Impact Of The IBC On Mirco, Small And Medium Enterprises (MSMEs) - A Comparative Study
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Category: Corporate & Insolvency
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IMPACT OF THE IBC ON MIRCO, SMALL AND MEDIUM
ENTERPRISES (MSMES): A COMPARATIVE STUDY
Purva Vishwas Mankame, Thakur Ramnarayan College of Law
ABSTRACT
The Insolvency and Bankruptcy Code (IBC), 2016, has significantly reformed India's insolvency resolution landscape, particularly for Micro, Small, and Medium Enterprises (MSMEs). This study explores the evolution of insolvency mechanisms before and after the IBC, highlighting the challenges MSMEs face, including procedural complexities, financial burdens, and the dominance of creditors in decision-making. The effectiveness of the PrePackaged Insolvency Resolution Process (PPIRP) is critically examined as a specialized framework for MSMEs. A comparative analysis with insolvency regimes in the United Kingdom and the United States provides insights into global best practices and potential reforms.
The study concludes with policy recommendations to enhance MSME accessibility to insolvency resolution, improve the efficiency of PPIRP, and strike a balance between business survival and creditor rights. Keywords: IBC, Insolvency and Bankruptcy Code, MSME Insolvency, Pre- Packaged Insolvency Resolution Process (PPIRP), Debt Resolution, Business Recovery, Corporate Insolvency, Comparative Insolvency Law, Creditor Rights, MSME Insolvency Reforms.
1. Introduction
The Insolvency and Bankruptcy Code (IBC), 2016, has been a landmark reform in India’s financial and legal landscape, significantly transforming insolvency resolution, particularly for Micro, Small, and Medium Enterprises (MSMEs). Before the IBC, India’s insolvency framework was fragmented, inefficient, and prolonged, leading to delayed debt resolution and poor recovery rates. The IBC introduced a structured, time-bound, and creditor-driven insolvency resolution mechanism, improving the ease of doing business and financial stability. However, MSMEs face unique challenges under the IBC, including high compliance costs, complex legal procedures, and creditor dominance in decision-making.
To address some of these issues, the government introduced the Pre-Packaged Insolvency Resolution Process (PPIRP) in 2021, specifically designed for MSMEs to facilitate a faster and cost-effective resolution process. This research paper critically examines the impact of the IBC on MSMEs, comparing pre- IBC and post-IBC insolvency resolution mechanisms, identifying key challenges, and assessing the effectiveness of PPIRP. Furthermore, it conducts a comparative analysis with the insolvency frameworks of the UK and the US to highlight best practices and potential reforms. The study concludes with policy recommendations aimed at enhancing MSME access to insolvency resolution, improving the efficiency of PPIRP, and ensuring a balanced approach between creditor rights and business continuity.
1.1 Background and Objective of the Study
Background for IBC The period before Insolvency and Bankruptcy Code 2016 has various scattered laws relating to insolvency and bankruptcy which caused insufficient and unsupportable results with undue delays. For example, • Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act SARFAESI –for security enforcement. • The Recovery of Debts Due to Banks and Financial Institutions Act, 1993
(RDDBFI) for debt recovery by banks and financial institutions. • Companies Act for liquidation and winding up of the company. • Ineffective implementation, conflict in one of these laws and the time-consuming procedure in the aforementioned laws, made the Bankruptcy Law Reform Committee draft and introduce Insolvency and Bankruptcy Law bill. These laws created delays, confusion, and inefficiencies, particularly affecting MSMEs that lacked financial and legal resources. The IBC replaced this fragmented system with a single, time-bound insolvency resolution framework, allowing businesses to either restructure or liquidate in an orderly manner. Objectives of the Study The primary objectives of this research are:
1. To assess the impact of the IBC on MSMEs, comparing pre-IBC and post-IBC
insolvency resolution mechanisms.
2. To identify major challenges MSMEs face under the IBC, such as procedural
complexities, financial burdens, and creditor dominance.
3. To evaluate the effectiveness of the Pre-Packaged Insolvency Resolution Process
(PPIRP) in resolving MSME financial distress.
4. To conduct a comparative study of insolvency frameworks in the United Kingdom and
the United States, identifying best practices.
