Regulator proposes upfront disclosure of MSME status of corporate debtor
The insolvency regulator – Insolvency and Bankruptcy Board of India (IBBI) – has proposed mandatory disclosures about the status of a corporate debtor, being registered or not, as an MSME (micro, small or medium enterprise) in accordance with the provisions of the Micro, Small and Medium Enterprises Development Act, 2006.
The regulator has also proposed that if available documents suggest the debtor qualifies as an MSME, the resolution professional may obtain an Udyam Registration Certificate on a case-by-case basis before making the disclosure in the information memorandum (IM).
These changes have been proposed after several instances came to fore where the classification of a corporate debtor as an MSME has been contested during the insolvency resolution process.
According to the regulator, better clarity on MSME status of a corporate debtor may encourage greater participation from potential resolution applicants who may have otherwise been uncertain about their eligibility.
“Certain resolution applicants specifically look for MSMEs due to their unique nature and advantages, such as simplified compliance requirements and government incentives. This may lead to enhanced participation and thereby lead to improved outcomes in terms of value maximization,” says a paper floated by the IBBI.
The MSME status of a corporate debtor has important implications for the insolvency resolution process, particularly in terms of the eligibility criteria for resolution applicants under Section 240A. However, this crucial information is not currently required to be explicitly disclosed in the Information Memoranda (IM).
Section 240A of the Insolvency and Bankruptcy Code (IBC) exempts resolution applicants for MSMEs from the disqualification criteria in clauses (c) and (h) of Section 29A. Moreover, under the Code pre-packaged insolvency resolution process (PPIRP) can be initiated only for an MSME.
It is pertinent to mention that Reserve Bank of India [Lending to Micro, Small & Medium Enterprises (MSME) Sector] Directions, 2017, mandate the enterprises to register online on the Udyam Registration portal and obtain ‘Udyam Registration Certificate’. The Master Directions also mandate that for Priority Sector Lending purposes, banks shall be guided by the classification recorded in the Udyam Registration Certificate.
The regulator has sought public opinion on its proposal.
Also See: Insolvency regulator issues code of conduct for CoC
