IBC Amendment 2021: A Bliss for MSMEs

Introduction

The President of India, Shri. Ram Nath Kovind, on April 4, 2021, promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. The said ordinance aims at amending the Insolvency and Bankruptcy Code, 2016, so as to make it more accommodating, cost-effective and hassle free for small businesses in the form of MSMEs (MSME full form is Micro, Small and Medium Enterprises).

A new chapter III A, which deals with pre-packaged insolvency resolution processes, has been added. According to the Ordinance, “an application for initiating a pre-packaged insolvency resolution process may be made in respect of a corporate debtor classified as a micro, small, or medium enterprise under sub-section (1) of section 7 of the Micro, Small, and Medium Enterprises Development Act, 2006.”

The bill offers pre-packaged resolution framework for stressed MSME businesses under the Code, having defaults of not more than Rupees One Crore. This pre-packaged resolution will allow efficient alternative insolvency process for the identified business in a manner that will maximize value for all stakeholders, preserves jobs and ensures least disruptions to the continuity of the business.

What is the Pre-Packaged Framework?

A Pre-Packaged insolvency framework, or more commonly known as a pre-pack is a system that allows debtors and creditors to come to an informal arrangement and prepare an insolvency plan before hand and submit it for approval. This method helps alleviate the stress of the corporate debtor by easing the process of corporate liquidation and insolvency. This is because the arrangement between the secured creditors and investors of the distressed company to form a consensual restructuring process saves time and is void of judicial intervention. It gives the parties a chance to mutually negotiate the terms and conditions and lay the future course of action and only involve the tribunal for approval and enforcement. This hybrid method allows for the company to skip the public biding process and facilitates greater cooperation and better business control.

Framework’s Informal Stage

The Indian pre-pack framework, according to the report, should combine the ‘best of both worlds’ by integrating aspects like speed, efficiency, and flexibility of an informal process with the binding effects and structure of a formal process. In order to achieve this goal, the Prepack Framework envisions the completion of certain actions prior to formally filing an application  for the start of the pre-packaged insolvency resolution process (“PP-IRP”), allowing the majority of the time to be spent outside of the formal process. These actions are like:

Actions by the Corporate Debtor – A special resolution must be passed by the members of the corporate debtor, or at least three-fourths of the total number of partners of the corporate debtor, as the case may be, sanctioning the filing of the Application (Resolution). This differs from the Report’s recommendation of a simple majority vote of the corporate debtor’s members. For the bankruptcy resolution of the corporate debtor, the corporate debtor must produce a “base resolution plan” (Base Resolution Plan). The provisions of Sections 30(1) and 30(2) of the IBC must be followed in the Base Resolution Plan. The majority of the corporate debtor’s directors or partners, as the case may be, shall sign a Declaration indicating, among other things:

• Within 90 days of receiving the Application, the corporate debtor must file it
• The name of the resolution professional who has been suggested and whose appointment has been approved
• The Prepack is not being launched with the intention of defrauding anyone
• Completion of the nomination process

Approvals taken by unrelated financial creditors –  The Prepack Framework states that a conference of financing creditors must be convened by the corporate debtor of financial creditors of a corporate debtor that are not the corporate debtor’s related parties, notified at least five days before the date of the meeting, except if the Unrelated FCs have agreed a shorter time. The corporate debtor is required to obtain the following approvals:

• The FC’s which are not linked to the financial debt due to such creditors represent not less than 66 % shall approve the submission of the application. The corporate debtor must submit  (a) resolution, (b) declaration and (c) base resolution plan for the Inter-Related FCs before requesting such an approval
• Unrelated FCs with a weighted voting share of at least 66 % of the total financial debt of such creditors should propose the name of an insolvency professional to be appointed as the resolution professional for the Prepack, and the said person should be approved by the Unrelated FCs with not less than 10% of the total financial debt of such creditors.

