Special insolvency resolution framework for MSMEs at advanced stage

A special resolution framework for MSMEs is at an advanced stage of preparation and a prepack resolution framework is also under works, IBBI chief M S Sahoo has said and emphasised that the insolvency law is evolving to offer innovative ways to service emerging needs. Amid the coronavirus pandemic that has also significantly impacted economic activities, the government has already suspended certain provisions of the Insolvency and Bankruptcy Code (IBC). The Code, which came into force in 2016, seeks to provide time-bound and market-linked resolution of stressed assets. Fresh proceedings under the Code currently remain suspended and the suspension could be extended to up to one year.

When asked about what could be the lasting impact once things normalise after COVID-19, Sahoo said necessity is the mother of invention and that the focus is on swift response. "The IBC is evolving to offer innovative ways of servicing emerging needs of the economy. A special insolvency resolution framework for MSMEs under section 240A of the Code is at an advanced stage of preparation. A prepack insolvency resolution framework is under works. The focus is swift response as the COVID-19 story unfolds further and recalibration of the ecosystem in sync with the all 'new normal'," he told in a recent e-mail interview.

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Sahoo is the Chairperson of the Insolvency and Bankruptcy Board of India (IBBI), a key institution in implementing the Code.

According to him, market participants and the ecosystem would be nimbler and that they would come up with innovative ways of implementing innovative resolution mechanisms currently under works. "There would be better acceptance of genuine business failures and consequently, entrepreneurship would flourish. IBC would emerge stronger," he stressed.

In May, the government announced various relaxations under the Code, including exemption of COVID-19-related debt and a special framework for Micro, Small and Medium Enterprises (MSMEs). The proposed relaxations under the Code were announced by Finance and Corporate Affairs Minister Nirmala Sitharaman as part of the more than Rs 20-lakh crore stimulus package unveiled to boost the economy ravaged by the pandemic and subsequent lockdowns.

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To fast-track processing of cases under the Code, efforts are going to have a provision for pre-packaged (pre-pack) corporate insolvency resolution plan wherein a restructuring plan would be agreed upon in advance between the company and its creditors."On whether there could be a disadvantage in terms of consolidating good behavioural changes brought in by the Code due to the current situation, Sahoo said, "I do not think so". "Firstly because, the suspension of IBC is limited to default (COVID default) arising during a short window of time. It neither absolves the debtor nor suspends the liabilities in respect of COVID default under various other laws. It insulates a firm from insolvency for COVID default, not for all defaults. Second, it is not fair to assume that the firms have a high propensity to default or the firms, who did not default till March 25, 2020, would default now taking advantage of the suspension, even when they can repay," he said.

Further, Sahoo noted that the Code would consolidate good behaviour through its unique feature that requires the promoters and external resolution applicants to compete for resolution of the company, unlike all earlier mechanisms that allowed creditors to find a resolution only from existing promoters.

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"A key challenge yet to be resolved is the timeline. The market performs better where there is little time between execution of transaction and its consummation. Hopefully, special framework for MSMEs and prepack resolution would be faster," he said.

In June, the IBC (Amendment) Ordinance, 2020 was issued to prevent companies from being pushed into insolvency proceedings for their failure to service debt obligations on account of the pandemic-induced stress.

Currently, entities cannot seek resolution under the IBC for any default arising on or after March 25, 2020. On March 25, the nationwide lockdown to curb spreading of coronavirus infections came into force. Corporate Insolvency Resolution Process (CIRP) can be initiated for defaults existing before the onset of COVID-19 and for defaults arising after it recedes. Also, applications already filed for initiation of CIRP, ongoing CIRPs, corporate liquidations, and voluntary liquidations have not been suspended.

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