Small and Medium Enterprises (SMEs) and the Insolvency Framework: Challenges in Accessing IBC Mechanisms

Micro, Small, and Medium Enterprises (MSMEs) are vital to the Indian economy, contributing significantly to GDP, employment, and exports[1]. However, they face unique financial vulnerabilities and challenges in accessing formal insolvency mechanisms[2]. The Insolvency and Bankruptcy Code (IBC), 2016, was enacted to consolidate insolvency laws and provide a time-bound resolution process[3]. While a landmark reform, the IBC framework, often designed with larger corporations in mind, presents barriers for MSMEs[4]. This paper aims to analyse the challenges MSMEs face in accessing IBC mechanisms despite provisions intended for them[5]. Employing a doctrinal methodology, this paper reviews the MSMED Act, 2006, the IBC, 2016, and relevant literature and reports[6]. Key findings suggest that high costs, procedural complexities, lack of awareness, limited access to insolvency professionals, and potential biases within the creditor committee structure disproportionately affect MSMEs' ability to utilize IBC effectively[7]. While specific provisions like Section 240A and the Pre-Packaged Insolvency Resolution Process (PPIRP) exist[8], systemic issues remain. The paper argues for targeted reforms to enhance accessibility and effectiveness of the IBC for MSMEs, drawing comparisons with international approaches where relevant, to ensure this critical sector can leverage insolvency laws for timely resolution and revival[9]. [1] Yajur Sood, Analysis of the Micro, Small and Medium Enterprises Act, 2006, 3 INDIAN J.L. & LEGAL RSCH. 1, 2 (2021) (discussing the role and employment contribution of MSMEs) [2] Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India) [hereinafter IBC, 2016] [3] Insolvency and Bankruptcy Code, 2016, No. 31, Acts of Parliament, 2016 (India) [hereinafter IBC, 2016] [4] Vivek Kumar, Reforms Brought in the Insolvency Regime: The Insolvency and Bankruptcy Code, 2016, 5 INDIAN J.L. & LEGAL RSCH. 1, 2 (2023) [5] Ronald B. Davis et al., The Modular Approach to Micro, Small, and Medium Enterprise Insolvency 20 [6] Ronald B. Davis et al., The Modular Approach to Micro, Small, and Medium Enterprise Insolvency 20 [7] Davis et al., supra note 3, at 20-21 [8] Id. at 25 [9] IBC, 2016, Preamble; see also Davis et al., supra note 3, at 21