India: Restructuring & Insolvency Monthly Newsletter | April 2021

Pre-packaged Insolvency Resolution Process - Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

• The President of India has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (The Ordinance) on April 04, 2021, to allow pre-packaged insolvency resolution process for Corporate Debtors classified as micro, small or medium enterprises (MSME) under the Micro, Small and Medium Enterprises Development Act, 2006.
• In the aftermath of the Covid-19 pandemic, the Central Government via the Insolvency and Bankruptcy Code (amendment) Ordinance, 2020 introduced Section 10A into the Insolvency and Bankruptcy Code, 2016 (IBC), which suspended the operation of Section 7, 9 and 10 of the IBC for initiation of fresh insolvency proceedings against the defaults incurred on and after March 24, 2020, for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf.
• The Ordinance alters the IBC by introducing the Ordinance as a part of Chapter IIIA of Part II of the Code. Further Section 4 of the Code has been amended to enable the Central Government to notify a pre-packaged procedure for defaults not more than INR 1 Crore.
• A pre-packaged settlement entails a corporation working out a restructuring agreement with its creditors before applying for bankruptcy protection. This helps to reduce the overall time and expense of the process and also ensures a quicker, cost-effective and value maximizing outcome for all the stakeholders. An application for initiating a pre-packaged insolvency resolution process may be made in respect of a Corporate Debtor, subject to the following conditions, that:
  • It has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process, as the case may be, during the period of three years preceding the initiation date
  • It is not undergoing a corporate insolvency resolution process
  • No order requiring it to be liquidated is passed under section 33
  • It is eligible to submit a resolution plan under section 29A
  • The financial creditors of the Corporate Debtor, not being its related parties, representing such number and such manner as may be specified, have proposed the name of the insolvency professional 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 66%
  • The majority of the directors or partners of the Corporate Debtor, as the case may be, have made a declaration, in a form that may be specified, as to the limitation period along with a declaration of no intent to commit fraud
  • The members of the Corporate Debtor have passed a special resolution, or at least 3/4th of the total number of partners, as the case may be, of the Corporate Debtor has passed a resolution, approving the filing of an application for initiating pre-packaged insolvency resolution process
• The Corporate Debtor must obtain approval from its Financial Creditors, who are not connected to it, for the filing of an application to initiate a pre-packaged insolvency resolution procedure, in such form as may be stated, representing not less than 66% in value of the financial debt due to such creditors.
• The pre-packaged insolvency resolution phase must be completed within 120 days of the pre-packaged insolvency start date. The moratorium will be in place from the pre-packaged start date until the process is completed, whether by resolution plan approval or otherwise.
• During the pre-pack period, the Corporate Debtor will remain under the current promoters' and management's control and custody. On the grounds set out in Section 61(3) of the Code, the Ordinance appeals against an order authorizing the pre-packaged resolution plan.
• By introducing a new facet of insolvency, the Government appears to be attempting to provide an alternative and efficient resolution mechanism. This is a positive development, but it was hoped that a similar platform would apply to non-MSME businesses. Prepacks will assist Corporate Debtors in reaching an agreement with lenders and handling the company's entire liability. A proper implementation of the Pre-Packaged Insolvency regime would benefit both the Debtor (MSME's) and the Creditors as higher resolution values could be achieved due to the quick process involved as compared to the steps involved in the Resolution Process under the IBC. Overall, it is expected that with the pursuit of the proposed Draft framework, a positive impact will be seen on the financial health of the debt market. However, a concrete conclusion can only be arrived at after this framework is approved and comes into effect. In addition to this The Government needs to further enhance the NCLT's infrastructure for proper utilization of the aimed benefits to introduce pre-packs.

Insolvency and Bankruptcy Board of India (Liquidation Process) (Amendment) Regulations, 2021

• In exercise of the powers conferred by Clause (t) of Sub-Section (1) of Section 196 read with Section 240 of the IBC, the Insolvency and Bankruptcy Board of India (IBBI) on March 04, 2021 notified the following amendments into the IBBI (Liquidation Process) Regulations, 2016 (Principal Regulations).
• Substitution of the existing Sub-Regulation (2)1 of Regulation 31 of the Principal Regulations with 'the liquidator shall file the list of stakeholders with the Adjudicating Authority within forty-five days from the last date for receipt of the claims.' It is pertinent to note that the present amendment has removed an additional step under Sub-Regulation (2) of Regulation 31 of the Principal Regulations i.e., announcement of the list of stakeholders in public who have filed their claims in the liquidation of the Corporate Debtor.
• Further, under Sub-Regulation (5) of Regulation 31 of the Principal Regulations, a sub-Clause (d) has been inserted according to which the list of stakeholders of the Corporate Debtor shall now be filed on the electronic platform of IBBI for dissemination on its website. However, the proviso to the same provides that this clause shall apply to every liquidation process ongoing and commencing on or after March 05, 2021. The purpose of this requirement is to improve transparency and enable stakeholders to ascertain the details of their claims at a central platform.
• In pursuance of the above, the IBBI via circular dated March 04, 2021, has made available an electronic platform at www.ibbi.gov.in for filing and updating the list of stakeholders. The platform permits multiple filings by the liquidator as and when the list of stakeholders is updated by the Liquidator and has directed the insolvency professionals to file the list of stakeholders of the respective Corporate Debtor under liquidation and modification thereof, in the format provided, within three days of the preparation of the list or modification thereof, as the case may be. The filings due as on the date of circular are now required to be filed within 15 days of the circular.

Footnote

1 31. List of stakeholders- (2) The liquidator shall file the list of stakeholders with the Adjudicating Authority within forty-five days from the last date for receipt of claims, and the filing of the list shall be announced to the public in the manner specified in Regulation 12(3)

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