Insolvency procedure for MSMEs is under a developing stage and through amendments it is always attempted to ensure a smooth transition.

Insolvency of MSMEs

The Micro, Small and Medium Enterprises (MSMEs) are mainly small sized business units categorised as per their investments. Under the Companies Act, the registered companies must comply with the prescribed provisions for the dissolution due to insolvency.

The Insolvency and Bankruptcy (Second Amendment) Ordinance 2018 relaxed the applicability of Sec. 29A to provide relief to the MSMEs in regard to submission of a resolution plan.

This was introduced by a significant amendment in the IBC resulting in a wide impact on the whole insolvency resolution regime. The said sec. 29A of IBC was brought into force to control the untrustworthy promoters from the activities of buyback assets at a subsidized price.

How shall the MSME be treated at the time of insolvency?

The MSMEs occupying a significant position in the Indian economy. The business units deserve incentives as they constitute the base of the Indian economy with the best approach to encourage MSMEs and provide a relief to exempt or relax certain provisions under the insolvency process regulatory.

The rights of the MSMEs are protected and preserved encouraging the entrepreneurs to enter the market and continue with their business by assuring them protection from fraudulent activities. The provisions introduced by the Sec. 29A was not limited to the Corporate Insolvency Resolution Process (CIRP) but also affected different aspects of the Indian economy.

New Amendment in the insolvency law regulating the resolution process for MSMEs

On 04th April 2021, a new Ordinance was promoted for introducing an amendment to the Insolvency and Bankruptcy Code that involves certain specific requirements for MSMEs relevant to their resolution of their insolvency.

According to the ordinance, it is necessary to provide an efficient alternate insolvency procedure to MSME for ensuring a quicker, cost effective and value maximizing result, without effecting much on the business, to secure the employment.

The implementation of the ordinance involve the introduction of alternate procedure as:

● A fast track Corporate Insolvency Resolution Procedure, abbreviated as CIRP under Chapter IV o Part II of the IBC, amending to make the new framework more debtor friendly than before.

● In the new framework of the CIRP, the existing management is able to retain the control over the corporate debtor, even when the resolution process is pending before the tribunal for a resolution.

● The bidding process has made a secured place in the regular insolvency proceedings that is to e followed by the promoters having the right to retain control till a better resolution plan comes in the picture.

It is presumed that as the approach is more lenient to the debtor in possession model, it ensures the significant rights to the financial creditors creating a hindrance to the dishonest promoters.