Last year, the Indian government had announced to bring a special insolvency resolution scheme for micro, small and medium enterprises (MSMEs). In line with its announcement, the government has now notified a pre-packaged insolvency resolution framework for the corporate debtors (classified as MSMEs) with a view to provide an efficient alternative insolvency resolution framework. The framework aims at ensuring a quicker and cost-effective resolution while maximising the value for all stakeholders with the least disruption to the business continuity and preserving the employment at the same time.
As per the framework, the corporate debtors (classified as MSMEs) will have an option to initiate the pre-packaged insolvency resolution process (PIRP). The government has set INR 1 million as the minimum threshold for initiation of PIRP. It is pertinent to note that while the suspension of fresh insolvency proceedings is no more in effect, the government has not yet reduced the minimum amount of default (from its current threshold of INR 10 million) for initiating the corporate insolvency resolution process (CIRP). Thus, if a corporate debtor (being MSME) has committed a default of less than INR 10 million but if the amount of default is INR 1 million or more, such corporate debtor can now seek protection under the PIRP framework.
Before filing an application for initiation of the PIRP, the corporate debtor would require prior approval of (a) its members by way of a special resolution (or approval of 3/4th partners in case of limited liability partnership), and (b) its financial creditors (not being its related parties) representing at least 66% in value of the total financial debts. The framework sets out a time period of fourteen (14) days for the adjudicating authority (AA) to either approve or reject an application for commencement of PIRP, and a time line of one hundred and twenty (120) days for completion of PIRP.
Where an application for commencement of PIRP in respect of a corporate debtor is pending with the AA, the framework requires the AA to approve or reject such an application before considering any application for commencement of CIRP in respect of the same corporate debtor. Further, the AA shall be required to first dispose the application for commencement of PIRP if such application is filed within a period of fourteen (14) days of filing of an application for commencement of CIRP.
One important aspect of the framework is that the corporate debtor will be required to provide a base resolution plan to the financial creditors prior to seeking their approval. The corporate debtor has been permitted to submit the base resolution plan either individually or jointly with any other person. In view of this, the framework has made it mandatory for the corporate debtor to be eligible under section 29A of the Insolvency and Bankruptcy Code, 2016 (Code). Within a period of two (2) days of PIRP commencement date, the corporate debtor shall be required to submit the base resolution plan to the resolution professional (RP) who shall present the same to the committee of creditors (CoC).
In case the CoC does not approve the base resolution plan or the base resolution plan does not provide for full payment of confirmed claims of the operational creditors, then the prospective resolution applicants will be given an opportunity to compete with the base resolution plan. However, such resolution applicants would need to comply with section 29A of the Code. If the base resolution plan does not provide for the full payment of the confirmed claims, then the CoC may require the promoters of the corporate debtor to dilute their shareholding or voting rights or control in the corporate debtor.
The framework has envisaged a debtor-in-possession model with supervision rights of the lenders. While the management of the corporate debtor shall continue to vest with its board of directors, the RP shall monitor the management of affairs of the corporate debtor. The framework casts an obligation on the promoters and directors of the corporate debtor to preserve and protect the property of the corporate debtor and manage its operations as a going concern. Prior approval of the CoC (with at least 66% votes) shall be mandatory for certain critical actions set forth in section 28 of the Code. In case of fraudulent conduct or gross mismanagement of the affairs of the corporate debtor during the PIRP period, the AA may order vesting of the management of the corporate debtor with the RP.
If no resolution plan is approved by the CoC within a period of ninety (90) days or if the CoC members at any point of time decide (with at least 66% votes) to terminate the PIRP, then PIRP shall stand terminated with the approval of AA. However, the CoC members may (by a vote of 66% voting shares), at any time after commencement of PIRP, decide to commence CIRP. In such a case, the AA may terminate the PIRP and order for commencement of CIRP in respect of such corporate debtor. The AA may order for liquidation of the corporate debtor if (a) fraudulent conduct or gross mismanagement of its affairs, and (b) PIRP has been terminated by AA on account of the reason that no resolution plan has been approved by the CoC.
While the Indian government increased the minimum amount of default for triggering insolvency proceedings from INR 100,000 to INR 10 million and suspended the fresh insolvency proceedings for a period of one (1) year (which suspension was in effect till 24 March 2021) to provide some respite to the Covid affected industries, the MSME sector was in dire need of a special scheme for insolvency resolution. The pre-pack framework is likely to help the small entities in achieving quicker, amenable and effective restructuring plans so as to resolve financial stress and at the same time, allow the promoters an opportunity to retain the ownership and control of the corporate debtor. The lenders shall also have an option to invite interested bidders (in case the operational debts are not being paid in full by the corporate debtor in the base resolution plan) which may help in value maximisation for all stakeholders. Now, as a next step, the government should come up with a pre-pack framework for non-MSME players also as recommended by the sub-committee of the Insolvency Law Committee.
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