MSMEs: Managing Financial Stress and Navigating under the Insolvency and Bankruptcy Code

Many MSME promoters continue to face financial stress but are either in denial mode or too shy to share their problems with outsiders. Here are some suggestions for MSMEs facing financial stress on how to navigate out of insolvency:

1. Act Quickly: Time is Critical in Insolvency Resolution

The saying “a stitch in time saves nine” applies equally to businesses facing financial challenges. As a Promoter, you are often the first to recognize when your enterprise is in distress. Since creditors can initiate the Corporate Insolvency Resolution Process (CIRP) under the IBC for any default of ?1 crore or more, it’s essential to act swiftly—whether to rectify the default or negotiate restructuring with your financial creditors. Avoiding communication with your banker can be detrimental; proactive engagement is crucial for any MSME. The IBC emphasizes the importance of timely intervention. Delaying action can exacerbate the situation significantly, so promptness is key.

2. Understand Personal Liability for Wrongful Trading under the IBC

Under Section 66 of the IBC, Promoter directors, as well as independent directors, can be held personally liable for wrongful trading during insolvency. The Code requires Promoter Directors to act as trustees for creditors once there’s doubt about their ability to meet financial obligations. In this “twilight period,” entering into transactions that could be seen as prioritizing certain creditors or misusing company funds can lead to claims of “avoidable transactions.” To mitigate risks, remain vigilant, act honestly, and avoid incurring additional liabilities.

3. Foster Open Communication: Prevention is Key

Having open discussions with your creditors—both financial and operational—is vital when facing potential defaults. Ignoring financial warning signs can escalate issues into crises. Many MSME Promoters fall into denial about their financial health, delaying necessary conversations with creditors and stakeholders. As Promoter Directors, confronting these challenges proactively can prevent them from spiraling out of control.

4. Seek Professional Help

Many MSME Promoters hesitate to consult professional advisors due to concerns about cost or a desire to keep their troubles private. However, this approach often exacerbates problems and erodes creditor confidence. When you notice early signs of financial distress, take these steps:

- Hire experts for professional guidance.

- Insist on thorough documentation of all actions taken.

- Ensure transparency in all financial dealings.

- Limit liability by avoiding reckless decisions.

- Drive early solutions, such as restructuring, to mitigate risks.

We have established a non-profit organization called Bharat Business Bridge (BBB), which brings together industry professionals in law, banking, accounting, business administration, restructuring, mediation, and insolvency resolution. Our mission is to assist MSME enterprises in overcoming financial challenges with low cost and high quality solutions. Remember, “even God helps only those who help themselves.” Acknowledging your distress and reaching out to professionals, creditors and stakeholders with transparency is the first step toward resolution.

5. Final Thoughts

Insolvency can be daunting but note remote. Hence, it’s your responsibility as a Promoter to be prepared. The IBC provides a structured framework, including a tailored “Pre-pack Insolvency Process” for MSMEs. However, the success of these initiatives depends on your prompt and informed actions. By adopting a proactive approach and seeking help at the right time, you can navigate challenging financial landscapes with confidence. BBB is here to support you in achieving a timely turnaround for your business.

Access Bharat business Bridge's linkedin page know further about our initiative.

Saneev Pandey

Consultant (Banking, Restructuring & Insolvency)