The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, notified the pre-pack insolvency resolution procedure, which has been the topic of significant discussion since the release of the Insolvency Law Committee’s recommendations on the issue, on April 4, 2021. The prescribed minimum default level of Rs 10 lakh for initiating the procedure would provide substantial assistance to MSMEs by providing them with access to an effective resolution mechanism through the pre-pack process. This would not have been feasible under the Corporate Insolvency Resolution Process due to the raised default threshold of Rs 1 crore (CIRP).
The implementation of the Insolvency and Bankruptcy Code, 2016 (often known as the “IBC”) has resulted in a paradigm shift in India’s business distress resolution system. Sign of relief for the firm, whose future had previously been dependent on a variety of debt restructuring plans undertaken in the past, the failures of which frequently resulted in insolvency or left the companies with unproductive assets whose worth degraded with time. The Pre-pack insolvency resolution method for MSME was created as a result of the rigidity of previous debt restructuring programmes.
And now small and micro businesses can gain benefits from government schemes by joining their business under the new udyam registration portal.
Most companies in the Indian economic environment are led by promoters. Currently, the IBC prohibits the firm’s management from regaining control of the business after being held liable for bringing the company to insolvency. This creates an imbalance problem, which may be successfully countered using Pre-Pack methods.
What is MSME Pre-Pack?
MSME Pre-pack refers to a strategy in which the debtor negotiates with the creditor in order to stay in business and continue its operations. In the event that a business is on the verge of insolvency due to macroeconomic disruptions, it would be a realistic option to allow the promoter to resurrect the company because he is aware with the dynamics and operational challenges.
The pre-Pack scheme, the most recent step in the evolution of the IBC, aims to coordinate various corporate restructuring tools such as asset sale of the debtor to another company, interim financing, refinancing, change in management, before the debtor enters into IBC insolvency proceedings. Avail financial help just by getting udyam registration certificate, finish the online process, apply today and the e-certificate will be emailed.
Instead of a public bidding procedure, a pre-pack envisions the resolution of a troubled company’s debt by a direct arrangement between secured creditors and current owners or outside investors.
Over the last decade, this form of insolvency procedures has grown in popularity as a vehicle for bankruptcy resolution in the United Kingdom and Europe. Under the pre-pack method, financial creditors will reach an agreement with the promoters or a possible investor and apply to the National Company Law Tribunal for approval of the resolution plan (NCLT).
Before a resolution plan may be filed to the NCLT, it must be approved by at least 66% of financial creditors who are unconnected to the corporate debtor. Before considering a petition for a CIRP, the NCLTs must either approve or reject an application for a pre-pack insolvency action.
According to sources familiar with the developments, pre-packs are primarily intended to provide MSMEs with an opportunity to restructure their liabilities and start over with a clean slate while still providing adequate safeguards to ensure that the system is not abused by firms to avoid making payments to creditors.
At the moment, only corporate debtors can begin a PIRP after receiving the consent of 66% of their creditors.
However, the pre-pack process allows for a “Swiss challenge” to any resolution plan that offers less than full recovery of dues for operating creditors.
Under the Swiss challenge process, any third party may propose a resolution plan for the struggling firm, and the initial applicant would be required to either match the improved resolution plan or forfeit the investment.
The interim report prepared by the Bankruptcy Law Reform Committee in February 2015 discussed the feasibility of the aforementioned scheme and suggested that such schemes are less effective for insolvency resolution because the Indian market lacks the infrastructure to allow ‘out of court’ restructuring without court intervention. However, the GOI and the relevant regulator (IBBI) investigated the plan, particularly in light of the Covid-19 outbreak, which was highlighted in the report but the ILC Sub-Committee on Pre-Packaged Insolvency Resolution Process on October 10, 2020.
In the recent past, shortly after the end of the GOI’s one-year suspension of insolvency imposed in the aftermath of the Covid-19 Pandemic on April 4, 2021, the Central Ministry enacted an ordinance to implement pre-packaged insolvency for entities classified as MSME with defaults of up to Rs 1 crore under the IBC.
The stated Ordinance emphasised the urgency and necessity of such an action because to the numerous economic challenges experienced during the epidemic.
The economies are struggling to stay afloat in the face of rising corporate and individual insolvencies caused by the Covid-19 epidemic. The IMF and World Bank have proposed a slew of policies, to be implemented in three stages, to help the economy shift smoothly to the productive side of the graph.
Various interim actions must be implemented in the initial phase to prevent bankruptcy and debt enforcement endeavours. In the second phase, when a large wave of insolvencies is expected, traditional methods, such as out-of-court exercises to ‘flatten the curve’ of insolvencies, may be used to handle it.