5. To provide policy recommendations for making the IBC more MSME-friendly, ensuring
a balance between creditor rights and business sustainability.1
1.2 Importance of MSMEs in India
Micro, Small and Medium Enterprises (MSME) sector has emerged as a highly vibrant and 1 https://www.drishtiias.com/printpdf/in-depth-insolvency-and-bankruptcycodeact#:~:text=The%20Central%20government%20introduced%20the,in%20advanced%20stages%20of%20r esolut ion.
dynamic sector of the Indian economy over the last five decades. MSMEs not only play crucial role in providing large employment opportunities at comparatively lower capital cost than large industries but also help in industrialization of rural & backward areas, thereby, reducing regional imbalances, assuring more equitable distribution of national income and wealth. MSMEs are complementary to large industries as ancillary units and this sector contributes enormously to the socio-economic development of the country Contribution of MSMEs Micro, Small, and Medium Enterprises (MSMEs) form the backbone of India’s economy, contributing significantly to: • 30% of the nation’s GDP • 45% of total exports • Over 110 million jobs, making MSMEs the second-largest employment generator after agriculture The primary responsibility of promotion and development of MSMEs is of the State Governments.
However, the Government of India, supplements the efforts of the State Governments through various initiatives. The role of the M/o MSME and its organizations is to assist the States in their efforts to encourage entrepreneurship, employment and livelihood opportunities and enhance the competitiveness of MSMEs in the changed economic scenario. The schemes/ programmes undertaken by the Ministry and its organizations seek to facilitate/provide: i) adequate flow of credit from financial institutions/banks; ii) support for technology upgradation and modernization; iii) integrated infrastructural facilities;
iv) modern testing facilities and quality certification; v) access to modern management practices; Classification of MSMEs As per the February 2025 Union budget the classification of MSMEs in India is based on both investment and turnover2 Classification Micro Small medium Manufacturing Investment in Plant and Machinery or Equipment: Investment in Plant and Machinery or Equipment: Investment in Plant and Machinery or Equipment: Enterprises Enterprises rendering Services Not more than Rs.1 crore and Annual Turnover; not more than Rs. 5 crores Not more than Rs.10 crore and Annual Turnover; not more than Rs. 50 crores Not more than Rs.50 crore and Annual Turnover; not more than Rs. 250 crores
The MSME sector in India has consistently demonstrated remarkable resilience and adaptability, significantly contributing to the nation's GDP over the years. The Gross Value Added (GVA) by MSMEs in India’s GDP was 29.7% in 2017-18, rising to 30.1% in both
202223. Even amid the unprecedented challenges posed by the COVID-19 pandemic, the
sector sustained a contribution of 27.3% in 2020-21, rebounding to 29.6% in 2021-22. These figures highlight the sector's pivotal role in driving economic growth and stability, reflecting its enduring strength and importance to the Indian economy. Government Initiatives for the Development of the MSME Sector The Government of India, in conjunction with regulatory authorities, has undertaken various legislative and policy measures to foster a conducive environment for the growth and sustainability of the Micro, Small, and Medium Enterprises (MSME) sector. A pivotal step in this direction was the enactment of the Micro, Small and Medium Enterprises Development Act, 2006 (MSMED Act), which laid down a structured framework for the promotion and regulation of MSMEs. A significant milestone in strengthening the financial and legal infrastructure for MSMEs
was the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC/Code). The IBC introduced a comprehensive and streamlined insolvency framework, addressing the inefficiencies of the erstwhile insolvency regime, which was marred by delays, procedural complexities, and an economically unviable resolution process. By establishing a timebound mechanism for insolvency resolution, the Code aims to safeguard the interests of small investors and provide an efficient exit strategy for distressed businesses.
1.3 The Need for an Effective Insolvency Resolution Framework
A well-functioning insolvency resolution mechanism is indispensable for economic stability,
investor confidence, and sustainable business growth. Recognizing this necessity, India introduced the Insolvency and Bankruptcy Code, 2016, a modern and sophisticated insolvency law aimed at ensuring a structured, transparent, and predictable resolution process. The IBC represents India’s first comprehensive legislation governing the insolvency of corporate entities and individuals, thus consolidating the previously fragmented legal framework.
2. Changes introduced in MSMEs
2.1 The Position of MSMEs Under the Insolvency and Bankruptcy Code, 2016
Pre-Amendment Position (Before Section 29A) The Insolvency and Bankruptcy Code, 2016 (IBC) was enacted to establish a comprehensive and consolidated framework for insolvency and bankruptcy resolution in India. However, with the introduction of the 2018 amendment, Section 29A was inserted, which outlined the categories of individuals and entities ineligible to submit a resolution plan. While the objective behind Section 29A was to prevent unscrupulous promoters and defaulting entities from regaining control of distressed businesses, its broad and rigid disqualification criteria became a subject of intense scrutiny and criticism. The provision was criticized for overly expanding the scope of disqualification, resulting in a drastic reduction in the pool of eligible resolution applicants.
