Insolvency Code Amendment Ordinance by Centre Allowing Pre-packaged Insolvency Process for MSMEs
The Central Government has circulated Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 (IBC Ordinance) permitting pre-packaged insolvency resolution process for corporate debtors that are micro, small or medium enterprises (MSMEs) under the Micro, Small and Medium Enterprises Development Act, 2006 (MSMEs Act).
The ordinance circulated by the Government amends the IBC allowing the Union to notify the pre-packaged process for defaults up to Rs 1 crore. On 24 March 2020, due to the pandemic, the Union Government had suspended the initiation of a fresh insolvency process. The suspension was extended from time to time and it ended on 24 March 2021.
The ordinance allows the pre-packaged insolvency process to ensure quicker, cost-effective, and value-maximizing outcomes for all the stakeholders, in a manner that is least disruptive to the continuity of their businesses and which preserves jobs.
This insolvency process is an informal plan that allows the approval of plans by the National Company Law Tribunals (NCLTs). The ordinance has introduced a separate chapter, Chapter IIIA, to the principal Act. It deals with the pre- packaged insolvency resolution process.
The following conditions are inserted for initiating the pre-packaged insolvency resolution process of a corporate debtor-
(a) The corporate debtor has not undergone the pre-packaged insolvency resolution process or completed corporate insolvency resolution process (CIRP), during three years preceding the initiation date;
(b) It is not undergoing the CIRP;
(c) No order is passed against the corporate debtor for its liquidation 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 should not have proposed the name of the insolvency professional who is to be appointed as the 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 60 percent in value of the financial debt due to such creditors, have approved such proposal in such form as may be specified:
There is a proviso that if the corporate debtor has no financial creditors, not being its related parties, the proposal and approval under this clause shall be provided by such persons as may be specified;
(f) The partners/ directors of the corporate debtor have to make a declaration in the prescribed form-
The corporate debtor has to file an application for initiation of the pre-packaged insolvency resolution process within 90 days;
The pre-packaged insolvency resolution process is not being initiated to defraud any person; and
The name of the insolvency professional proposed and approved to be appointed as resolution professional under clause (e).
(g) A special resolution should be passed by the members of the corporate or at least ¾th of the total number of partners of the corporate debtors (as the case may be) should have passed a resolution. The resolution should be passed approving the filing of an application for initiating pre-packaged insolvency resolution process.
Approval shall be taken from the financial creditors who are not the related parties of the corporate debtor, representing not less than 60 percent in value of the financial debt due to such creditors, for the filing of an application for initiating the pre-packaged insolvency resolution process.
The pre-packaged insolvency resolution process shall be completed within 120 days from the pre-packaged insolvency commencement date. The moratorium shall be available from the pre-pack commencement date till the closure of the process, whether by approval of the resolution plan or otherwise.
The ordinance further provides that the corporate debtor shall remain under the control and possession of the current promoters and management during the pre-pack process.
Appeals are allowed against an order approving the pre-packaged resolution plan on the grounds laid down under Section 61(3) of the Code of 2016.