The Pre-Packaged Insolvency Process For MSMEs

The Central Government on 4th April 2021 notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (“Ordinance“). The Ordinance provides for a pre packaged insolvency process for micro, small and medium enterprises (“MSMEs“).

The Central Government has noted that the COVID-19 pandemic has impacted businesses, financial markets and economies all over the world, including India, and has impacted the business operations of MSMEs and exposed many of them to financial distress. The Central Government had suspended the filing of fresh applications for the initiation of the corporate insolvency resolution process in respect of defaults arising during the period of one year from 25th March 2020 and had also increased the minimum amount of default for initiation of corporate insolvency resolution process to one crore rupees. MSMEs are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population. It was therefore considered necessary to urgently address the specific requirements of MSMEs relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures.

The Central Government has vide the Ordinance introduced a pre-packaged insolvency process for MSMEs. The Central Government may specify a minimum amount of default which shall not be higher than 1 crore for matters relating to the pre-packaged insolvency resolution process of  MSMEs.

The Ordinance provides for a new Chapter III-A in the Insolvency and Bankruptcy Code, 2016 (“IBC“) which provides for a pre-packaged insolvency resolution process. It is important to note that the pre-packaged insolvency process under Chapter III-A  can only be availed off by corporate debtors falling within the ambit of the definition of “MSME” under the Micro, Small and Medium Enterprises Development Act, 2006.

The Ordinance does not define what a pre-packaged insolvency process means. However, the process provided by the Ordinance contemplates a plan worked out by a creditor and a debtor which is subsequently approved by the National Company Law Tribunal. The pre-packaged insolvency process involves the appointment of an insolvency professional as the resolution professional.

Section 54A(2) further lays down the conditions which have to be fulfilled for a corporate debtor to file an application to initiate the pre-packaged insolvency process. These conditions are:

(a) it has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process, as the case may be, during the period of three years preceding the initiation date;

(b) it is not undergoing a corporate insolvency resolution process;

(c) no order requiring it to be liquidated is passed under section 33;

(d) it is eligible to submit a resolution plan under section 29A;

(e) the financial creditors of the corporate debtor, not being its related parties, representing such number and such manner as may be specified, have proposed the name of the insolvency professional to be appointed as resolution professional for conducting the pre-packaged insolvency resolution process of the corporate debtor,

(f) the financial creditors of the corporate debtor, not being its related parties, representing not less than sixty-six per cent. in value of the financial debt due to such creditors, have approved such proposal in such form as may be specified;

(g) the majority of the directors or partners of the corporate debtor, as the case may be, have made a declaration, in such form as may be specified,

(g) the members of the corporate debtor have passed a special resolution, or at least three-fourth of the total number of partners, as the case may be, of the corporate debtor have passed a resolution, approving the filing of an application for initiating pre-packaged insolvency resolution process.

Once the corporate debtor fulfils the conditions specified in Section 54A, it may file an application with the NCLT for initiating the pre-packaged insolvency resolution process along with the specified documentation. The Adjudicating Authority shall within 14 days of receipt of the application either admit the application or reject the application. The pre-packaged insolvency resolution process shall commence from the date of admission of the application. The process shall be completed within a period of 120 days from the pre-packaged insolvency commencement date.

Under Section 54F(1) the resolution professional is vested with the responsibility to conduct the pre-packaged insolvency resolution process. Section 54F(2) vests numerous powers and duties in the resolution professional to conduct the pre-packaged insolvency resolution process. The resolution professional shall  work with the corporate debtor who shall provide a base plan for resolution. The resolution professional shall also consult with a committee of creditors of the corporate debtor on the base plan and subsequent resolution plans. Only once the resolution plan is approved by the committee of creditors, can application be made to the NCLT to approve the resolution plan.

If the NCLT is satisfied that the resolution plan has been approved by the committee of creditors  of the corporate debtor and  meets the requirements of Section 30(2) of the IBC, it shall, within thirty days of the receipt of such resolution plan, by order approve the resolution plan.

The NCLT before passing an order for approval of a resolution plan Shall satisfy itself that the resolution plan has provisions for its effective implementation. An appeal against an order of the NCLT will lie to the National Company Law Appellate Tribunal (NCLAT).

Conclusion:

The pre-packaged insolvency resolution process is a proactive step in ensuring the speedy and quick insolvency resolution for MSMEs. MSMEs constitute the backbone of the Indian economy and it is commendable that the ordinance was notified keeping the MSMEs in mind. As with any regulations only time will tell us about the effectiveness of Chapter III-A.


Article by Mini Raman, 1st published in Mondaq

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