IBC study calls for auction reform to boost MSME insolvency resolution

New Delhi: A study commissioned by the insolvency regulator has called for removing structural inefficiencies in the current auction design pertaining to the rescue of bankrupt micro, small and medium enterprises (MSMEs) and putting in place an improved model to boost resolution.

The study on MSMEs in the Insolvency and Bankruptcy Code (IBC) by Management Development Institute, Gurgaon, favoured the introduction of a single objective auction model where the bidder offering the highest recovery is awarded.

This should be coupled with a quasi-absolute priority rule with an MSME orientation for distribution of proceeds, it said.


Under this framework, financial creditors' priority is fully recognised up to the stressed firm's liquidation value, reflecting their security interests. Any value realised beyond liquidation is then distributed proportionately across creditor classes.

This should be done while replacing the "no impairment" clause in the so-called pre-pack insolvency resolution process with a principle-based allocation. Currently, this clause requires that operational creditors suffer no impairment of their claims.

The study underscored several other steps to bolster the insolvency framework for MSMEs. It called for the systematic collection and publication of data on pre-admission recoveries and settlements.

It advocated separating avoidance transaction reviews from the core resolution process involving MSMEs.

The study suggested mandating structured recording of operational creditor invoices of Rs 1 crore and above by National e-Governance Services, and allowing aggregation of claims by operational creditors to reduce related procedural costs.