Critics argued that Section 29A did not effectively distinguish between genuine applicants and those with a history of financial misconduct, leading to unintended consequences. Post-Amendment Position • The IBC introduced Section 240A specifically for MSMEs, exempting them from disqualifications under Section 29A(c) to 29A(h). This critical amendment enables MSME promoters (who aren't willful defaulters) to bid for their own companies during insolvency proceedings, and further empowers the Central Government to introduce additional exemptions for MSMEs if deemed necessary in the public interest. • The Insolvency Law Committee recommended these exemptions because MSMEs face unique challenges: they rarely attract external bidders due to limited financial viability, making original promoters typically the only interested parties willing to revive these businesses.
Without these exemptions, MSMEs would likely face forced liquidation due to lack of suitable resolution applicants, undermining the core objectives of the IBC. • The Second Amendment refined the disqualification criteria by: narrowing the scope to only offenses listed in the newly introduced Twelfth Schedule; limiting disqualification to convictions with punishments exceeding two years (or seven years under other laws);
implementing a time-bound disqualification period of only two years following release for individuals who served sentences; and excluding convictions related to connected persons rather than the applicant directly.
2.2 Introduction of Pre-Packaged Insolvency Resolution Process (PPIRP) (2021)
One of the most significant reforms for MSMEs under the IBC was the introduction of the PrePackaged Insolvency Resolution Process (PPIRP) in April 2021. This mechanism was designed exclusively for MSMEs, offering a simplified, cost-effective, and debtor-friendly resolution process. Key Features of PPIRP
1. Under PPIRP's debtor-in-possession model, MSME promoters maintain control of
their company during resolution plan negotiations with creditors, unlike CIRP where a Resolution Professional takes over management.
2. PPIRP requires the debtor (MSME) and creditors to negotiate a resolution plan before
approaching the NCLT, which significantly reduces the time required for resolution compared to the traditional CIRP process.
3. PPIRP operates as a fast-track process that must be completed within 120 days
compared to CIRP's 330 days, with the NCLT required to approve the resolution plan within 90 days of initiation.
4. PPIRP eligibility is restricted to MSMEs that are not undischarged insolvents, with
the additional requirement that the Corporate Debtor must secure approval from at least 66% of financial creditors before initiating the process.
5. PPIRP is cost-effective and less litigious as it reduces legal expenses through
preformal insolvency negotiations and minimizes court intervention, ultimately leading to quicker resolutions for distressed MSMEs.
2.3 Relaxed Compliance Requirements Compared to Large Corporate Insolvencies
Recognizing the limited financial and operational capacity of Micro, Small, and Medium
Enterprises (MSMEs), the Insolvency and Bankruptcy Code (IBC) has introduced several relaxed compliance requirements to ensure that MSMEs can navigate insolvency resolution without excessive procedural burdens. Unlike large corporate entities, which have the resources to manage complex insolvency proceedings, MSMEs often struggle with high compliance costs, legal formalities, and lengthy resolution timelines. The relaxation of these requirements helps reduce bureaucratic hurdles, simplify procedural obligations, and enable MSMEs to restructure or exit the market in a more efficient manner. One of the most significant reliefs for MSMEs under the Insolvency and Bankruptcy Code (IBC) comes in the form of exemptions provided by Section 240A concerning Section 29A.
Section 29A generally disqualifies certain individuals and entities from submitting a resolution plan to prevent defaulting promoters and ineligible applicants from reclaiming control of distressed companies. However, for MSMEs, this restriction posed a challenge, as external bidders often showed little interest in acquiring small businesses, leaving them with no viable resolution path. To address this, Section 240A was introduced, granting exemptions to MSME promoters from specific disqualifications under Section 29A. This allows them to submit resolution plans, provided they are not wilful defaulters or otherwise disqualified under particular provisions. By enabling genuine MSME promoters to revive their businesses, this provision helps prevent unnecessary liquidations due to a lack of alternative bidders.
2.3 Role of the National Company Law Tribunal (NCLT)
The National Company Law Tribunal (NCLT) serves as the adjudicating authority for corporate insolvency cases under the Insolvency and Bankruptcy Code (IBC), 2016. However, MSMEs often encounter significant challenges in navigating the insolvency framework due to procedural delays, excessive case backlogs, and judicial inefficiencies. Despite the IBC's objective of ensuring a time-bound resolution within 330 days, MSMEs frequently face prolonged proceedings caused by adjournments and the high volume of pending cases, exacerbating their financial distress. To address these systemic challenges, policy reforms such as the expansion of NCLT benches, the establishment of MSME-specific fast-track insolvency courts, and the simplification of procedural requirements are imperative. Additionally, government-led financial assistance programs for legal representation would enhance accessibility to
insolvency proceedings for MSMEs, aligning with the broader objective of the IBC—to facilitate business rehabilitation over liquidation. Without such reforms, MSMEs will continue to face disproportionate obstacles, undermining their ability to effectively utilize insolvency resolution mechanisms.
