Empowering MSMEs: Specialized Insolvency Frameworks For Resilience And Growth

A. Introduction

Micro, Small, and Medium Enterprises (“MSMEs”) are the bedrock of India’s economic ecosystem, contributing 30% to the national GDP, over 45% to India’s exports and employing over 24 crore individuals, according to the Annual Report 2024–25 of the Ministry of MSME. Recognizing the vital role MSMEs play in the economy and the unique difficulties they face during financial stress, the Insolvency and Bankruptcy Code, 2016 (“IBC”), has incorporated a specialized insolvency framework for MSMEs.

Under Section 240A of IBC, inserted by the IBC (Second Amendment) Act, 2018, MSMEs are exempted from disqualifications under Section 29A(c) and (h) of IBC, enabling promoters, even if classified as NPAs or personal guarantors, to remain eligible resolution applicants. This carve-out ensures value preservation in family-led and promoter-dependent enterprises, often considered as the hallmark of Indian MSMEs. This ambit was widened by the Hon’ble Supreme Court in Hari Babu Thota, In re, (2024) 242 Comp Cas 1, wherein it was held that Section 240A protection applied even if the business got registered as a MSME after the insolvency process commenced.

Further, in a move to safeguard MSMEs, facing current uncertainty, from unnecessary insolvency proceedings (MCA Press Release, 24.03.2020), the minimum default threshold under Section 4 of the IBC was increased from Rs.1 lakh to Rs1 crore. This measure provided significant relief by reducing the risk of premature litigation.

The Pre-Packaged Insolvency Resolution Process (“PPIRP”), introduced in April 2021, strengthens the framework by offering MSMEs a faster and more efficient debtor‑in‑possession model. This article takes a critical look at the IBBI’s targeted reforms and regulatory innovations aimed at improving insolvency resolution for MSMEs, while also addressing the structural and procedural challenges that continue to affect the sector’s resilience.

B. IBBI’s Key Initiatives for MSME Insolvency Resolution

In response to the growing financial vulnerability of MSMEs, the Government of India introduced the PPIRP, specifically for MSMEs, through the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was later enacted by Parliament as the Insolvency and Bankruptcy Code (Amendment) Act, 2021. According to the latest Quarterly Newsletter of the IBBI (July–September 2025), sixteen applications had been admitted under the PPIRP as of 30 09.2025. Of these, one application was withdrawn, resolution plans in ten cases have been approved, and five cases remain in process, indicating the framework’s effectiveness.

The PPIRP is a time-bound and cost-effective alternative to traditional insolvency. It begins when a corporate debtor, after obtaining the approval of at least 66% of its unrelated financial creditors (who are not related to the corporate debtor), files an application for PPIRP along with a base resolution plan. This plan is then submitted to the Committee of Creditors (“CoC”) for evaluation. If no other resolution plan is received, and the base plan does not impair operational creditors, it may be approved directly by the CoC. However, if competing plans are received or if the base plan involves impairment, the CoC may vote on the most viable option. This process has been designed to offer completion within 120 days, resulting in faster resolution and reduced procedural complexity as compared to other Corporate Insolvency Resolution Processes (“CIRP”).

Additionally, for MSME insolvency resolution, in order to increase transparency and regulatory efficiency in, the IBBI has released a Discussion Paper dated 23.08.2024 which proposes  certain amendments to the Insolvency Resolution Process for Corporate Persons Regulations, 2016 (“CIRP Regulations, 2016”). This paper recommends mandatory disclosure of MSME status in the Information Memorandum (“IM”) prepared under Regulation 36, as well as in the invitation for Expression of Interest under Regulation 36A. The intent is to allow prospective resolution applicants to understand whether Section 240A exemptions apply and to assess the commercial viability and compliance requirements for submitting a resolution plan accordingly.  However, it is pertinent to note that the said proposed amendment has not yet been incorporated in the CIRP Regulations, 2016.

C. Structural and Procedural Challenges Faced by MSMEs under the IBC

While the IBBI has undertaken several targeted reforms to support MSMEs under IBC, 2016, the practical realities of the sector continue to reveal deep-rooted structural and procedural limitations.

A key challenge for MSME includes limited success of PPIRP.  Under Section 54A(3) of the IBC requires that a PPIRP can start only if unrelated financial creditors holding at least 66% voting rights approve. This is difficult for MSMEs because most are family-owned and rely heavily on related-party credit. Further, if the Base Resolution Plan reduces operational creditors’ dues, the CoC must invite competing plans and ensure value maximization under Section 54K(4). This results in corporate debtors often including terms favoring operational creditors resulting in lower recoveries for financial creditors. This makes financial creditors hesitant to agree to debt reductions, creating challenges in meeting the 66% approval requirement.

The case of Amrit India Limited (An MSME), (CP (IBPP) No.03(PB)/2022), illustrates these challenges vividly. Amrit India, a trading and consultancy firm, was admitted into PPIRP by the Ld. NCLT Delhi on 28.11.2022. The company had been non-operational for nearly three years and consequently filed for resolution noting a trust breakdown with its sole financial creditor. Thereafter, the CoC approved the resolution plan dated 03.05.2023, wherein Aquarius Fincap and Credits Pvt. Ltd. was acquired control for Rs. 7.2 lakh against the total admitted claims which exceeded Rs. 38 lakhs. Out of this sum, Rs. 5 lakh was paid in tranches to the financial creditor, and further Rs. 2.2 lakh was paid to other creditors. This amounted to a significant haircut of nearly 81% reflecting low valuation, minimal bidder interest, as well as a lack of better alternative resolution plans.

Further, in the case of Shree Rajasthan Syntex Ltd. v. State Bank of India & Ors., CP No. (IBPP)- 01/54C/JPR/2022, vide order dated 22.08.2023, the Ld. NCLT Jaipur approved the base resolution plan of the corporate debtor (An MSME), admitted into PPIRP. Against the total admitted claim of Rs. 111.67 crore, the total settlement amount offered under the Approved resolution plan was merely Rs. 41.94 crore, again reflecting a haircut of nearly 63% These significant haircuts, deter financial creditors from entering into agreements with MSMEs until there is a possibility of substantial recovery, as they fear substantial losses.

D. Conclusion: Towards a Robust and Inclusive MSME Insolvency Processes

India’s evolving insolvency regime has been continuously evolving to accommodate the needs of MSMEs. Beginning from exemptions under Section 240A and leading to the introduction of PPIRP, the process has moved away from a uniform approach for all entities, thereby recognising that different enterprises operate at vastly different scales. Yet, persistent challenges such as informal record-keeping, limited access to professionals, and low awareness continue to hinder effective MSME participation.

While not designed exclusively for MSMEs, a key proposal in the IBBI’s Discussion Paper dated 04.02.2025, (pp. 3–4), on the “coordinated resolution of interconnected entities” holds significant promise for small businesses. Many MSMEs operate through closely held, vertically or laterally linked units. The existing framework treats each unit in isolation, often resulting in fragmented and poor outcomes. The proposed mechanism, enabling joint hearings, common resolution professionals, and aligned timelines, could help unlock collective value, reduce process duplication, and improve recovery prospects in such MSME networks.

In the future, whether the reforms will be successful will be decided not just by regulatory designs but by the effective delivery of the redesigned processes through correct and effective implementation, targeted capacity-building, and greater on-ground access to professional support. For MSMEs, the code can fulfil its promise of timely and inclusive resolution only by matching simplification with support.

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