Govt. introduces a Pre-Packaged Insolvency Resolution Process for Corporate Persons classified as MSME – The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 – 04.04.2021
Preamble of the Ordinance that it is considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs; In order to achieve these objectives, it is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises.
https://ibclaw.in/govt-introduces-a-pre-packaged-insolvency-resolution-process-for-corporate-persons-classified-as-msme-the-insolvency-and-bankruptcy-code-amendment-ordinance-2021-04-04-2021/
[ https://www.moneycontrol.com/news/business/economy/covid-19-impact-government-introduces-ordinance-on-pre-pacs-for-ditressed-msme-firms-under-ibc-6729341.html
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Key Highlights of IBC Ordinance on 04/04/2021 Pre-Packaged IRP for distressed MSMEs under IBC 2016
Objective 1. To ensure quicker, cost-effective and value maximising for all
2. Least disruptive to the continuity of MSME businesses and preservation of the jobs
Key highlights:
1. CG shall notify the minimum amount for initiation of Pre-Packaged IRP, which shall not exceed one crore rupees.
2. New CHAPTER III-A PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS”, which provide for-
a. Eligibility criteria
b. Duties of RP before initiation and after the initiation.
c. Time-limit for completion: Within 120 days from commencement date
d. Creditor- approved resolution plan shall be submitted to AA: within 90 days
e. Procedure for Declaration of moratorium and public announcement during the pre-packaged IRP
f. Conditions subject to which the BOD / partners of CD manage the affairs of the CD as a going concern, exercise and discharge their contractual duties and statutory rights etc.
g. Time limit for Constitution of CoC and their rights including the passing of resolution to vest the management of the CD with the RP, initiation of CIRP. Voting for termination of pre-packaged IRP etc.
h. Procedure for consideration and approval of resolution plan
i. Penal provisions to be levied by the AA on the officer of the CD, on an application by the RP on and after the PP ICD that he/she manages its affairs with the intent to defraud creditors of the CD or for any fraudulent purpose.
[04/04] *Govt. introduces a Pre-Packaged Insolvency* Resolution Process for Corporate Persons classified as MSME – The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 – 04.04.2021
MINISTRY OF LAW AND JUSTICE
(Legislative Department)
New Delhi, the 4th April, 2021/Chaitra 14, 1943 (Saka)
THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2021
NO. 3 OF 2021
Promulgated by the President in the Seventy-second Year of the Republic of India.
An Ordinance further to amend the Insolvency and Bankruptcy Code, 2016.
WHEREAS COVID-19 pandemic has impacted businesses, financial markets and economies all over the world, including India, and has impacted the business operations of micro, small and medium enterprises and exposed many of them to financial distress;
AND WHEREAS the Government has taken several measures to mitigate the distress caused by the pandemic, including increasing the minimum amount of default for
initiation of corporate insolvency resolution process to one crore rupees, and suspending filing of applications for initiation of corporate insolvency resolution process
in respect of the defaults arising during the period of one year beginning from 25th March 2020;
AND WHEREAS such suspension for filing of applications for initiation of corporate insolvency resolution process has ended on 24th March 2021;
AND WHEREAS the country has shown remarkable resilience, be it tackling the pandemic or ensuring economic recovery;
AND WHEREAS micro, small and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population;
AND WHEREAS it is considered necessary to urgently address the specific requirements of micro, small and medium enterprises relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures;
AND WHEREAS it is considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs;
AND WHEREAS in order to achieve these objectives, it is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises;
AND WHEREAS Parliament is not in session and the President is satisfied that circumstances exist which render it necessary for him to take immediate action;
Pre-Packaged Insolvency Resolution Process for MSMEs
The Ordinance still went ahead and provided this exemption to MSMEs applying for pre-pack resolution process, thereby allowing promoters with NPAs to also participate in the resolution process. This, in the authors’ view, is a step forward in realizing the objective of introducing pre-pack insolvency. The idea is to allow the corporate debtors to retain control of the management and to ensure its revival, without having to undergo the lengthy insolvency process under the IBC. By allowing the promoters to remain in control of the resolution process by adopting the pre-pack route, the Ordinance prevents a huge drain in the already limited resources of the corporate debtor, therefore incentivizing the promoters to act in the best interest of the debtor. Considering that most MSME defaults do not meet the current threshold prescribed under the Code, and most resolution applicants are not interested in revival of distressed MSMEs, allowing the promoters of the MSMEs to submit resolution plans would maximize the survival rate of the MSMEs.
https://ibclaw.in/pre-pack-insolvency-resolution-process-for-msmes/ Important Provisions of MSME Pre-packaged Insolvency Resolution Process
Summary of important provisions of pre-packaged Insolvency Ordinance, 2021.
https://ibclaw.in/important-provisions-of-msme-pre-packaged-insolvency-resolution-process/
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: *We examine pre-packs and their impact on the insolvency resolution process*.
The central government has promulgated an ordinance allowing the use of pre-packs as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore, under the Insolvency and Bankruptcy Code.
The move comes soon after the end of a one-year suspension of insolvency initiation imposed by the government in light of the Covid-19 pandemic. The government had last year also increased the minimum default threshold for insolvency proceedings from Rs 1 lakh to Rs 1 crore. We examine pre-packs and their impact on the insolvency resolution process.
What are pre-packs?
A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process. This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade. Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
The approval of a minimum of 66 per cent of financial creditors that are unrelated to the corporate debtor would be required before a resolution plan is submitted to the NCLT. Further NCLTs are also required to either accept or reject any application for a pre-pack insolvency proceeding before considering a petition for a CIRP.
What are the benefits of pre-packs over the Corporate Insolvency Resolution Process (CIRP)?
One of the key criticisms of the CIRP has been the time taken for resolution. At the end of December 2020, over 86 per cent of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold. One of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.
The pre-pack in contrast is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
Another key difference between pre-packs and CIRP is that the existing management retains control in the case of pre-packs while a resolution professional takes control of the debtor as a representative of financial creditors in the case of CIRP. Experts note that this allows for minimal disruption of operations relative to a CIRP.
What is the key motivation behind the introduction of the pre-pack?
According to sources aware of developments, pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors.
“Prepacks will help corporate debtors to enter into consensual restructuring with lenders and address the entire liability side of the company,” said Rajiv Chandak, partner at Deloitte India, noting that the government should consider setting up specific benches of the NCLT to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.
How are creditors protected from misuse by promoters to simply reduce liabilities and retain control?
Experts noted that the pre-pack provisions introduced by the central government also provided for adequate protection to ensure the provisions were not misused by errant promoters. The pre-pack mechanism allows for a swiss challenge for any resolution plans which proved less than full recovery of dues for operational creditors. Under the swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or forego the investment.
“… adopting plan evaluation process akin to Swiss Challenge, it (the pre-pack mechanism) retains competitive tension such that promoters propose plans with least impairment to rights and claims of creditors,” said Soumitra Majumdar, partner at law firm J Sagar Associates adding that the option available to creditors to require the promoters dilute their shareholding in case the resolution plan provides for impairment of claims by creditors would also be a significant deterrent against “unreasonable terms” in resolution plans.
Creditors are also permitted to seek resolution plans from any third party if they are not satisfied with the resolution plan put forth by the promoter.
What next?
The pre-pack is expected to be rolled out to all corporations over time as legal issues around the provisions are settled through case law, according to experts
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