The third step is for traditional debt resolution techniques to address the remaining overhang and assure medium-term economic development.
In response, the Government of India has implemented particular steps such as;
To protect the interests of MSMEs from insolvency procedures, the GOI increased the default ceiling for filing an insolvency application from Rs 1,00,000 to Rs 1 crore.
The Ordinance’s Key Points
According to the Ordinance issued on April 4, 2021, a new chapter, Chapter IIIA, has been added to the IBC to address issues relating to the pre-packaged bankruptcy resolution procedure.
An application for the commencement of pre-packaged insolvency resolution can be submitted by a Corporate Applicant before the Adjudicating Authority pertaining to a Corporate Debtor classed as MSME, subject to numerous requirements as provided in Section 54a. The Pre-pack Insolvency rules shall not apply if an application under Section 7, 9, or 10 of the IBC has been made and is pending as of the date of said Ordinance, 2021.
If an application for the beginning of the insolvency resolution procedure is delayed due to Section 54C, the Adjudicating Authority shall accept or revoke Section 54C on priority before considering any application submitted under Sections 7, 9, or 10 of the IBC.
If an application under section 54C is filed within 14 days of any application under sections 7, 9, or 10 that is awaiting approval, the Adjudicating Authority should cancel the application under section 54C. If an application under Section 54C is filed more than 14 days after the filing of any application under Sections 7, 9, or 10 of the IBC, the Adjudicating Authority will cancel the said application under Sections 7, 9, or 10 of the IBC.
The Corporate Debtor must get 66 percent approval from the respective Financial Creditors, who are not its connected parities, for application filling relating to pre-pack insolvency procedure, such as form as may be asked. The Pre-Pack insolvency process has a 120-day competition period from the date of filing.
The relevant body has 14 days from the date of receipt to accept or reject the application. However, before cancelling the application, the Adjudicating Authority informs the applicant through notification that the inaccuracy in the application must be corrected within seven days.
According to section 14 of the IBC, the moratorium must apply mutatis mutandis to the pre-pack insolvency procedure for MSME. The Moratorium will be available from the start of the pre-pack procedure until the process is completed.
Unlike the normal Corporate Insolvency Resolution Procedure, the corporate debtor’s existing promoters and management maintain possession and control during the pre-pack procedure. If management’s base resolution plan is not sanctioned or does not provide for full payment of genuine claims, the Resolution official shall force the Resolution Applicant to submit a resolution plan or compete with a base resolution plan.
Section 61(3) of the IBC allows for an appeal against the judgement authorising the pre-pack settlement process. With a vote percentage of 66 percent, the Committee of Creditors may agree to initiate a Corporate Insolvency Resolution Process involving Corporate Debtor after the pre-pack commencement date but before the sanctioning of resolution plan u/s 54K of the IBC.
In the event of any criminal behaviour by the organisation and/or severe mismanagement, as well as the revocation of the pre-pack insolvency procedure, the Adjudicating Authority may issue a liquidation judgement. Businesses should register under the MSME Department online and download udyam certificate.
Bottom-line
The introduction of Pre-Pack bankruptcy for small businesses has enhanced our country’s Insolvency Resolution Framework. Its purpose is to advocate for the IBC aims in order to achieve a smooth resolution of the troubled firm.
While the pre-pack is now only available to small businesses, the GOI intends to make it available to larger corporations as well. While outlining the pre-pack plan for other corporations, the benefits and downsides of the MSME pre-pack should be considered.
Unlike the insolvency procedure mentioned in the IBC, the promoter will continue to run the firm throughout the msme pre-pack discussion. And if they are unable to provide the necessary data pertaining to the scheme and asset value to the creditors, the pre-packs will fail to perform their function.
Because this arrangement usually involves working with the company’s management, it prioritises the interests of creditors and debtors over operational creditors. As a result, the effectiveness of the pre-pack is strongly related to the roles played by process participants—Management, Resolution professional, financial creditor, and Adjudicating Authority.
To accomplish the goal of adopting pre-pack resolution at the primary stage with value maximisation, the whole economic landscape of both the firm and creditors must be harmonised. Throughout the process, the msme pre-pack must include checks and balances. The asymmetry of detail necessitates complete disclosure, with severe consequences for intentional denial.
The linked party and the alienation of assets at reduced prices necessitate the resolution expert’s best efforts to address the probable obstacles. However, given the nature of pre-packs, the same can be a feasible instrument for creditors to use in resolving fiscal difficulties of organisations, particularly group corporations, through a uniform approach.
