The Insolvency and Bankruptcy Board of India released a press note highlighting a research study by Management Development Institute, Gurgaon on the role of MSMEs under the Insolvency and Bankruptcy Code, 2016. The study evaluates MSMEs as both operational creditors and corporate debtors and identifies key challenges in insolvency processes. It finds that nearly 80% of cases are resolved at the pre-admission stage, indicating the importance of early settlement mechanisms. The report recommends improved data collection on pre-admission settlements, mandatory recording of large operational creditor invoices, and enabling aggregation of MSME claims to reduce costs. It also proposes a recovery-focused auction model and reforms in the pre-packaged insolvency process, including replacing rigid provisions with principle-based frameworks. Further, it suggests separating avoidance proceedings from resolution and enhancing MSME awareness. Overall, the study aims to strengthen the insolvency ecosystem, improve recovery outcomes, and make the IBC more accessible and effective for MSMEs.
Insolvency and Bankruptcy Board of India
Press Release No. IBBI/PR/2026/5 Dated: 06th April, 2026
Subject: Research study on ‘Micro, Small and Medium Enterprises in the Insolvency and Bankruptcy Code’ conducted by Management Development Institute, Gurgaon’
The Management Development Institute, Gurgaon has undertaken a research study titled “Micro, Small and Medium Enterprises in the Insolvency and Bankruptcy Code.” The study presents an assessment of the Micro, Small and Medium Enterprises (MSMEs) under the Insolvency and Bankruptcy Code, 2016 since its inception and offers an examination of the role of MSMEs in insolvency proceedings under the Code, both in their capacity as Operational Creditors (OCs) and as Corporate Debtors (CDs).
2. The study highlights several recommendations to strengthen the insolvency framework for MSMEs. It calls for the systematic collection and publication of data on pre-admission recoveries and settlements. It suggests mandating structured recording of operational creditor invoices (₹1 crore and above) by NeSL. To improve access, the study proposes allowing aggregation of claims by MSME operational creditors and reducing related procedural costs. It also recommends a recovery-focused auction model guided by a quasi-Absolute Priority Rule, alongside replacing the “no impairment” clause in PPIRP with a principle-based allocation. Further, it advocates separating avoidance transaction reviews from the core resolution process, while keeping resolutions provisional, and emphasises enhancing awareness and capacity-building for MSMEs through targeted outreach and support initiatives.
3. The findings of this study offer insights into the evolving role and experience of MSMEs under the insolvency framework and contribute to an understanding of the practical challenges, emerging trends, and potential areas for MSMEs.
4. The full report is available on the website of the Insolvency and Bankruptcy Board of India at https://ibbi.gov.in/uploads/resources/7373b47de45dd16da8313f1863709fcb.pdf.
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Executive Summary
This report studies how the Insolvency and Bankruptcy Code (IBC), 2016 has played out for the Micro, Small and Medium Enterprises (MSMEs) since its inception. MSMEs are particularly vulnerable to liquidity stress, which can quickly cascade to insolvency. This report examines MSMEs in their capacity as Operational Creditors (OCs) as well as Corporate Debtors (CDs) in cases filed under the IBC.
We have supplemented the post-admission case-level data provided by the Insolvency and Bankruptcy Board of India (IBBI) with financial data sourced from the Prowessdx and ProwessIQ databases provided by the Centre of Monitoring Indian Economy (CMIE), and qualitative information from expert interviews and focus groups of relevant stakeholders. We assess and determine firm characteristics using scores for solvency and liquidity using frequency matrices, correlations, and significance tests using ANOVA and paired t-tests. We also use theoretical and MS-Excel modelling to understand possible behaviour, which are tested using regression analysis on empirical data.
