How the Recent Changes in Insolvency Code will Benefit MSMEs

The Government of India after the introduction of I&B Code 2016 was receiving representation from stakeholders w.r.t hindrances they were facing under Insolvency and Bankruptcy Code 2016 and rules made thereunder. A sense of insecurity was seen in many Corporate Debtors especially MSMEs after the introduction of the Code. More importantly after the recent amendment introduced in the Code which had restricted the promoters of the Corporate Debtor to be resolution applicant.

Committee set by the Government

A Committee was formed by Ministry of Corporate Affairs, Government of India having representation from various institutes, industry chambers and experts in various disciplines. The members of the Committee keeping in mind the difficulties and challenges received from various stakeholders submitted its report recently.

Recommendations

Many key recommendations were made in the report including the recommendations w.r.t Micro, Small and Medium Enterprises (MSMEs). The committee observed that MSMEs forms the foundation of the Indian economy, and are key drivers of employment, production, economic growth, entrepreneurship and financial inclusion. MSMEs hold in the Indian economy cannot be underestimated, as they are one of the best vehicles for job creation and economic growth.

The recommendations given by the Committee includes rationalization in the provisions of Section 29A w.r.t MSMEs. Section 29A which has been introduced recently in the I&B Code 2016 restricts promoters to be resolution applicant. On the contrary, in case of MSMEs mostly the promoters will be interested in acquiring them. Meaning thereby, if the Corporate Insolvency Resolution Process is triggered in case of any MSME, the result due to restriction as to Resolution Applicant is liquidation. The Committee thereof had recommended that promoters of such MSMEs who are not declared willful defaulter be allowed to participate in the resolution process.

Suggestions

Further, the Committee has suggested that at the moment there is no requirement to increase the payment to Operational Creditor from the present case of Liquidation value. The Committee though had discussed in detail that in case Operational Creditors have not been paid properly and paid with liquidation value, they can interrupt the working of the Corporate Debtor but it was the suggestion of Committee that at present instead of increasing the share of operational creditor, an attempt be made that quality of the resolution plan be improved. The Committee while deciding on this issue have also referred to the decisions of various adjudicating authorities who while approving the Resolution plan have considered high value for Operational creditors i.e. more than the liquidation value given under the Code or even the timelines of 30 days. The Committee, however, keeping larger interest in mind suggested to not amend the provisions in this regard even for MSMEs.

The Committee has also proposed that Section 240A be introduced under the I&B Code, which empowers the Central Government to exempt or vary the application of provisions of the Code by way of a notification for a certain class or classes of companies including for MSMEs. Similarly, Section 240B, be inserted which will give the power to provide relief to MSMEs from the provisions of code which restricts the eligibility criteria of resolution applicants however this will not exempt the resolution applicants even in case of MSMEs which are declared as Willful Defaulter as per the guidelines of Reserve Bank of India.

Conclusion

In overall the Insolvency Law Committee considering the fact that MSMEs are the backbone of Indian Economy tried to safeguard their interest and if the recommendation gets implemented will definitely give a sense of relief to the promoters of MSMEs facing the threat of CIRP. Further, even the operational creditors of such MSMEs will not try to hamper the interest of the MSMEs as they are bound by Code to receive the liquidation value within the prescribed timelines of 30 days.