Centre promulgates IBC amendment ordinance to allow pre-packaged insolvency for MSMEs

The Central Government has promulgated Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 to allow pre-packaged insolvency process for MSMEs.

The Ordinance, in essence, has amended the Insolvency and Bankruptcy Code 2016 and allows the Central Government to notify such pre packaged process for defaults of not more than Rs 1 crore.

The government had been looking to offer a pre-packaged resolution framework for stressed companies under the IBC. A pre-packaged resolution essentially translates to a company preparing a restructuring plan with its creditors before initiating insolvency proceedings. This helps to cut down the time and costs in the overall process.

Soumitra Majumdar, Partner, J Sagar Associates says The IBC Amendment Ordinance 2021 makes available the pre-packaged route to genuine and viable cases, to ensure least business disruption. “While modelled on a debtor-in-possession approach, it vests significant consent rights to the financial creditors, such that the mechanism cannot be misused by errant promoters. Further, adopting the plan evaluation process akin to Swiss Challenge, it retains competitive tension such that promoters propose plans with least impairment to rights and claims of creditors,” he says.

A new chapter III A has been inserted that deals with pre-packaged insolvency resolution process. “An application for initiating 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 Ordinance stated.

It also said that an application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor, keeping the following conditions in mind:

• 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;
• It is not undergoing a corporate insolvency resolution process;
• No order requiring it to be liquidated is passed under section 33;
• It is eligible to submit a resolution plan under section 29A;
• 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, and 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.
• 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,
• 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 has passed a resolution, approving the filing of an application for initiating pre-packaged insolvency resolution process.

Misha, Partner at Shardul Amarchand Mangaldas & Co, said, "The intent of the government appears to be to provide for an alternative and efficient resolution mechanism especially for MSME’s by introduction of a new chapter in the statute. This is a welcome step although it was hoped that such a framework available to non-MSME’s as well. The framework of chapter does not reduce the role and involvement of NCLT’s very significantly - it is hoped that given that this process can be initiated only by the companies with consent of 66% of its unrelated financial creditors, the disputes are minimal allowing the process to run more efficiently than the normal CIRP."

In June 2020, the government promulgated an ordinance that suspended initiation of new insolvency proceedings for defaults. This came into effect from March 25 - the date when the nationwide lockdown commenced. The suspension of proceedings, which was initially for six months, was extended twice for three months each.

Rajiv Chandak, Partner, Deloitte India, said, "The introduction of prepack framework was supposed to coincide with lifting moratorium on filing fresh cases of Insolvency. Currently, the government has restricted prepacks provisions for MSME and will extend to other Corporates in sometime. Prepacks will help corporate debtors to enter into consensual restructuring with lenders and address entire liability side of the Company. The government needs to further augment the NCLT’s infrastructure so that prepacks can be implemented in time bound manner. It may consider setting up specific benches looking at Prepack and Insolvency above certain size to expedite resolution of large cases in timebound manner."