The Insolvency and Bankruptcy Board of India (IBBI) has released a study conducted by MDI, Gurgaon, examining how the IBC (2016) serves Micro, Small, and Medium Enterprises (MSMEs). The findings suggest that while the Code has strengthened overall credit discipline, MSME cases rarely progress through the full insolvency process.
Instead, nearly 80% of cases are resolved at the pre-admission stage, as firms prefer early settlement over entering the Corporate Insolvency Resolution Process (CIRP), where control shifts away from promoters.
At the same time, the MSME-specific Pre-Packaged Insolvency Resolution Process (PPIRP) has seen very limited adoption, with only 14 filings since 2021, indicating significant gaps in design and incentives for smaller firms.
Key Findings and Post-Admission Realities
Pre-Admission Outcomes: Early settlements remain the primary recovery route for MSMEs, proving more effective than formal post-admission proceedings, where recovery rates average only 32.8%.
Auction Design Flaws: Current auction models create uneven incentives that often lead to lower payouts for Operational Creditors (OCs) as their total claim share increases.
Structural Constraints: MSMEs face persistent challenges such as information asymmetry and limited legal capacity, which frequently result in minimal returns once a firm enters full liquidation.
Decision-Making Delays: Anomalies in voting within the Committee of Creditors (CoC) often distort the resolution process and create unnecessary delays for smaller stakeholders.
Recommendations for Targeted Reform
Aggregation of Claims: To improve access, the study suggests allowing smaller vendors to aggregate their claims to meet the ₹1 crore filing threshold, with safeguards to prevent misuse.
Mandatory Digital Records: Requiring that invoices above ₹1 crore be recorded on the NeSL platform would provide immutable evidence, reducing disputes and speeding up court admissions.
Fairer Distribution Rules: Implementing a "quasi-Absolute Priority Rule" in auctions would ensure that proceeds are distributed more equitably between banks and smaller suppliers.
Simplifying the Pre-Pack Model: Reforming PPIRP by removing the "no-impairment" clause and separating the investigation of past transactions would align incentives and reduce procedural complexity.
What is "PPIRP"? PPIRP (Pre-packaged Insolvency Resolution Process) is a specialized "debt-restructuring" tool designed to resolve financial distress in MSMEs quickly. It acts as a catalyst for Business Continuity because it allows the existing management to stay in charge while negotiating a rescue plan with their lenders. This mechanism manifests as a transition from "confrontational litigation" to "collaborative restructuring," which significantly lowers the time and cost involved compared to a standard bankruptcy case. For the IBBI, refining PPIRP is a primary lever to benchmark a trajectory where temporary financial stress does not lead to the permanent closure of productive small businesses.
Policy Relevance
Improves access to insolvency mechanisms for small creditors: Allowing aggregation of claims can enable MSMEs acting as operational creditors to meet filing thresholds and participate more effectively in the IBC process.
Addresses distributional imbalances in resolution outcomes: Reforms to auction design, including variants of the absolute priority framework, can improve recovery outcomes for smaller creditors relative to financial institutions.
Strengthens role of digital infrastructure in dispute resolution: Expanding use of platforms such as National E-Governance Services Ltd (NeSL) can reduce information asymmetry and accelerate admission and verification processes.
Reassesses effectiveness of MSME-specific insolvency tools: Low adoption of PPIRP highlights the need to simplify procedures and align incentives between financial and operational creditors.
Highlights reliance on informal resolution pathways: The dominance of pre-admission settlements suggests that firms prefer out-of-court restructuring, raising questions about the design and accessibility of formal insolvency processes.
Follow The Full News Here: IBBI: Impact of IBC on MSMEs - Research Report April 2026