Govt amends insolvency law; introduces pre-packaged resolution for MSMEs

Seeking to provide a quicker and value-maximising outcome for stressed MSMEs, the government has introduced a pre-packaged resolution process for such enterprises by amending the insolvency law.

Now, Micro, Small and Medium Enterprises (MSMEs) can seek resolution for their stress through the pre-packaged process under the Insolvency and Bankruptcy Code (IBC).

An ordinance was promulgated to amend the IBC on April 4.

Many MSMEs have been impacted by the coronavirus pandemic and experts opined that the latest amendment, which comes less than two weeks after the suspension of certain IBC provisions ended, is a welcome move.

The suspension -- wherein fresh insolvency proceedings were not allowed for a year starting from March 25, 2020 -- was implemented amid the coronavirus pandemic disrupting economic activities.

According to the ordinance -- whereby the pre-packaged resolution process has been introduced -- it is 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.

Generally, under a pre-packaged process, main stakeholders such as creditors and shareholders come together to identify a prospective buyer and negotiate a resolution plan before submitting the plan to NCLT for formal approval.

All resolution plans under the IBC need to be approved by the National Company Law Tribunal (NCLT).

As per the ordinance, it is considered expedient to provide an efficient alternative insolvency resolution process MSMEs to ensure a quicker, cost-effective and value maximising outcome for all 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," it added.

Soumitra Majumdar, Partner at J Sagar Associates, said the IBC Amendment Ordinance 2021 makes available the pre-packaged route to genuine and viable cases, to ensure least business disruption.

"While modelled on 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," Majumdar noted.

L Viswanathan, Partner at Cyril Amarchand Mangaldas, said the government has cautiously introduced the pre-pack regime only for the MSME sector at this point of time, which is welcome.

"The pre-pack regime comes with procedural checks and balances including applicability of Section 29 A and two-third creditors' consent for both initiation and approval of the base resolution plan.

"Participation of eligible existing promoters is encouraged with the board continuing in control and the debtor proposing the base resolution plan," he added.

Broadly, Section 29 of the IBC seeks to prevent defaulting promoters from taking back their companies under the resolution process.

He also said the creditors' committee can convert the pre-pack process to the usual corporate insolvency resolution process by 66 per cent majority at any time, or require the board to cease control through intervention of the NCLT in case of fraud or mismanagement by the existing management.

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 MSMEs by introduction of a new chapter in the statute.

This is certainly a welcome step although it was hoped that such a framework will be made available to non-MSMEs as well, Misha added.

Rajiv Chandak, Partner at Deloitte India, said the introduction of pre-pack framework was supposed to coincide with lifting moratorium on filing fresh cases of insolvency.

"Pre-packs will help corporate debtors to enter into consensual restructuring with lenders and address entire liability side of the company. Government needs to further augment the NCLT's infrastructure so that pre-packs can be implemented in time-bound manner," he said.

During the one-year suspension period starting from March 25, 2020, Sections 7, 9 and 10 of the IBC were suspended to provide relief for companies hit by the pandemic.

Sections 7, 9 and 10 deal with initiation of corporate insolvency resolution process by a financial creditor, operational creditor and corporate debtor, respectively.