Home / News / India /  Owners of bankrupt MSMEs could lose business at bidding stage in some cases

Owners of micro, small and medium enterprises (MSMEs) going into bankruptcy proceedings under a simplified regime rolled out this week could lose their business in certain cases if they do not match a better offer from a potential investor.

The Insolvency and Bankruptcy Board of India (IBBI) is currently framing regulations under the new bankruptcy resolution framework for MSMEs introduced this week by way of an ordinance.

The proposed regulations will specify what will happen to the corporate turnaround plan offered by the existing management if not approved by the creditors and if some other investor is prepared to throw in his or her hat, said a person who has direct knowledge of the development. The regulations will specify how attractive the new bid will need to be in order to qualify.

As per the new framework called pre-packs for turning around MSMEs, the existing management will stay in control of the business while exploring a revival scheme.

However, the shareholders’ control of the business will face a challenge if the committee of creditors (CoC) does not back their resolution plan for any reason, including any haircut for operational creditors. The CoC will have to compulsorily call fresh bids if the operational creditors face a haircut as per the base plan.

“In such cases, the revival scheme offered by shareholders would be made public, triggering a Swiss challenge. The shareholders will get an opportunity to retain the business by matching any better offers received from potential investors," explained the person quoted above. The regulations will outline the process of holding the bidding.

The idea is to make sure that the business gets the best possible chance of survival, explained the person.

The pre-pack scheme allows the management of the business under which payment default took place to stay in control of the operations in order to avoid any disruption to the business that could lead to job losses. But that protection is subject to market competition from anyone who can run the company better.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, promulgated on Monday gives enough flexibility to the authorities to make suitable regulations to operationalize the scheme, while keeping the substantive law to the barebones.

Experts saw merit in the scheme. “In the case of MSMEs, often shareholders also perform management roles and have connections with clients and suppliers, which makes it imperative to allow them to continue to run the business during the bankruptcy resolution process to realize better value. This scheme could see quick revival of small businesses facing distress," said Manoj Kumar, partner and head - M&A, transactions and insolvency at Corporate Professionals, an advisory firm.

An email sent to the ministry of corporate affairs spokesperson remained unanswered till press time.

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