We find that the pre-admission stage of the IBC has significance for both creditors – more so for the OCs – and debtors, particularly MSMEs. Petitions filed at this stage signal creditors’ intention to recover overdue payments, triggering a response from the counterparty (CD), whose response in turn signals not only their intent but also their ability to settle. The dynamics at this stage, most importantly, signal the OCs’ and CDs’ financial health to each other and the larger ecosystem they operate in. Our analyses of post-admission data provided by the IBBI confirm that firms that settle (pre- or post-admission) are financially healthier than those that enter the full CIRP; those that settle earlier are healthier. This applies to both OCs and CDs. With close to 80% of the petitions getting disposed of pre-admission, these dynamics are important to understand and take cognizance of for the IBC and the MSME ecosystem to be more meaningful and effective for MSMEs.
In this spirit, we recommend more detailed data capture at the pre-admission stage to better understand the behaviour of key players; while most creditors may be looking to settle and recover their dues, we aver that the IBC-as-a-recovery mechanism is not in conflict with the IBC-as-a-resolution mechanism. Indeed, the objective of the IBC is not resolution for the sake of resolution. Instead, it is the optimisation of firm value either through resolution, liquidation, or settlement.
We discover a difference in CDs’ behaviour towards OC dues versus FC dues. This, coupled with FCs’ priorities and regulations that govern them, results in FCs petitioning CDs much later than an average OC applicant. We see a significant difference in financial health between CDs petitioned by FCs versus those petitioned by the OCs, the latter having better solvency and liquidity scores, which we believe, represents the value erosion caused by the delay in petitioning by the FCs. This result also holds for MSME CDs. Strengthening the settlement mechanism will help conserve the asset value of these CDs and significantly improve payoffs for all parties involved. Speeding up the process can prevent MSME OCs and CDs, who are typically stressed for liquidity (we find that only a minority receive and/ or pay their dues within 45 days on average), from slipping into insolvency. An effective way could be to mandate that undisputed OC invoices above a threshold, say Rs. 1 crore, be uploaded to the NeSL, which serves as the basis for all IBC petitions and admissions. It will enable quicker pre-admission settlements as well as quicker admissions, thus shortening the process time. To make the IBC more affordable, cost-effective, and a relevant option for MSME OCs, we also recommend a process for aggregating claims and partial waiver of post-admission, IBC process-related expenses.
We analyse the IBC auction process and distribution of the proceeds among the OCs and FCs. A twin-objective function confronted by the bidders – maximizing the asset value and hence, overall realization, coupled with minimizing FC haircut – leads to sub-optimal plans, which opens up litigation, resulting in delays. We move to a single objective function in which the bidder (resolution applicant) with the highest overall offer for the combined claims of the FCs and the OCs wins the auction. A quasi-APR formula (Iyer & Prasad, 2025), with an MSME orientation is used to distribute proceeds among the creditor groups. This approach maximizes the asset value and reduces the need for voting on the amounts involved, and can speed up the process significantly.
Our analysis of the Pre-packaged Insolvency Resolution Process (PPIRP) reveals an inherent lack of goal congruence and misalignment of incentives among the key players, i.e. the MSME CD, OCs and the FCs that comprise the CoC. The current framework is heavily tilted towards the CD and the OCs (for valid reasons), while giving the CoC the power to decide on both admission and resolution, creating a potential conflict of interest and potentially leading to actions that increase the probability of worse outcomes for the MSME CDs. This makes the PPIRP unfavorable to both FCs and the MSME CDs. We recommend reconsidering the clause requiring non-impairment of OCs, and suggest a principles-based design that results in payouts for and some sacrifice by both the FCs and the OCs, while still appreciating the latter’s need to remain strong for their own and the MSME CD’s sake. We also recommend speeding up the PPIRP by separating the main resolution process from the investigation of avoidance transactions. We suggest steps to increase awareness and trust in the PPIRP among MSME CDs through effective communication. While we do not make any recommendations outside the IBBI’s domain as part of this study, for MSMEs to effectively leverage the IBC, we recommend taking an ecosystem view, which will mean stepping outside the confines of IBBI’s purview to harmonize frameworks, platforms, rules and laws across the RBI, NCGTC, direct and indirect taxes, and the Ministry of MSMEs.