3. Challenges Faced by MSMEs Under the IBC
3.1 High Procedural and Compliance Costs
The Insolvency and Bankruptcy Code (IBC) was introduced to provide a structured framework for insolvency resolution in India. However, Micro, Small, and Medium Enterprises (MSMEs) often face significant financial and procedural challenges when attempting to utilize this mechanism. The high costs associated with compliance and procedural requirements pose a major hurdle, discouraging many MSMEs from availing themselves of the IBC’s benefits. Below are the key challenges under this category: • Legal, administrative, and compliance costs are often prohibitive for MSMEs. One of the primary concerns for MSMEs under the IBC is the high legal and administrative costs associated with the resolution process. The insolvency proceedings involve multiple steps, including filing petitions, submitting financial records, and meeting regulatory requirements, all of which incur costs.
The requirement to comply with legal formalities, including preparing detailed financial statements and submitting them before the National Company Law Tribunal (NCLT), can be financially and administratively burdensome for small businesses. Unlike large corporations with dedicated legal teams, MSMEs often lack the expertise and resources to handle these processes independently, forcing them to rely on external legal professionals. • Engaging insolvency professionals and lawyers adds financial strain. The IBC mandates the appointment of insolvency professionals (IPs) to oversee the Corporate Insolvency Resolution Process (CIRP). These professionals play a crucial role in managing the debtor’s assets, liaising with creditors, and ensuring compliance with legal requirements. However, their fees can be quite substantial, often making it difficult for MSMEs to afford their services.
Since the IBC process is intricate and requires professional
guidance, MSMEs are left with little choice but to hire insolvency professionals and lawyers, leading to additional financial strain.
3.2 Limited Access to Professional Advisory Services
One of the major hurdles MSMEs face under the Insolvency and Bankruptcy Code (IBC) is their limited access to professional advisory services. Unlike large corporations that can afford dedicated financial advisors, insolvency professionals, and legal experts, MSMEs often struggle to access these essential services. The insolvency resolution process requires expert guidance in areas such as financial restructuring, legal documentation, and compliance with regulatory norms, but MSMEs lack the financial and human resources to hire such professionals.
3.3 Creditors’ Dominance in the Resolution Process
The IBC framework grants significant power to the Committee of Creditors (CoC), which is primarily composed of financial creditors such as banks and financial institutions. This dominance often leads to a prioritization of debt recovery over the survival of distressed MSMEs. Since financial creditors hold voting power in the resolution process, their primary objective is to maximize their own recovery rather than ensuring the long-term sustainability of the business. This creates a disadvantage for MSMEs, which may require flexible restructuring plans to survive but instead face aggressive recovery actions.
3.4 Delays in Resolution and Liquidation Risks
A significant challenge MSMEs face under the IBC is the delay in resolution due to the
backlog of cases at the National Company Law Tribunal (NCLT). The IBC initially prescribed a 180day resolution period (extendable by 90 days), but in practice, cases often take much longer due to the sheer volume of pending cases. MSMEs, which operate on limited financial reserves, find it difficult to sustain themselves during these prolonged insolvency proceedings. The extended resolution timeline reduces the chances of business revival and leads to increased financial distress.
4. Pre-Packaged Insolvency Resolution Process (PPIRP) and Its Effectiveness
The Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced in April 2021
under the Insolvency and Bankruptcy Code (IBC), 2016, as a specialized insolvency framework for Micro, Small, and Medium Enterprises (MSMEs). The key motivation behind PPIRP was to address the shortcomings MSMEs faced under the Corporate Insolvency Resolution Process (CIRP), such as high costs, procedural delays, and excessive creditor dominance. By streamlining the resolution process, PPIRP aimed to provide an efficient, cost-effective, and debtor-friendly mechanism for MSMEs facing financial distress.
