## Policy Summary: Protection of MSME Creditors in the Insolvency and Bankruptcy Code (IBC) Process
This document summarizes the Indian government's response to concerns regarding the protection of Micro, Small, and Medium Enterprise (MSME) creditors within the National Company Law Tribunal (NCLT) process under the Insolvency and Bankruptcy Code (IBC), 2016. Specifically, it addresses questions raised in Lok Sabha Unstarred Question No. 1274, answered on July 28, 2025, regarding the composition of the Committee of Creditors (CoC) and the interests of MSME creditors.
The response clarifies the following key points:
* **CoC Composition:** Section 21 of the IBC stipulates that the CoC comprises all unrelated Financial Creditors (FCs) of the Corporate Debtor (CD). Operational Creditors (OCs) can be invited to CoC meetings if their aggregate dues are not less than 10% of the total debt, as per Section 24(3) of the Code, but they do not have voting rights. However, if a CD has no financial debt or all FCs are related parties, the CoC will consist of the eighteen largest OCs by value, or all OCs if their number is less than eighteen.
* **Protection of MSME Interests:** The IBC aims to balance the interests of all stakeholders, including MSMEs. Key provisions protecting OCs, including MSMEs, are:
* **Right to Initiate CIRP:** Section 9 grants OCs the right to initiate Corporate Insolvency Resolution Process (CIRP) against CDs.
* **Minimum Entitlement:** The Code guarantees OCs a minimum entitlement in the resolution plan, ensuring they receive at least what they would have received in liquidation under Section 53.
* **Representation in CoC:** As detailed above, OCs can be part of the CoC under specific circumstances where financial creditors are absent or related parties.
* **Pre-Packaged Insolvency Resolution Process (PPIRP):** The sixth amendment in 2021 introduced PPIRP specifically for corporate MSMEs to expedite resolution. Furthermore, clauses c and h of Section 29A, which restrict certain individuals from submitting resolution plans, do not apply to MSMEs in the PPIRP framework.
Key Entities Referenced
Ministry of Corporate Affairs: The Indian government ministry responsible for corporate affairs.
Lok Sabha: The lower house of the Parliament of India.
MSME: Micro, Small and Medium Enterprises. These are businesses that are classified based on their investment and turnover.
NCLT: National Company Law Tribunal. It is a quasi-judicial body in India that adjudicates issues relating to Indian companies.
Committee of Creditors: A committee consisting of the financial creditors of a corporate debtor, formed during the corporate insolvency resolution process.
Insolvency and Bankruptcy Code, 2016: An act of the Parliament of India which consolidates the law relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner.
Corporate Debtor: A corporate entity that owes a debt to creditors.
Pre-Packaged Insolvency Resolution Process: An alternative insolvency resolution process for corporate MSMEs in India.
GOVERNMENT OF INDIA
MINISTRY OF CORPORATE AFFAIRS
LOK SABHA
UNSTARRED QUESTION NO. 1274
ANSWERED ON MONDAY THE 28TH JULY, 2025/ SRAVANA 6, 1947 (SAKA)
PROTECTION OF MSME CREDITORS
QUESTION
1274. MS MAHUA MOITRA:
Will the Minister of CORPORATE AFFAIRS be pleased to state:
(a) whether in the NCLT process currently, the CoC (Committee of Creditors)
consists of only term debt or senior debt holders for resolution;
(b) whether there is no mandate for representation of operational creditors on the
CoC;
(c) whether the MSME creditors do not get anything in resolution process and suffer
the most; and
(d) the steps taken by the Government to protect the interests of MSME creditors
who are hit hardest in IBC proceedings?
ANSWER
MINISTER OF STATE IN THE MINISTRY OF CORPORATE AFFAIRS AND MINISTER
OF STATE IN THE MINISTRY OF ROAD TRANSPORT AND HIGHWAYS
[HARSH MALHOTRA]
(a): Section 21 of the Insolvency and Bankruptcy Code, 2016 (Code/ IBC) provides
that the Committee of Creditors (CoC) shall comprise all unrelated Financial
Creditors (FCs) of the Corporate Debtor (CD).
(b): Section 24(3) of the Code provides that Operational Creditors (OCs) or their
representatives may be invited to attend CoC meetings where the aggregate dues
owed to them constitute not less than 10% of the total debt. However, such OCs
shall not have any right to vote in the meetings of the CoC.
(c) & (d): The Code aims to balance the interests of all stakeholders. It provides
protection and rights to operational creditors, including MSMEs, ensuring fair
treatment throughout the CIRP. The salient provisions in this regard are as follows:
(i) Right to Initiate CIRP: Section 9 of the Code provides operational creditors
with the statutory right to initiate insolvency proceedings against CDs.(ii) Minimum Entitlement: The Code provides for minimum entitlement for OCs
under the resolution plan such that payment to OCs is not less than what
they would receive in liquidation under Section 53.
(iii) Representation in CoC: Under Section 21 of the Code, the CoC comprises of
all unrelated FCs of the CD. However, where the CD does not have any
financial debt, or where all its FCs are related parties, the CoC shall comprise
of the eighteen largest OCs by value, provided that if the number of OCs is
less than eighteen, the CoC shall include all such OCs.
(iv) Through the sixth amendment (2021) to the Code, the Pre-Packaged
Insolvency Resolution Process (PPIRP) was introduced for corporate MSMEs
to fast-track resolution of cases. Provisions of clauses (c) and (h) of Section
29A of the Code, which restricts certain individuals from submitting
resolution plans, do not apply to MSMEs.
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