Govt notifies IBC amendment to bring in prepacks for insolvency process of MSMEs

Under the Micro, Small, and Medium Enterprises Development, Act, 2006, The Central Government today issued the Insolvency and Bankruptcy Code (IBC) Amendment Ordinance 2021 and have allowed the pre-packaged insolvency resolution processes for corporate debtors regarded as micro, small, or medium enterprises.

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The suspension that ended on March 24, 2020 was extended last year on the same date, but due to the Covid-19 pandemic, it was extended for another year till March 24,2021. The Ordinance allows the Central Government to notify such pre-packaged procedure for defaults up to Rs. One Crore.

The pre-packaged insolvency resolution procedure must be completed within 120 days of the pre-packaged insolvency commencement date, and the moratorium will be available from the pre-pack commencement date until the process is closed, whether by approval of the resolution plan or otherwise.

A pre-packaged insolvency procedure is an informal debt settlement scheme devised by the  creditor and debtor. The Ordinance requires the National Company Law Tribunals to approve such informal proposals. In order to deal with pre-packaged insolvency settlement processes, a new chapter, Chapter IIIA, has been added into this Act.

The Centre stated that it felt there was an urgent need to introduce a special scheme for MSMEs due to the unique nature of their businesses and simpler corporate structures so an Ordinance was introduced to allow pre-packaged insolvency process, claiming that it would ensure quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner that is least disruptive to finances.

A corporate debtor may file an application to initiate a pre-packaged insolvency resolution process if the following seven conditions have been met. A corporate debtor may file an application to initiate a pre-packaged insolvency resolution process if the following seven conditions have been met.

·         It has not gone through a pre-packaged insolvency resolution process or completed a corporate insolvency resolution process in the three years preceding the initiation date;

·         It is not in the process of resolving corporate insolvency.

·         There is no order requiring it to be liquidated under Section 33.

·         It is eligible to apply a resolution plan under Section 29A.

·         The corporate debtor’s financial creditors have proposed the name of the insolvency professional (not related) to be appointed as resolution professional for conducting the pre-packaged insolvency resolution process, representing not less than 66% of the financial debt due to such creditors, and have accepted such proposal in such form as may be stated.

·         The majority of the corporate debtor partners, have made a declaration, in such form as may be specified, stating, that the corporate debtor shall file an application for initiating pre-packaged insolvency resolution process within a definite time period not exceeding ninety days; that the pre-packaged insolvency resolution process is not being initiated to defraud any person; and it should also mention the name of the proposed and approved insolvency professional to be appointed as resolution professional under clause (e)

·         Members of the corporate debtor have passed a special resolution, or at least three-fourths of the total number of partners, authorising the filing of an application for initiating the pre-packaged insolvency resolution procedure, in such form as may be stated.

During the entire pre-pack process the corporate debtor shall remain under the control and possession of the current promoters and management.