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Why most MSMEs are not eligible for the pre-packed insolvency resolution process

As per the Ordinance which has introduced Chapter III A calls for a prior registration under the Micro, Small and Medium Enterprises Development Act for a corporate debtor to be eligible for pre-packaged insolvency resolution process.

April 12, 2021 / 05:35 PM IST
The government had announced a Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs under the Aatmanirbhar Bharat Abhiyan.

The government had announced a Rs 3 lakh crore Emergency Credit Line Guarantee Scheme (ECLGS) for MSMEs under the Aatmanirbhar Bharat Abhiyan.


The government on April 4  promulgated the IBC (Amendment) Ordinance, 2021 which provides for a pre-packaged resolution process for MSMEs, a move that was hailed by several experts and industry bodies. The objective was to provide an efficient alternative insolvency resolution process to the small and medium enterprises (MSMEs).

However, it appears that a large number of MSMEs in India will not be able  eligible for the pre-packed insolvency resolution process under the Insolvency and Bankruptcy Code (IBC).

This is because as per the Ordinance which has introduced Chapter III A calls for a prior registration under the Micro, Small and Medium Enterprises Development Act for a corporate debtor to be eligible for pre-packaged insolvency resolution process.

" An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006," the government ordinance said.

According to National Sample Survey 73rd Round (2015-2016), there are an estimated 6.3 crore MSMEs that exist in India. However, as per the data available with Udyam Registration (MSME registration) website only 26.42 lakh MSMEs have registered till date. This essentially means that the unregistered MSMEs which exceed the registered MSMEs by a large number cannot take recourse under the pre-packaged regime for insolvency resolution.

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However, there is a further restriction to it. Not all the registered MSMEs can avail the pre pack resolution plan. As per the Insolvency and Bankruptcy Board Of India (Pre-Packaged Insolvency

Resolution Process) Regulations, 2021, the pre pack resolution extends to only companies and Limited Liability Partnerships and keeps sole proprietorship, partnerships and Hindu Undivided Family forms of MSMEs out of the ambit of the pre pack process thereby further restricting the number of MSMEs eligible for pre pack.

Under Chapter I of the regulation, the identification number of the  refers to limited liability partnership identification number or the corporate identity number of the debtor but remains silent on sole proprietorship, partnerships and Hindu Undivided Family.

Nadiya Sarguroh, Senior Associate MZM Legal said, "It appears that the scope of the pre pack insolvency process is very limited and covers only  MSME’ s incorporated as LLPs and Companies in the absence of applicability of Chapter III of the IBC, 2016 which covers the insolvency for Partnerships, Sole Proprietorship & HUF’s as the same has not yet been notified."

Further, the form P6 - Declaration by Director/Partners as given under Insolvency and Bankruptcy Board Of India (Pre-Packaged Insolvency

Resolution Process) Regulations, 2021 calls for the date of incorporation of the corporate debtor thereby making a incorporation a mandatory requisite for the entities.

According to Ajay Shaw, Partner, Debt and Restructuring, DSK Legal, the IBC prepack process is intended only for corporate persons who qualify as MSME and, hence the pre pack scheme covers only the LLPs and companies, and not Hindu Undivided Family, proprietorship, partnership forms of MSMEs.

 

 

 

 
Shreeja Singh
first published: Apr 12, 2021 05:22 pm

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