Special insolvency framework for MSMEs seeks shorter timeline, more control to debtors

The government has sometimes back announced a special framework under the Insolvency and Bankruptcy Code (IBC) for MSME sector.  The discussion on the same has been started under the aegis of the Insolvency and Bankruptcy Board of India (IBBI), which has prepared an initial draft for the special framework.

Even as the IBBI is holding discussions with stakeholders on the initial draft, here are few of the important changes (in the existing insolvency law) as envisaged in the draft:

Definition of MSME: 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

To be triggered only by debtors: Under the special framework, insolvency proceeding can be started only by the corporate debtor with the consent of the unrelated financial creditors having at least 25% of the outstanding financial claims

Debtor-in-possession model: Unlike in the IBC, where the board of the company cease to exists once the Interim Resolution professional (IRP) is appointed, under the new MSME framework the promoters of the debtor will continue to run the company. They will be given the responsibility of appointing an IP as Resolution Professional to conduct the process. The IP can be replaced by the CoC, if considered appropriate.

Relaxed Section 29A clauses for resolution applicants: The draft maintains that since MSMEs are the bedrock of the Indian economy, and the intent is not to push them into liquidation, which would affect the livelihood of employees and workers of such MSMEs, it is recommended that a promoter, who is not a wilful defaulter will be allowed to submit resolution plan for the MSME in insolvency.

Role of IPs: Under the proposed MSME framework, IP will no longer be required to oversee day-to-day functioning o f the company. Instead their role will be limited to collating and verifying the list of claims against the CD, constituting the committee of creditors (CoC), and inviting resolution plans from prospective resolution applicants, wherever required, in accordance with the process laid down hereafter.

Shortened timeline:  The draft framework recommends a much shorter time line – 90 days from the existing 330 days — for completion of the resolution process. “Since the special framework envisages a debtor-in-possession model and enables most promoters to submit resolution plans by relaxing the some of the section 29A ineligibilities, the process should be concluded in a shorter timeframe.” Says the draft.

Simplified processes: To reduce the cost associated with the process, it has been suggested to do away with the requirement of newspaper publication of the public announcement as it argues that newspaper publication may not be highly effective in case of MSMEs where the market for resolution plans is usually very narrow in terms of geography. The publication on the website of the CD and IBBI should be sufficient.

To make the claim process simpler, the draft framework suggests that the MSME should make available 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.