4.1 Concept and Objectives of PPIR
PPIRP is a hybrid insolvency process that combines debtor-in-possession and creditorincontrol models, allowing financially distressed MSMEs to negotiate resolution plans with creditors before initiating formal insolvency proceedings. This contrasts with CIRP, where creditors take control and initiate the process, often leading to business disruptions and prolonged resolution timelines. Providing a faster and cost-effective resolution mechanism. One of the main goals of PPIRP is to offer a speedier and less expensive alternative to CIRP. Under PPIRP, MSMEs can submit a pre-negotiated resolution plan to the National Company Law Tribunal (NCLT), reducing the need for prolonged litigation and procedural delays. Unlike CIRP, where cases may take 330 days or more, PPIRP aims to complete the resolution process within 120 days, minimizing operational disruptions for MSMEs
4.2 Benefits for MSMEs
The Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced to address the financial and procedural difficulties that MSMEs face under the Corporate Insolvency Resolution Process (CIRP). PPIRP provides a simpler, faster, and more cost-effective alternative to traditional insolvency proceedings while ensuring that businesses can continue operations during the resolution process. The key benefits of PPIRP for MSMEs are explained below: • Less expensive than the regular Corporate Insolvency Resolution Process (CIRP). One of the primary advantages of PPIRP is that it significantly reduces the cost of insolvency
proceedings compared to CIRP. Under CIRP, MSMEs must bear high costs related to the appointment of Insolvency Professionals (IPs), legal representation, regulatory compliance, and procedural formalities. These costs often make it financially unviable for small businesses to seek insolvency resolution. • Debtor-in-possession model ensures business continuity. A major drawback of CIRP is that once insolvency proceedings begin, the management
control of the company is transferred to a Resolution Professional (RP). This can disrupt business operations, leading to customer loss, supplier disengagement, and employee uncertainty. In contrast, PPIRP follows a debtor-in-possession model, allowing MSMEs to retain control of their business while working on a resolution plan. Negotiated settlements before entering formal insolvency. Another key benefit of PPIRP is that it allows debtors and creditors to negotiate a resolution plan before initiating formal insolvency proceedings. This pre-negotiation mechanism helps in reducing disputes, speeding up the resolution process, and improving overall recovery rates.
4.3 Limitations and Challenges in Implementation
While the Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced as a faster and cost-effective alternative to the Corporate Insolvency Resolution Process (CIRP), its implementation faces several challenges. Despite its potential benefits, MSMEs encounter eligibility restrictions, creditor dominance, and lack of awareness, which hinder its effectiveness. • Eligibility criteria restrict many MSMEs from accessing PPIRP. The strict eligibility criteria for PPIRP prevent many MSMEs, particularly sole proprietorships and unregistered businesses, from accessing the framework. Only MSMEs classified under the MSMED Act, 2006, that have not undergone PPIRP or CIRP in the past three years and have 66% creditor approval can initiate the process. • Creditors still hold the power to approve resolution plans, limiting debtor
autonomy. Although PPIRP allows debtors to retain control, creditors still hold significant power in the resolution process. The Committee of Creditors (CoC) must approve the pre-negotiated resolution plan with a 66% majority, often prioritizing debt recovery over the MSME’s longterm viability. • Lack of awareness among MSMEs regarding PPIRP. A significant challenge in PPIRP implementation is the lack of awareness among MSMEs
regarding its procedures and benefits. Many MSME owners lack access to legal and financial advisory services, making it difficult to navigate the insolvency process.
5. Comparative Analysis with Other Jurisdictions
A comparative analysis of MSME insolvency frameworks in different countries provides
valuable insights into how various jurisdictions handle financial distress for small businesses. The United Kingdom (UK) and the United States (US) have established insolvency mechanisms that aim to balance creditor rights with business continuity, offering useful lessons for India’s Pre-Packaged Insolvency Resolution Process (PPIRP) under the Insolvency and Bankruptcy Code (IBC), 2016. United Kingdom (UK) The UK has a well-established insolvency framework that provides multiple avenues for financially distressed businesses, including Company Voluntary Arrangements (CVA) and the Administration Process. These mechanisms enable MSMEs to restructure their debts and explore recovery options before facing liquidation.
1. Company Voluntary Arrangements (CVA)
A Company Voluntary Arrangement (CVA) is a debt restructuring mechanism that allows
struggling businesses to negotiate a repayment plan with creditors while continuing operations. Key features of a CVA include:
The company proposes a restructured repayment plan to creditors. • If 75% (by value) of creditors approve, the plan becomes legally binding. • The company remains under debtor control, enabling MSMEs to trade while gradually repaying debts.
2. Administration Process
The Administration Process serves as another insolvency option, offering businesses a structured pathway to recovery while preventing immediate liquidation. Its key aspects include: • Companies can voluntarily enter administration or be placed into administration by a secured creditor. • A licensed insolvency professional (administrator) takes control of the business,
aiming to revive it through restructuring or asset sales. • If recovery is unfeasible, the business proceeds to liquidation as a last resort. United States (US) The United States has a well-established insolvency framework under the Bankruptcy Code, which provides structured mechanisms for businesses facing financial distress. For MSMEs, two key insolvency options are:
1. Chapter 11 Bankruptcy: Providing Debtor-in-Possession Rights and Structured
Restructuring Chapter 11 Bankruptcy is a court-supervised restructuring process that enables companies, including MSMEs, to reorganize while maintaining operational control. It follows the Debtorin-Possession (DIP) model, allowing existing management to retain control during insolvency proceedings, unlike India's creditor-controlled Corporate Insolvency Resolution Process (CIRP). One of its key protections is the automatic stay on creditors, which prevents them from taking recovery actions immediately after a company file for Chapter 11, giving businesses time to develop a restructuring plan. The process also offers flexible repayment
terms, enabling companies to renegotiate repayment schedules and modify existing contracts for a sustainable turnaround. Additionally, the restructuring plan requires creditor approval, but dissenting creditors can be overridden under the "cramdown" provisions if the court deems the plan reasonable. While Chapter 11 provides extensive restructuring options, its high costs and complexity often make it impractical for small businesses, leading to the introduction of Subchapter V, a more streamlined alternative.
