The special insolvency framework for MSMEs is likely to allow the debtor to remain in the possession of the company till a resolution is reached, but all important decisions will have to be finalised by the committee of creditors, Insolvency and Bankruptcy Board of India, chairman, M S Sahoo said on Friday.
“The current framework requires the company to go from promoter to interim resolution professional to the resolution professional and then to the resolution applicant. For a small company this is a lot of business disturbance,” Sahoo said.
The move will not require any change in the law and will be enabled under the provisions of section 240A of the IBC which exempts MSMEs from certain clauses of section 29A that keeps the promoter of a non-performing asset from taking part in the resolution plan.
“The (insolvency law) committee is considering the framework for pre-packaged scheme and it will give its report by the end of this month. It will require a change in the law,” Sahoo said.
Pre-packaged insolvency resolution plans, popular in the United States and United Kingdom, involve an agreement by the stressed company and its creditors with a buyer before initiating insolvency proceedings.
Speaking at the seminar organised by Associated Chambers of Commerce of India, Sahoo said that suspension of corporate insolvency resolution process under IBC for a certain period was a “keyhole surgery.”
He said that what was suspended is very microscopic and done in the interest of saving viable firms from a premature death.
“Law has to be firmly grounded into the realities of the market. Closure of a company in these times would mean loss of livelihood for many….Not being able to liquidate a unviable firm is a mistake that can be corrected in the next quarter but the opposite can never be overturned,” Sahoo said.
Former finance secretary, Subhash Garg said that the decision to totally suspend IBC and give a wholesale moratorium was not business or bank friendly and that it should have been left to the lenders.
“This extreme position in policy shift is not appropriate...Banks have become risk averse as a result of access to IBC being denied,” Garg said.
He also said that entrepreneurs were forced to sell their businesses outside the IBC for much less since there was no auction-driven model available.