Framework’s Formal Stage

Following the completion of the informal procedure outlined above, an application for the formal beginning of a Prepack may be filed with the appropriate Adjudicating Authority in connection to a corporate debtor if the following requirements are met:

• corporate debtor is an MSME
• The De Minimus Threshold is met by the default
• All of the steps outlined above that must be accomplished during the Informal Phase are performed
• During the three  years preceding the date of beginning of Prepack or completion of CIRP, the corporate debtor has not undergone Prepack or completed CIRP, as the case may be (3 Year Period). It’s worth noting that the 3 Year Period appears to be measured from the hypothetical date on which the Prepack would be launched if the Application is allowed, rather than the date on which the Application is filed, according to the wording of the Ordinance.
• As of the date of filing the application, the corporate debtor is not undergoing CIRP

The Adjudicating Authority has not issued an order under Section 33 of the IBC ordering the liquidation of the corporate debtor in concern and Section 29A of the IBC allows the corporate debtor to submit a settlement plan.

 PPIRP Benefits

• PPIRP is quicker than CIRP
• It is Cost-effective because less time and numerous measures are done toward settlement before proceeding to the Adjudicating Authority, the amount of money spent is likewise lower
• The Corporate Debtor’s management remains in the hands of the Corporate Debtor’s Board of Directors. As a result, the CD operation is easy
• In the PPIRP, there is less judicial intrusion

Who can apply for PPIRP?

1. It is available to Micro, Small and Medium Enterprises(MSME’s) with a minimum default threshold of Rs. 10 Lakhs and a maximum of Rs. 10 Crore.
2. Unlike CIRP, it can only be availed by the corporate debtor.
3. The company should not have undergone, applied for or completed PPIRP or CIRP in the preceding three years.
4. There is no standing or past order with regards to liquidation of the corporate debtor.
5. The corporate debtor is eligible as per standards of Section 29 of IBC.
6. Not less than 66% of corporate creditors, not being related parties, have given approval to the PPIRP proposal and have also proposed a name for insolvency professional.
7. A special resolution has been passed approving the filing of an application for initiating the PPIRP.

The pre-packaged insolvency resolution process must be completed within 120 days from the date of commencement of process. The resolution professional must file the resolution plan before the adjudicatory authority within the first ninety days and the authority must give its decision and approve the proposal within the remaining thirty days.

Upon commencement, the adjudicatory authority will declare a moratorium for the corporate debtor, appoint the resolution professional and make a public announcement with respect to the commencement of PPIRP. The process thereafter is almost identical to that of CIRP, with the resolution professional having several powers, formation of the committee of creditors and the submission of a resolution plan.

However, during the PPIRP, the management of the company will vest with the Board of Directors, subject to certain conditions.

All and above, the pre-packaged insolvency resolution process is attractive because it is much more cost-effective, speedy and efficient than the traditional Corporate Insolvency Resolution Process (CIRP), which is time consuming and is riddled with compliances and prone to delays.

Conclusion

 The government intends to investigate alternatives to the traditional corporate bankruptcy resolution procedure with the introduction of pre-packaged insolvency resolution. Given the particular character of MSMEs’ businesses and MSMEs’ importance to India’s economic growth, the IBC Ordinance 2021 places a specific emphasis on their rehabilitation. Recognizing that MSME businesses lack the resources to withstand protracted stress, the PPIRP strives to provide a semi-formal settlement method with the least amount of fees, delays, and conflicts. The pre-packaged procedure, in all aspects, offers a more mature and stronger insolvency procedure.

References

1. THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2021
2. https://economictimes.indiatimes.com/small-biz/legal/centre-promulgates-ibc-amendment-ordinance-to-allow-pre-packaged-insolvency-for-msmes/articleshow/81909630.cms
3. https://www.mondaq.com/india/insolvencybankruptcy/1067642/pre-packaged-insolvency-resolution-process-under-the-insolvency-and-bankruptcy-code?type=mondaqai&score=79
4. https://www.mondaq.com/india/insolvencybankruptcy/1057918/pre-packaged-insolvency-for-msmes