2. Subchapter V (for MSMEs): Streamlined Insolvency Under the Small Business
Reorganization Act (SBRA) Recognizing that Chapter 11 is costly and time-consuming for small businesses, the Small Business Reorganization Act (SBRA), 2019 introduced Subchapter V—a simplified version of Chapter 11 tailored for MSMEs. Subchapter V offers a streamlined and cost-effective alternative to traditional Chapter 11 bankruptcy, specifically designed for MSMEs. It significantly reduces legal expenses and court delays by requiring cases to be completed within 90 days, making it a faster and more affordable option. Following a debtor-friendly approach, businesses retain management control throughout the process, similar to India’s Pre-Packaged Insolvency Resolution Process (PPIRP). Unlike standard Chapter 11 proceedings, Subchapter V eliminates the need for a formal creditors' committee, simplifying the process and reducing procedural complexities.
Additionally, it does not follow the absolute priority rule, meaning MSME owners can retain ownership even if creditors are not fully repaid, making it a more flexible restructuring option. 5. 2 Key Takeaways for India A comparative analysis of MSME insolvency frameworks in the US, UK, and India
highlights key areas where India’s Pre-Packaged Insolvency Resolution Process (PPIRP) can be improved. By incorporating best practices from global insolvency regimes, India can make PPIRP more effective, debtor-friendly, and efficient for MSMEs. The following are the key takeaways:
1. India Can Adopt Debtor-Friendly Provisions from the US Chapter 11 System
One of the biggest limitations of PPIRP is the high level of creditor control, which makes it difficult for MSMEs to initiate and successfully complete the resolution process. In contrast,
the US’s Chapter 11 (Subchapter V) provides strong debtor protections, allowing MSMEs to retain control of their businesses while restructuring debts. Lessons from the US Model: • No Mandatory Creditor Pre-Approval: In the US Subchapter V, MSMEs can file for insolvency without requiring prior creditor approval. This reduces delays and ensures business continuity. PPIRP, however, mandates 66% creditor consent before filing, making it difficult for MSMEs to enter the process. • Cramdown Provisions for Fair Restructuring: In Subchapter V, courts can approve a resolution plan even if creditors disagree, ensuring that MSMEs get a fair chance at restructuring. India’s PPIRP lacks such protections, as creditors dominate the approval process. • Faster and Less Expensive Procedures: Subchapter V has a strict 90-day timeline, reducing legal and administrative costs.
PPIRP’s 120-day process, with mandatory creditor involvement, can be more time-consuming and costly.
2. MSME-Specific Frameworks Like the UK’s CVA Can Help Reduce Liquidation
Risks
A major drawback of India’s IBC framework is that many MSMEs end up in liquidation
instead of successfully restructuring their debts. The UK’s Company Voluntary Arrangement (CVA) model offers a cost-effective and flexible alternative, helping businesses avoid liquidation. Lessons from the UK Model: • Informal Negotiations Before Insolvency Filing: The UK’s CVA allows MSMEs to negotiate debt restructuring informally, without court intervention unless challenged. PPIRP, however, requires NCLT involvement, increasing delays and costs. • Minimal Court Involvement: CVA does not require constant court oversight, reducing procedural burden. In contrast, PPIRP requires NCLT approval at multiple stages, making it less accessible for small businesses.
Focus on Business Continuity: Under CVA, the debtor retains control, negotiates directly with creditors, and can continue operations. PPIRP also allows debtor control, but due to creditor pre-approval requirements, many MSMEs struggle to get plans approved, leading to liquidation.
6. Impact Assessment: Pre-IBC vs. Post-IBC for MSMEs
The introduction of the Insolvency and Bankruptcy Code (IBC), 2016 marked a significant shift in how Micro, Small, and Medium Enterprises (MSMEs) handle financial distress. Before the IBC, MSMEs faced lengthy litigation processes, low recovery rates, fragmented legal frameworks, and limited participation in insolvency proceedings. The Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced in 2021 to further simplify the insolvency process for MSMEs. However, while IBC and PPIRP have led to improvements, several challenges remain. One of the most significant changes under IBC is the reduction in resolution time. Before IBC, MSME insolvency cases could take 4-5 years to resolve due to litigation delays, creditor disputes, and multiple legal procedures. This led to asset depreciation and financial instability, making business recovery difficult.
