Pre-packaged Insolvency Resolution Process for MSME Corporate Debtors

The Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 has been promulgated by the Central Government to allow pre-packaged insolvency resolution process for corporate debtors classified as micro, small or medium enterprises under the Micro, Small and medium enterprises (“MSME”) under the Micro, Small and Medium Enterprises Development Act, 2006 having default amounting to minimum Rs. 10 Lakhs and not more than Rs. 1 Crore.

It is mentioned in the ordinance that MSMEs are critical for Indians Economy as they are contributing significantly to its gross domestic product and provide employment to a sizeable population and considering the urgency to provide an efficient alternative insolvency resolution process for the MSME, it is considered expedient to introduce a pre-packaged insolvency resolution process for the MSMEs.

• MSME as per the Micro, Small and Medium Enterprises Development Act, 2006: –

Composite Criteria: Investment in Plant & Machinery/equipment and Annual Turnover

What is pre-packaged insolvency resolution process (Pre-pack): –

Pre-packaged Insolvency Resolution Process is newly introduced under the Insolvency and Bankruptcy Code, 2016 (“IBC”) to provide resolution expeditiously against the Corporate Debtor which has committed a default under section 4 of the IBC. Pre-packs are a form of restructuring that allow creditors and debtors to work on an informal plan and then submit it for approval.  In this case, Base Resolution Plan is prepared by the Corporate Debtor first and the same is approved by the Committee of Creditors. In the case of Pre-pack, application is filed by the Corporate Debtor itself after fulfilling the eligibility criteria as given under IBC.

Eligibility Criteria for the Corporate Debtors for filing application for Pre-Pack: –

• Corporate Debtor is classified as MSME
• It has not undergone pre-packaged insolvency resolution process or Completed CIRP during the period of 3 years preceding the initiation date
• It is not undergoing CIRP
• Order for the liquidation is not passed under section 33
• It is eligible to submit resolution plan under section 29A of the IBC
• Special Resolution is passed by the shareholders of the Company in the General Meeting
• Financial Creditors (Not being related party) representing not less than 66% in value of financial debt has proposed the name of the Insolvency Resolution Professional and approved the proposal.

Comparison between CIRP and Pre-pack

Financial Creditors or Operational Creditors filing an application under section 7 or 9 are not allowed to file application for Pre-Pack Insolvency.

Unique Features of the Pre-pack

• Management of Affairs of the corporate debtor shall vest with the Board of Directors.
  • The corporate debtor shall not undertake any of the following actions without obtaining prior approval of the committee, namely –
    • Transaction above a threshold as decided by the committee; and
    • Any other matter as decided by the committee and not covered under section 28 of IBC.

• Pre-packaged insolvency resolution process shall be completed within 120 days from the date of admission of Pre-pack by the Adjudicating Authority i.e NCLT.
• Application for the initiation of Pre-packaged Insolvency Resolution Process can be filed even if Application for initiation of CIRP is filed under section 7,9 and 10 of the IBC.
• Base Resolution plan is prepared by the Corporate Debtor and the same is required to be submitted to the Resolution Professional within 2 days of admission of application and the Resolution Professional shall present it before the Committee of Creditors (COC).
• A resolution plan shall provide for the measures, as may be necessary, for maximisation of value of its assets, including the following: –

• 1. transfer of all or part of the assets of the corporate debtor to one or more persons;
  2. sale of all or part of the assets whether subject to any security interest or not;
  3. restructuring of the corporate debtor, by way of merger, amalgamation and demerger;
  4. the substantial acquisition of shares of the corporate debtor;
  5. cancellation or delisting of any shares of the corporate debtor, if applicable;
  6. satisfaction or modification of any security interest;
  7. curing or waiving of any breach of the terms of any debt due from the corporate debtor;
  8. reduction in the amount payable to the creditors;
  9. extension of a maturity date or a change in interest rate or other terms of a debt due from the corporate debtor;
  10. amendment of the constitutional documents of the corporate debtor;
  11. issuance of securities of the corporate debtor, for cash, property, securities, or in exchange for claims or interests, or other appropriate purposes;
  12. change in portfolio of goods or services produced or rendered by the corporate debtor;
  13. change in technology used by the corporate debtor; and
  14. obtaining necessary approvals from the Central and State Governments and other authorities.

• The amount payable under a resolution plan –

• 1. to the operational creditors shall be paid in priority over financial creditors; and
  2. &to the financial creditors, who have a right to vote under sub-section (2) of section 21 and did not vote in favour of the resolution plan, shall be paid in priority over financial creditors who voted in favour of the plan.

• COC will approve the base resolution plan only if the Claims of Operational Creditors is not impaired.
• In case COC does not approve the base resolution plan or base resolution plan impairs the claims of the operational creditors, Resolution Professional shall invite Resolution Plan from the prospective resolution applicants.
• It is mandatory upon the COC to approve either the Base Resolution Plan or New Resolution plan presented by the Resolution Professional.
• Resolution Plan is required to be approved by the COC within 90 days of admission of application of NCLT. If the COC does not approve the Resolution Plan, Resolution Professional shall file an application for Termination Pre-package Insolvency Resolution Process
• After the submission of the Resolution plan to the NCLT, NCLT is timebound to approve or reject the resolution plan within 30 days.
• Upon the filing of application for termination of Pre-pack, NCLT shall pass order for the liquidation.

Conclusion

Corporate Debtor which is MSMEs might find it difficult to find out the Buyer which will drag out the Corporate Debtor from the Insolvency Proceedings hence and end up going into liquidation. Pre-pack will save this corporate debtor from going into liquidation since the existing management will remain in the Control of the Corporate Debtor and the application for Pre-pack will be filed only after the approval of the resolution plan by the financial creditors.

Though there is a timeline of 120 days for the completion of pre-pack, NCLT still has a role to play in approving the Resolution Plan for the MSME. NCLT must have proper infrastructure so that the pre-packaged insolvency resolution process can be completed within the given timeline.