Fast relief: MSMEs may get waiver from one-year insolvency suspension, centre plans special resolution framework

By: |
August 6, 2020 7:45 AM

Plans for units with turnover of up to Rs 250 cr in just 90 days; MSMEs may get waiver from one-year insolvency suspension

The special framework will adopt the new definition of MSMEs. So firms with an annual turnover of up to Rs 250 crore each or investments of up to Rs 50 crore, will be covered by it.The special framework will adopt the new definition of MSMEs. So firms with an annual turnover of up to Rs 250 crore each or investments of up to Rs 50 crore, will be covered by it.

The government will soon notify a special insolvency resolution framework for stressed MSMEs, which is likely to reduce the mandatory time-frame for submitting a resolution plan for such businesses to just 90 days from the current 270 days for all companies, to cut delays, sources told FE. The promoters, who are not wilful defaulters, will also be allowed to bid for their stressed assets.

As reported by FE earlier, while insolvency proceedings are suspended for up to one year against fresh defaults from March 25 to soften the Covid-19 blow, MSMEs will likely be allowed to approach the adjudicating authority even during this period to declare them insolvent if they wish to pursue a resolution of their stressed assets. But for this, they have to take approval from unrelated financial creditors accounting for at least 25% of the total outstanding financial claims. However, creditors, for their part, can’t drag MSMEs to the National Company Law Tribunal (NCLT) during this one year.

The special framework will adopt the new definition of MSMEs. So firms with an annual turnover of up to Rs 250 crore each or investments of up to Rs 50 crore, will be covered by it. “The framework is ready and will be notified soon. It will expedite the resolution process and cut costs,” said one of the sources.

According to the proposals, the promoters will also continue to run the MSMEs, instead of the financial creditors through the help of resolution professionals, throughout the course of resolution. If the successful bidder is a third party, the control of the company will then be shifted out of the original promoters’ hands to the new owners.

If finally approved, the proposals will be part of a special framework under Section 240-A of the Insolvency and Bankruptcy Code (IBC) that the government has proposed to bring in to offer certain flexibilities to MSMEs battered by the Covid-19 outbreak. Finance and corporate affairs minister Nirmala Sitharaman had in May announced the intent to come out with the special mechanism for MSMEs.

Data available with insolvency regulator IBBI show, proceedings in 2,170 cases were going on as of March 2020. Typically most of the insolvent firms are MSMEs, so any relief to such small businesses will benefit a large number of insolvent units. Also, a much shorter time frame will expedite the resolution process when bad loans are expected to see a sharp spike due to the pandemic. As such, the resolution of close to a third of the ongoing cases has been dragging on beyond the mandatory 270 days, primarily due to legal hassles.

While larger firms have greater abilities to absorb risks, MSMEs have been most vulnerable to the damaging impact of the pandemic. So extending flexibilities to them through the special framework at this juncture remains critical from the government’s point of view.

Another source said the government is also considering a suggestion to allow the flexibility of extending the 90-day time-frame by 30 days or so with the approval of the NCLT. The extant framework provides for a time-frame of 180 days for the subsmission of a resolution formula for any insolvent company, which can be extended by another 90 days with the NCLT approval.

Already, in a bid to insulate small businesses from being dragged to the NCLT, the default threshold for triggering insolvency has recently been raised to Rs 1 crore from just Rs 1 lakh earlier.

The special framework is aimed at complementing the Centre’s latest measures under the Atmanirbhar Bharat Abhiyan scheme in ensuring that MSMEs get adequate credit to resume operations.

For instance, MSMEs are eligible for the recent package, including additional, collateral-free working capital loan (up to 20%) with a cap of Rs 3 lakh crore (with official guarantee), subordinate debt of Rs 20,000 crore and Rs 50,000-crore fund of funds to bolster the equity base of MSMEs that have growth potential and need some handholding. Just the collateral-free loan move is expected to help 45 lakh units, the government has said.

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