New Pre-Packaged Resolution Process Not Beneficial for Micro, Small MSMEs: Claim Experts

The pre-packaged insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) specified under the new Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, doesn’t address the real problems of micro and small enterprises, say experts. Further, the majority of the MSMEs don’t fall inside the ambit of the new Code as per several provisions in the Ordinance.

On April 4, President Ram Nath Kovind promulgated the ordinance to make amendments in the Insolvency and Bankruptcy Code, 2016 (Code), laying out procedures for the resolution of bankrupt MSMEs.

It is expected that the incorporation of the pre-packaged insolvency resolution process for MSMEs in the Code, states a press statement by the Ministry of Corporate Affairs, will alleviate the distress faced by MSMEs due to the impact of the pandemic and the unique nature of their business, duly recognising their importance in the economy.

“It provides an efficient alternative insolvency resolution framework for corporate persons classified as MSMEs for timely, efficient and cost-effective resolution of distress thereby ensuring positive signal to debt market, employment preservation, ease of doing business and preservation of enterprise capital,” according to the Ministry.

This ordinance is simply a glorified one time settlement scheme for MSMEs although through a cumbersome process especially for micro and small enterprises, said K E Raghunathan, convenor of the Consortium of Indian Associations.

The central government has set the threshold default of Rs 10 lakh for initiating the resolution process for MSMEs and the time frame for the process is fixed at 125 days. 

“The resolution process in the National Company Law Tribunal (NCLT) comes with a cost, making it difficult for the micro and small scale entrepreneurs. The package does not provide an opportunity for redressal mechanisms for bankrupt MSMEs,” said Raghunathan. 

As per the ordinance, classification of MSMEs under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006, is required for initiating the pre-packaged resolution process. It is to be noted that only 26.42 lakh have been registered under Udyam registration (new registration process specified by the central government). Reportedly, another 76 lakh MSMEs which have earlier registered with the government did not re-register under Udyam by March 31, a cut off date specified by the central government. Industry bodies are appealing to the central government to extend the deadline and advertise the benefits of the registration among industries. 

While there is no recent government data on the number of MSMEs, according to the National Sample Survey (2015-2016), there are over 6.3 crore unincorporated MSMEs in India. As the numbers specify, the majority of the unregistered MSMEs to the tune of six crore are outside the ambit of the IBC Code.

Furthermore, the resolution package is restricted to only companies and Limited Liability Partnerships while entities registered as sole proprietorship, partnerships and Hindu Undivided Family forms of MSMEs are excluded from its ambit.

“Extending a bankruptcy resolution scheme under the IBC to unincorporated entities and proprietorships, however, is hugely challenging given the large number of such enterprises and the limited infrastructure including the number of National Company Law Tribunal (NCLT) benches,” the Mint quoted a government official on the condition of anonymity.