MSMEs get new insolvency route

2021-04-06 03:11:24

NEW DELHI: The Centre has promulgated an ordinance to speed up the insolvency resolution process for micro, small and medium enterprises (MSMEs), which are expected to be the hardest hit by the pandemic.
The ordinance, promulgated on Sunday, provides for a pre-packaged insolvency resolution process, something that was not available so far.
Last week, TOI had reported that the Union Cabinet had recommended the ordinance, which has now received the green light from President Ram Nath Kovind. Under the provisions, an MSME can avail of the special option, provided it has used the window during the preceding three years, or was part of the corporate insolvency resolution process in the past or is facing liquidation, apart from certain other conditions.
The entity will need the consent of at least 66% of its creditors, according to the value of financial debt, for filing the pre-packaged insolvency application.
The government has provided that the process needs to be completed within 120 days of the commencement date, with the resolution plan to be submitted within 90 days.
Once the process starts, a moratorium has to be put in place, along with the appointment of a resolution professional. But a major change in the resolution process is the decision to allow the board or the partners of the MSME to manage the affairs of the company, something that is not available for the larger entities.
The committee of creditors can, however, decide to vest the management of the entity with the resolution professional in case over 66% vote in favour of the proposal.
“Participation of eligible existing promoters is encouraged with the board continuing in control and the debtor proposing the base resolution plan. Operational creditors are protected by requiring market testing of the base resolution plan if it impairs the claims of operational creditors. In addition, the creditors committee can also convert the pre-pack process to the usual CIRP (corporate insolvency resolution plan) by 66% majority at any time, or require the board to cease control through intervention of the NCLT in case of fraud or mismanagement by the existing management,” said L Viswanathan, partner at Cyril Amarchand Mangaldas.

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