Industry bodies in the MSME space, insolvency and legal experts have welcomed the ordinance for a pre-packed insolvency resolution process for MSMEs, saying the move will lead to quicker resolution.
According to a notification, the government had on April 4 amended the insolvency law by bringing in an ordinance that provides for a pre-packaged resolution process for micro, small and medium enterprises.
“It looks like a welcome step in the right direction as the ordinance will shorten the resolution timeline. Moreover, the current proprietor will continue to play the role until the resolution is arrived at and can also participate in bidding in case of a buyout,” said Ashok Saigal, Co-Chairman of the Confederation of Indian Industry’s National MSME Council and MD of Frontier Technologies, a small-scale manufacturing company.
According to the experts, a pre-packed insolvency resolution mechanism is a process wherein a resolution arrangement is agreed upon between the debtor and lender before approaching the NCLT for approval. Under the pre-pack framework, a debtor initiates and participates in the resolution proceedings with the lender through an informal process that would help avoid lengthy court procedures.
Inexpensive compared to CIRP
Experts say that this arrangement will help in significantly reducing the timeline of the resolution process and will also be inexpensive compared to proceedings done through the corporate insolvency resolution process (CIRP).
Under the existing CIRP, as stated in the Insolvency and Bankruptcy Code (IBC), a maximum of 270 days has been provided for the completion of the resolution process. A resolution professional (RP) is appointed to take control of the administration and the incumbent promoters have to step down. The RP manages the bidding and resolution process, which takes several months in most cases.
“It is a very good step by the government because in the case of MSMEs, it is difficult to find a buyer. But now, with the pre-pack arrangement, the debtors will remain in the management till a resolution is figured out,” said Sanjay Aggarwal, President of the PHD Chamber of Commerce and Industry. “Moreover it also lets the existing promoters bid for their own company, which will compress the timeline and make it inexpensive for the promoters.”
“The government could have considered increasing the debt default threshold limit above Rs 1 crore, but nonetheless, a positive beginning has been made for the industry,” Aggarwal added.
Under the ordinance issued on Monday, the debt default threshold has been fixed at up to Rs. 1 crore.
Shorter resolution timeline
According to Ajay Shaw, Partner, Debt and Restructuring, DSK Legal, the ordinance appears to be a move in the right direction as the pre-pack provides a platform to the debtor and lender to arrive at a common resolution, which will be binding on all the stakeholders. Moreover, unlike the IBC process, it is the debtor who will be in possession of the resolution mechanism. He further noted that under the pre-pack process, there is a significant improvement in the resolution timeline, which has been set at 120 days.
Shaw, however noted that despite the ordinance letting debtors be in charge, it is the lenders who are expected to play a significant role as most MSMEs in India do not understand their legal entitlements and are largely unorganised.
Ashwin Bishnoi, Partner, Khaitan & Co said, "The ordinance for MSMEs is good as it gives existing promotors a path to negotiate with lenders and bid for their own company. Moreover, the ordinance will lead to a much quicker resolution as there is a significant improvement in the time frame for completion."
Bishnoi did, however, note that the question will remain as to how many MSMEs will actually be able to use the pre pack route as many MSMEs in India are unorganised.
But, Bishnoi, added that the experience with MSMEs should help the Government decide on how and when to roll this out for larger credits.