With the implementation of IBC, the theoretical resolution timeline was set at 330 days. However, practical implementation has faced hurdles due to the backlog of cases at the National Company Law Tribunal (NCLT), leading to delays beyond the stipulated timeframe. PPIRP was introduced to speed up the process for MSMEs, allowing them to submit a pre-negotiated resolution plan and avoid unnecessary litigation delays. Another major improvement post-IBC is in the recovery rate for creditors and MSMEs. Before IBC, recovery rates were as low as 25%, primarily due to the lengthy resolution process, leading to asset depreciation and reduced business value. Post-IBC, recovery rates have improved to approximately 45%, but outcomes still vary based on creditor cooperation and case complexity.
In cases where financial creditors are willing to negotiate restructuring plans, MSMEs have a better chance of survival. However, if creditors prefer liquidation over resolution, recovery rates remain low. Lastly, MSME participation in insolvency proceedings has increased due to PPIRP. Before IBC, MSMEs faced high costs, legal barriers, and limited access to insolvency resolution
mechanisms, discouraging them from seeking formal restructuring. Post-IBC, with the introduction of PPIRP, MSMEs now have a structured and accessible mechanism that allows them to retain control of their business while negotiating a resolution plan with creditors. However, challenges such as NCLT delays and creditor dominance in decision-making still pose risks to MSME participation. Overall, IBC has significantly improved the insolvency resolution landscape for MSMEs by reducing legal complexities, improving recovery rates, and offering a more structured framework through PPIRP. However, delays in NCLT proceedings, high creditor influence, and inconsistent recovery outcomes indicate that further reforms are needed to make PPIRP more effective and accessible for struggling MSMEs. Case Studies of MSME Insolvency Under IBC Case Name 1: GCCL Infrastructure & Projects Ltd.
, In re (2022)3 Fact of the case GCCL Infrastructure & Projects Ltd. , a Gujarat-based MSME, faced financial distress due to accumulated debt and liquidity issues. Given its classification as an MSME under the MSMED Act, 2006, the company opted for Pre-Packaged Insolvency Resolution Process (PPIRP) under Section 54C of the Insolvency and Bankruptcy Code (IBC), 2016. This decision allowed GCCL Infrastructure to explore debt restructuring without undergoing fullfledged Corporate Insolvency Resolution Process (CIRP), which is more time-consuming and costly. Judgement The NCLT Ahmedabad Bench approved the pre-negotiated resolution plan for GCCL Infrastructure & Projects Ltd. , recognizing the effectiveness of PPIRP under Section 54C of the IBC, 2016.
The tribunal ruled that the resolution plan, having secured 66% creditor approval, met all legal requirements and was finalized within the mandated 90-day period, ensuring a swift and cost-effective resolution. Unlike traditional CIRP cases, existing
3 https://ibbi.gov.in/Jan2022-
March2022/files/basichtml/page20.html#:~:text=Till%20March%2C%202022%2C%2021%2C100%20applicat ions%20for%20initiati on,of%201%20GCCL%20Infrastructure%20&%20Projects%20Ltd.
promoters were allowed to retain control, preventing business disruption while enabling debt restructuring. The claims of operational creditors were also addressed, ensuring financial stability within the company’s supply chain. The tribunal emphasized that PPIRP offers a structured yet flexible insolvency resolution mechanism, making it a preferable alternative to CIRP for MSMEs. Case Study 2: Saravana Global Holdings Ltd. v. Bafna Pharmaceuticals Ltd. , NCLT Chennai Bench (2022)4 Facts of the Case Bafna Pharmaceuticals Ltd. , a Chennai-based MSME in the pharmaceutical sector, faced financial distress due to accumulated debt and cash flow issues. The company defaulted on its financial obligations, prompting Saravana Global Holdings Ltd.
, a financial creditor, to file an application under Section 7 of the Insolvency and Bankruptcy Code (IBC), 2016, seeking initiation of the Corporate Insolvency Resolution Process (CIRP) against Bafna Pharmaceuticals. The case faced significant delays at the NCLT Chennai Bench, as multiple hearings and adjournments prolonged the admission of the CIRP application. The delay caused a deterioration in the company’s financial condition, further affecting its operational viability and reducing the chances of a successful resolution. The extended legal proceedings eroded the company’s value, making it more difficult to attract potential investors for revival. Judgment of the Case The NCLT Chennai Bench eventually admitted the CIRP application, ruling that Bafna Pharmaceuticals had defaulted on its financial obligations and met the insolvency criteria under Section 7 of the IBC.
