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16 April 2021

Pre-Packaged Insolvency

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The Government on April 4, 2021 notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 ("IBC Ordinance, 2021") amending the Insolvency and Bankruptcy Code, 2016 ("IBC")...
India Insolvency/Bankruptcy/Re-Structuring
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The Government on April 4, 2021 notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 ("IBC Ordinance, 2021") amending the Insolvency and Bankruptcy Code, 2016 ("IBC") to introduce pre-packaged insolvency resolution process ("Pre-Packaged Insolvency") for Micro, Small and Medium Enterprises ("MSMEs"). The Government has also introduced the Insolvency and Bankruptcy (Prepackaged Insolvency Resolution Process) Rules, 2021 ("Pre-Packaged Insolvency Rules, 2021") with effect from April 9, 2021.

Background: For some time now, IBC has been criticized for failing to bring successful resolution in a vast majority of cases. One of the main reasons for 'below the expectation' success of IBC in reviving the stressed businesses has arguably been 'ouster of the promoters' of the company. Neither the committee of creditors nor the resolution professionals are in many cases equipped to take timely and fruitful business decisions, and it is the promoters who have their fingers on the pulse of their businesses. This in turn leads to the businesses eventually succumbing to liquidation, which was the residuary but not the primary expected outcome of the IBC.

Pre-Packaged Insolvency therefore works on the formula of debtor-in-control approach (in contrast with the creditor-in-control IBC regime prevailing till now), since a conscious and willing promoter of the corporate debtor has the best shot of reviving his own business with the support of law, the creditors and of course, the NCLT.

Second triggering factor has been COVID-19, which led to moratorium on initiation of new insolvency proceedings for defaults committed between March 25, 2020 and March 24, 2021. Removal of moratorium is a tricky aspect, as we would see in times to come.

Procedure: The procedure for initiation and completion of Pre-Packaged Insolvency, as of now available only for MSMEs, is broadly as follows:

  1. A corporate applicant may file an application with the NCLT under Section 54C for initiating pre-packaged insolvency resolution process complying with other applicable provisions of the IBC;
  2. The NCLT shall, within a period of fourteen days of the receipt of the application, by an order admit/reject the application;
  3. The Pre-Packaged Insolvency shall commence from the date of admission of the application. The time-limit for its completion is within a period of one hundred and twenty days from the pre-packaged insolvency commencement date;
  4. The resolution professional ("RP") shall procure and submit the resolution plan, within a period of ninety days from the pre-packaged insolvency commencement date. The base resolution plan by the promoter of MSMEs is to be approved by committee of creditors. If the base resolution -plan is not approved by the committee of creditors, the RP shall invite prospective resolution applicant to compete with base resolution plan;
  5. If no resolution plan is approved by the committee of creditors, the RP shall file an application with the NCLT for termination of the pre-packaged insolvency resolution process. The jurisdictional NCLT Bench may inter-alia terminate the Pre-Packaged Insolvency and pass a liquidation order.

The application for initiating Pre-Packaged Insolvency can be made by MSMEs subject to inter-alia following restrictions and conditions:

  1. Corporate Debtor has not undergone a Pre-Packaged Insolvency during the period of three years preceding the initiation date;
  2. Corporate Debtor is not undergoing a CIRP, and no order of liquidation has been passed against the Corporate Debtor;
  3. Corporate Debtor or its promoter are otherwise eligible to submit a resolution plan under Section 29A of IBC, meaning thereby that the account of the Corporate Debtor is not NPA and the promoters of the Corporate Debtor are not wilful defaulters and/or barred on other parameters specified in Section 29A of IBC;
  4. The proposal of Pre-Packaged Insolvency is approved by not less than sixty six percent of financial creditor (no related parties).

Observations: The Pre-Packaged Insolvency, being a debtor driven process, is expected to augment consensual restructuring, lender autonomy and to expedite resolution of stressed assets in a time bound manner.

The introduction of Pre-Packaged Insolvency reflects that the Government is inclined to recalibrate its thinking to improve the chances of success on scorecard of the IBC. It would be interesting to see the phase-wise implementation of Pre-Packaged Insolvency to other Corporate Debtors, based on experience gained from its implementation on MSMEs.

Disclaimer: LexCounsel provides this e-update on a complimentary basis solely for informational purposes. It is not intended to constitute, and should not be taken as, legal advice, or a communication intended to solicit or establish any attorney-client relationship between LexCounsel and the reader(s). LexCounsel shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained in this e-newsletter. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.

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