The Union Cabinet on Wednesday recommended promulgation of an ordinance to fast-track insolvency resolution of micro, small and medium enterprises (MSMEs), a plan that was first announced last year.

The plan involves a “prepack” insolvency resolution scheme for MSMEs, leaving the promoter in the saddle, while the resolution proposal is finalised. Besides, the promoter of small businesses will be given an opportunity to participate in the resolution process, including submitting a plan.

This is a marked departure from the resolution process for business at present. Through an amendment the government had barred promoters from participating in the resolution process and it resulted in their ouster from the management and ownership of company.

But in case of MSMEs, a special dispensation has been provided because the proprietor or the promoter knows the intricacies of the business and often puts his or her lifetime savings in the business. In any case, there may be limited interest in taking over a small business, limiting the ability for resolution, which could result in a rush to liquidation, something that the government is keen to avoid.

The plan drafted by the Insolvency & Bankruptcy Board of India had proposed giving promoters first right to present the resolution plan.

Manali bhanushali
Author: Manali bhanushali

Manali Bhanushali