Under IBC, the government has made promoters and related entities of companies facing insolvency resolution ineligible to bid during the resolution process. This provision was incorporated into IBC to prevent promoters from buying the same company at a steep discount.
In case of MSMEs, however, there is a view that the asset pool is limited, and it is usually the promoter or the founder who knows the intricate details, prompting the Insolvency and Bankruptcy Board of India (IBBI) to recommend a special dispensation for small businesses. In any case, the promoter or the founder brings his personal resources and goes to the extent of mortgaging her house to raise money.
While announcing the economic revival package, finance minister Nirmala Sitharaman had said that a special set of provisions would be put in place for MSMEs, something that has been demanded for months.
The IBBI’s draft resolution mechanism for MSMEs has been sent to the ministry of corporate affairs (MCA), which will take the final call.
The regulator has also recommended that the promoter and the founder should be allowed to remain in the saddle even after the resolution process has been initiated, government sources told TOI.
A concept of “debtor in saddle” is a departure from the current norms where the National Company Law Tribunal (NCLT) appoints a resolution professional to manage the affairs of the company during the resolution process. The resolution professional works with a committee of creditors to take key decisions. Under the proposed regime for MSMEs, the committee of creditors will work with the promoter or the founder.
Similarly, IBBI has proposed that, unlike the suspension of IBC provisions for up to 12 months in case of large entities, MSME owners or promoters should be allowed to trigger voluntary insolvency resolution action, the sources said. The provisions have been kept in abeyance due to the Covid-19 pandemic.
The move is meant to ensure that there is no undue pressure on small businesses, which are seen to be most vulnerable during a crisis, including the current one.
Earlier this week, an official statement said, after revising the default threshold for IBC action from Rs 1 lakh to Rs 1 crore, MCA is finalising a special insolvency resolution under section 240A of the Code to provide relief to the MSMEs and the rules will be notified soon.