However, the tribunal acknowledged the impact of procedural delays, which had negatively affected both creditor recoveries and business viability. The court observed that such delays in insolvency admission could lead to value erosion and reduce the effectiveness of the IBC’s time-bound resolution mechanism. The judgment reinforced the need for faster processing of MSME insolvency cases to
4 https://indiankanoon.org/doc/150481353/
prevent businesses from reaching an irrecoverable state. It also highlighted the limitations of CIRP for MSMEs, as prolonged litigation and procedural inefficiencies often hamper quick debt resolution. The case underscored the necessity of streamlined insolvency mechanisms, such as Pre-Packaged Insolvency Resolution Process (PPIRP), which is designed specifically to address MSME financial distress more efficiently than CIRP.
7. Policy Recommendations and Future Reforms
While the Insolvency and Bankruptcy Code (IBC), 2016, and the Pre-Packaged Insolvency Resolution Process (PPIRP) have improved MSME insolvency resolution, several challenges persist, including limited accessibility, procedural inefficiencies, and creditor dominance. To make the framework more effective, inclusive, and supportive of MSMEs, targeted policy reforms are needed. These reforms should focus on simplifying MSME access to insolvency mechanisms, improving the efficiency of PPIRP, and balancing creditor rights with MSME sustainability.
7.1 Enhancing Accessibility of IBC for MSMEs
One of the biggest challenges MSMEs face under the IBC is navigating the complex insolvency process. Many small businesses lack legal expertise and financial resources, making it difficult to apply for insolvency or restructuring under PPIRP. Simplifying the application process— such as introducing standardized templates, digital filing systems, and pre-approved financial restructuring frameworks—can help MSMEs initiate insolvency proceedings without excessive legal costs and delays. Additionally, reducing procedural complexities in NCLT approvals would make the process more efficient for smaller enterprises.
7.2 Streamlining PPIRP for Better Efficiency
Although PPIRP was designed as a faster alternative to traditional insolvency proceedings, its strict eligibility criteria and creditor-dominated approval process create barriers for MSMEs. Currently, only corporate MSMEs registered under the MSMED Act, 2006, are eligible, excluding sole proprietorships and unregistered businesses, which form a significant portion of India's MSME sector. Expanding eligibility criteria to include all MSMEs, irrespective of legal registration status, would ensure that more small businesses
benefit from PPIRP and avoid liquidation due to technical disqualifications.
7.3 Balancing Creditor Rights and MSME Sustainability
While creditor rights are crucial to maintaining financial stability, excessive creditor control often leads to MSME liquidations rather than successful restructuring. Currently, operational creditors (such as suppliers and vendors) have limited decision-making power in insolvency proceedings, while financial creditors (such as banks) dominate the Committee of Creditors (CoC). This imbalance often results in resolutions that prioritize financial creditor recoveries over business sustainability. Ensuring equal participation of operational creditors in voting on resolution plans would create a more balanced system that considers the interests of all stakeholders, not just banks.
8. Conclusion
The introduction of the Insolvency and Bankruptcy Code (IBC), 2016, and the Pre-Packaged Insolvency Resolution Process (PPIRP) represents a major step forward in improving the insolvency resolution framework for Micro, Small, and Medium Enterprises (MSMEs) in India. However, several challenges remain that limit the effectiveness of these mechanisms. A comparison with insolvency frameworks in the UK and the US provides valuable insights
into potential reforms, ensuring a more balanced, efficient, and accessible resolution process for MSMEs.
8.1 Summary of Findings
The IBC has significantly improved the MSME insolvency landscape by reducing resolution timelines, improving recovery rates, and creating a unified legal framework. The introduction of PPIRP has further streamlined the process, allowing MSMEs to negotiate pre-packaged restructuring plans before entering formal insolvency proceedings. However, issues such as NCLT delays, creditor dominance, and limited MSME awareness continue to hinder its effectiveness. Many MSMEs still face liquidation rather than successful restructuring due to strict eligibility criteria, procedural inefficiencies, and high compliance costs.
8.2 Future Directions for Research and Policy Development
To ensure continuous improvement in MSME insolvency resolution, further empirical
research and policy studies are required. One key area for future research is evaluating the real-world impact of PPIRP through data-driven empirical studies. Examining case studies and statistical outcomes will help identify the practical successes and failures of PPIRP, allowing policymakers to make evidence-based improvements to the framework.
References
1. Reports and guidelines on the IBC framework and PPIRP., https://ibbi.gov.in/
2. Updates on IBC amendments and MSME policies., https://www.mca.gov.in/
3. Reports on MSME credit availability and insolvency resolution challenges.,
https://www.rbi.org.in/
4. National Company Law Tribunal (NCLT) Decisions
5. The Economic Times – Articles on insolvency trends, PPIRP, and MSME
restructuring., https://economictimes.indiatimes.com/
6. Harvard Law Review – Articles comparing global insolvency laws, including US
Chapter 11 and UK CVA., https://harvardlawreview.org/