Government changes the insolvency law, pre-packaged insolvency plan to settle debt owed on MSME

During the Covid period, the financial condition of the small and medium enterprises of the country has deteriorated significantly. It is believed that millions of undertakings of this category may have to start the insolvency process. In view of this problem, the government has introduced a new way. Under this, micro, small and medium scale industrial units (MSMEs) which are unable to repay banking loans up to Rs 1 crore, a pre-approved insolvency plan will be implemented. The benefit will be that under the existing insolvency law, the matter of repayment of the outstanding loans on these small units will be resolved at a very low cost and in a short time.

It will also be quite convenient for banks and financial debtors as debt will be settled in a short time. The government has issued the necessary notification on Sunday to amend the Insolvency and Bankruptcy Code (IBC) to implement this new framework. The central government had constituted a committee after the introduction of Covid-19 last year. The objective was to suggest a mechanism for MSMEs to complete the insolvency process in the event of non-payment of outstanding debts. Based on the recommendations of this committee, a new section 54C has been added to the IBC. There is a provision to complete the entire process within 120 days.

Compared to the current IBC, a major relief is being given to the company or undertaking involved in the insolvency process under this provision that in general there will be no change in their management. At the commencement of the insolvency process under the IBC, the rights of the company management are forfeited and management is handed over to a professional appointed by the court. Right now if there is a complaint of fraud etc. against the management running the MSME, only then it can be done otherwise it will continue to work. This will keep the company functioning normally.

Another major difference is that in this process only MMME can give a plan to pay their outstanding debts. In this plan given by the promoters of MSME, it has to be clearly stated what they are going to do next to improve the performance of the company and what will be the way to repay the debt. The plan can be implemented with the approval of 60 percent of creditors (lending financial institutions or banks).