New Delhi, Apr 8 (KNN) A research study by Management Development Institute has highlighted critical structural gaps in how micro, small and medium enterprises (MSMEs) are treated under the Insolvency and Bankruptcy Code (IBC), calling for targeted reforms to improve access, recovery outcomes and procedural efficiency.
Pre-admission settlements dominate outcomes
The study found that the insolvency framework functions largely as a pre-admission settlement mechanism rather than a resolution pathway. Of over 39,000 cases filed, nearly 80 percent were resolved before admission into the Corporate Insolvency Resolution Process (CIRP).
For operational creditors (OCs), including MSMEs, the trend is even sharper, with around 85 percent of cases settled, withdrawn or dismissed at the pre-admission stage, underlining the importance of early-stage negotiations.
MSMEs face ‘double marginalisation’
MSMEs, typically classified as operational creditors, face systemic disadvantages such as limited legal and financial capacity, information asymmetry on debtor distress, fragmented claims and weak bargaining power and frequent rejection or reduction of claims due to documentation gaps.
The study notes that MSMEs often suffer ‘double marginalisation’, both as smaller creditors and as part of a broader OC category with limited influence in decision-making.
CIRP outcomes remain weak for MSMEs
Even when cases proceed to CIRP, outcomes remain challenging. A significant number end in liquidation rather than resolution. Recovery rates for MSME creditors remain low and the process is often too costly and time-consuming for small firms.
The report emphasises that the real economic value for MSMEs lies in the threat of insolvency, which drives settlements, rather than the resolution process itself.
Key reform recommendations
To address these gaps, the study proposes several reforms. It suggests better data transparency by systematic tracking of pre-admission settlements and recoveries. Mandatory invoice recording of large operational claims with over Rs 1 crore, to be recorded on National e-Governance Services Ltd for faster dispute resolution.
The study also suggests claim aggregation by allowing MSMEs to combine smaller claims to meet filing thresholds, providing cost relief by waiver or deferring insolvency process costs for MSMEs, auction redesign by introducing a quasi-Absolute Priority Rule to ensure fairer distribution of proceeds and PPIRP reforms by simplifying and realigning incentives in the pre-pack insolvency framework to improve adoption
Need for MSME-sensitive insolvency architecture
The study also flags structural inefficiencies in the current auction mechanism, where resolution applicants prioritise financial creditors due to voting power, often at the expense of operational creditors.
It calls for a more MSME-sensitive insolvency architecture, focusing on faster and cheaper processes, fairer allocation of recovery and improved awareness and participation in pre-pack mechanisms.
Bottom line
While the Insolvency and Bankruptcy Code has strengthened credit discipline in India, the study concludes that its effectiveness for MSMEs remains limited without targeted reforms, particularly in addressing pre-admission dynamics, cost barriers and structural biases in resolution outcomes.
(KNN Bureau)
