Draft MSME insolvency law seeks resolution in 90 days; allows promoters to bid for company

The special insolvency resolution framework for MSMEs, at an early stage of drafting by the Insolvency and Bankruptcy Board of India (IBBI), recommends a much shorter timeline - 90 days instead of the existing 330 days - for completion of the process, and allows promoters of a defaulting MSME to submit resolution plan.

The special draft framework, which will be applicable for MSMEs with turnover less than Rs 250 crore or an investment less than Rs 50 crore, recommends that the insolvency procedures against an MSME can only be triggered by the MSME itself and not by any of the creditors. But for initiating an insolvency process, the MSME must take approval from unrelated financial creditors having at least 25% of the outstanding financial claims.

The draft provisions, which are yet to be made public, also envisage a complete change in the approach - from the existing creditor-in-control to debtor-in-control. That means the promoters of the MSME continues to run the company, instead of the financial creditors through the help of resolution professionals (RPs), as is the norm under the Insolvency and Bankruptcy Code (IBC).

According to the draft framework, the resolution professionals will have no role in managing day-to-day affairs of the company, but their role will be limited to conducting and supervision of the insolvency process.

The draft framework also seeks to simplify claim verification process and preparation of information memorandum. It says that to reduce the cost, the RP does not need to make public announcement of the commencement of the insolvency process in newspapers. Instead, a public notice on the website of the MSME and IBBI would be sufficient.

To make the claim process simpler, the draft framework suggests that the MSME should provide an updated list of outstanding claims, and a draft information memorandum, based on its books, which may be certified by the Chairman/Managing Director of the company, to the RP on the day he is appointed. The RP should provide the details of claims to each creditor and seek confirmation or objections.

Sanjeev Ahuja, insolvency professional and director, Grenoble Consultants Pvt Ltd, says that the 90-day timeline is too tough to comply with especially when the NCLT takes its own sweet time to hear the cases. "The time taken by the NCLT is beyond the control of the resolution professionals. In my view, 120 days plus an additional 60 days looks a more pragmatic timeline - 120 days is the normal time and in case if I need an extension, another 60 days," he says.

Ahuja, who has been part of the deliberations on the draft framework says that another problem with the proposed rules is that they do away with the need for public announcements through newspapers. "It goes against the principle of natural justice. Why do you think as Rs 240-crore MSME will have a handful of creditors? The idea of public announcement is that people across the globe come to know about it. Then they want the RPs to write each and every creditor for confirmation, which is not possible. You make public announcement and, people will come back with their claims," he says.

The framework also seeks to exempt the MSMEs from Section 29A of the IBC, which bars promoters from submitting a resolution plan. It argues that since the business of an MSME attracts interest primarily from its promoter and may not be of interest to other resolution applicants, it is in the interest of a defaulting MSME to allow its promoters to submit a resolution plan.

The promoter should be able to inform the resolution professional within 15 days of the initiation of the insolvency process if they are going to submit a resolution plan or not. The resolution plan submitted by the promoter would then be put out for Swiss challenge, and third-parties will be allowed to come up with better bids, if at all.

The Committee of Creditors (CoC) will be formed as in normal course. However, to make matter simpler, a resolution plan could be approved by the CoC if 66 per cent of the total voting shares of the creditors who cast their votes, vote in favour of the plan, which means abstinence of certain creditors would not delay the process.

It is to be noted that the Finance Minister on May 17, 2020, while announcing the special packages for industry, has proposed a special insolvency framework for MSMEs.

Even as the IBBI is working on the special framework for MSMEs, it is not certain if the same will be applicable only for the period during which normal insolvency process will remain suspended or the MSME framework would be there forever.

The framework also enables initiation of the insolvency resolution process on the occurrence of default of at least Rs 1 lakh, arising before or after 25th March 2020, irrespective of increase in threshold of default from Rs 1 lakh to Rs 1 crore and suspension of initiation of CIRP under sections 7, 9 and 10 for defaults during the COVID-19 period.

ALSO READ: MSMEs crisis: New Rs 1 crore payments default threshold for bankruptcy backfires

ALSO READ: Banks sanction over Rs 75,400 crore of loans to MSMEs under credit guarantee scheme

ALSO READ: Save MSMEs campaign! Easier access to Rs 3 lakh crore loan scheme, GST rebate among top demands

ALSO READ: MSME credit guarantee scheme suffers as banks fear NPAs