Troubled MSMEs thrown a lifeline with pre-pack resolutions

India Business Law Journal | 25th May, 2021

The long-awaited Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, (ordinance) has amended the Insolvency and Bankruptcy Code, 2016 (code), with the aim of reviving micro, small and medium enterprises (MSME). The ordinance has inserted section 54A into the code, which makes available pre-packaged insolvency resolution processes (PPIRP) for stressed MSME corporate debtors.

Satish Anand Sharma
Senior associate
SNG & Partners

For a minimum default of ₹1 million (US$13,500), the MSME corporate debtor may apply for a PPIRP with the approval of unrelated financial creditors having no less than 66% of the debt by value. The PPIRP is to be completed with a stringent timeline of 120 days and a moratorium shall apply. This differs from corporate insolvency resolution processes (CIRP) under chapter II, which can also be filed by financial or operational creditors. Under PPIRPs, unrelated financial creditors, with no less than 66% of the debt by value, appoint an insolvency professional as the resolution professional. Before making the application, the corporate debtor must submit the financial creditors’ required information such as a base resolution plan, a declaration on avoidance transactions and the special resolution passed by its shareholders.

The roles of the resolution professional, the committee of creditors (CoC) and the directors or partners of a corporate debtor under a PPIRP differ significantly from those in a CIRP. Under PPIRPs, the resolution professional monitors the management of the affairs of the corporate debtor, and attends meetings of the directors and of the CoC. In the event of a breach of obligations by the directors, the resolution professional shall inform the CoC of such breach. The resolution professional is the one to apply to the adjudicating authority (AA) to avoid any fraudulent or wrongful trading transactions.

During PPIRPs, management of the corporate debtor remains with the directors/partners, who shall endeavour to preserve the value of corporate debtor, to manage its operations as an ongoing concern and to discharge their contractual and statutory duties. Unlike a CIRP, the powers of the directors, and the management of the corporate debtor do not vest in the resolution professional except with the approval of the AA. Where there is gross mismanagement or fraudulent conduct, the CoC may resolve to vest the management in the resolution professional, who shall seek the approval of the AA.

Anshita Gupta
SNG & Partners

Under PPIRPs, the corporate debtor shall submit a base resolution plan to the CoC. The CoC may approve the said plan, provided that it does not entail a haircut for any claims owed to operational creditors. If the CoC does not approve the base resolution plan or if it reduces any claims owed to the operational creditors, the resolution professional must invite resolution plans from prospective resolution applicants and submit them to the CoC. The CoC selects one and may approve it if it is significantly better than the base resolution plan. Otherwise, the selected plan has to compete with the base resolution plan. The CoC may approve the better resolution plan for submission to the AA, but if it does not approve either plan within 90 days, the resolution professional shall file with the AA an application to terminate the PPIRP.

If the base resolution plan impairs any claim owed by the corporate debtor, the CoC may require the promoters of the corporate debtor to dilute their shareholding or voting or control rights. It is an impairment of claims where the resolution plan does not provide for the full payment of the confirmed claims in accordance with the list of claims maintained by the resolution professional. However, there are no restrictions on making scattered payments to creditors under the base resolution plan.

If the AA has ordered the management of the corporate debtor to vest in the resolution professional, but the resolution plan approved by CoC does not result in a change in the management or control of the corporate debtor, the AA shall reject such resolution plan, terminate the PPIRP and liquidate the corporate debtor. If, before the approval of a resolution plan by the CoC, the resolution professional informs the AA that the CoC has resolved to terminate the PPIRP or to initiate a CIRP, the AA shall terminate the PPIRP and liquidate the corporate debtor or initiate a CIRP.

The ordinance tries to give a reprieve to the MSME sector, which has been hardest hit by the pandemic. Whether the reform rescues or sinks MSMEs will only be known once a number of them have undergone the process.