“The Special Framework for MSME” – A twist in the tale, IBC turning on its head. Once Again!!

For long we, in India have tried to deal with the distressed asset space, the so called Non-Performing Asset (NPA) malaise, ailing banks.

For long we, in India have tried to deal with the distressed asset space, the so called Non-Performing Asset (NPA) malaise, ailing banks. Reasons for the ballooning of NPA’s have been different, some genuine and some not, but the intended remedy always has been more of a hit and trial, at times the experiments going on for decades. We had specific statutes in SICA/BIFR for long, followed by schemes such as SDR, CDR, S4A etc (all based on the concept of Debtors in Possession; DIP) all attempting the treatment of the problem but with less than par results. Then we made a brave move and attempted to follow the UK Model, based on Creditors in Control (CIC) and got our very own version of the same, called Insolvency & Bankruptcy Code (IBC) in Dec 2016. Whether it could make the desired impact and clean up the books of the Banks it was supposed to? (all this with regular twists and turns early on like introduction of 29A barring promoters, homebuyers becoming financial creditors, constitutional challenge to the Code in its entirety, etc), Jury is still out. Meanwhile, the slowing economy and the collateral damages on either side had the Government really thinking hard on further tweaks required (the Code has seen more than 4 amendments already in a span of 3 years in addition to numerous others in the regulations) and some of them had to be drastic, including the raising of the very threshold to initiate the CIRP (Corporate Insolvency Resolution Process), essentially aimed to safeguard the MSME, real reason seemingly being the crumbling infrastructure at NCLT Benches across the country.

Then exactly from no where we had the Corona virus, which has brought the entire world to its kneels, and India wasn’t spared either. Apart from the ‘big’ step of announcing suspension of Sec 7/9/10 (provisions through which CIRP is initiated by a Financial Creditor, Operational Creditor or the Corporate Debtor respectively), there was an announcement to have a special framework for MSME sector, which according to Government had to bear the maximum impact of the slowing down of economy earlier and now the covid pandemic. Last few days, there have been discussions at various forums and some news items also give us a peep into the ‘features’ of the much awaited ‘special framework’. Though one will have to wait for the fine print to really understand the language, intent and the real impact, the features which seem to be the highlights of the framework are briefly discussed for the readers benefit. Am sure, like every time, some would stand to benefit from the proposed changes and others would find themselves on the other side of the law, accepting it as a challenge, once again.

The major twist in the tale appears to be the very CIC model which gives way back to the old DIP regime. Whether we say it’s a learning from the past, a failed experiment or discovering the fact that MSME’s were the true collateral damage during the early evolution of IBC, it definitely means that the IBC would be turning on its head in respect to ‘control’ still being with the Debtor. So, during the proposed CIRP (likely to be less than 180 days), the existing Management would continue to run its operations the way they used to prior and will have the RP (Resolution Professional) sitting with them driving the prescribed CIR Process. The COC too would have a reduced role and mainly would be involved on the supervision and the approval of the Resolution Plan. The submission of the Plan too would be the prerogative of the existing CD/Promoter and only on its failure would there be the need of the price discovery (through the Swiss Challenge route). Equally important would be the fact that, the initiation of CIRP would also be restricted to the concerned CD (MSME) only which is bringing back erstwhile Sec 10 application in a new avatar. Some other procedural changes are being proposed to make the process simpler and quicker which is always a welcome step as far as the intent goes.

The issue is only the final piece, which at times (often) is prone to various /multiple interpretations leading to confusions and unnecessary litigations. High time we start drawing straight lines and efficiently translate our intent into words which are simple and clear. On timelines, the problem hardly lies at the ’legal’ level but more on the interpretation and implementation level and to an extent due to the lack of infrastructure where it matters.

We might have to await the details and the connected reaction from the stakeholders with regard to the reduced time period of CIRP, the DIP proposal, the Sec 10 in a new avatar making only the concerned MSME to initiate the CIRP, the truncated role of COC and RP, the ROFR on the submission of the Plan, the price discovery through swiss challenge, the availability of enough Resolution Applicants (RA’s) in these testing times, the diluted avatar of 29A for MSME’s and the other connected procedural changes, but surely the IBC is again changing and this time on its head.

As is true with law of land, the Government must balance many conflicting interests of various stakeholders and ideally on a real time basis, so the current back and forth has to be taken into the stride with the evolution of law. What is important is also to see how it impacts us and how would it impact us with the proposed changes. In these times of stress and strain, MSME’s would want to make most of the given opportunity to pare their debt through meticulous planning by working backwards on the sustainable debt and the likely Resolution Plans which if approved could make a significant difference in the viability of the organisation.

We at ILO are geared to handhold the MSME sector to understand the need, share the vision and take you through this maze of ‘changing dynamics’ of IBC. We together can make a difference by extracting the maximum advantage for the benefit of the organisation by reworking the debt and its structuring. Let’s do it together.