Government amends insolvency law to introduce pre-packaged resolution process for stressed MSMEs

New Delhi: Seeking to provide a quicker and value-maximising outcome for stressed MSMEs, the government has introduced a pre-packaged resolution process for such enterprises by amending the insolvency law.

Now, Micro, Small and Medium Enterprises (MSMEs) can seek resolution for their stress through the pre-packaged process under the Insolvency and Bankruptcy Code (IBC).

An ordinance was promulgated to amend the IBC on April 4, 2021.

Many MSMEs have been impacted by the Coronavirus pandemic and experts opined that the latest amendment, which comes less than two weeks after the suspension of certain IBC provisions ended, is a welcome move.

The suspension — wherein fresh insolvency proceedings were not allowed for a year starting from March 25, 2020 — was implemented amid the coronavirus pandemic disrupting economic activities. According to the ordinance — whereby the pre-packaged resolution process has been introduced — it is considered necessary to urgently address the specific requirements of MSMEs relating to the resolution of their insolvency due to the unique nature of their businesses and simpler corporate structures.

Generally, under a pre-packaged process, main stakeholders such as creditors and shareholders come together to identify a prospective buyer and negotiate a resolution plan before submitting the plan to NCLT for formal approval.

All resolution plans under the IBC need to be approved by the National Company Law Tribunal (NCLT).

As per the ordinance, it is considered expedient to provide an efficient alternative insolvency resolution process MSMEs to ensure a quicker, cost-effective and value maximising outcome for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs. "... in order to achieve these objectives, it is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises," it added.