IBC moves a step closer to socio – economic development of the country

Micro, Small, Medium Enterprise (MSME) sector is considered as the backbone of the Indian Economy that has contributed substantially in the socio-economic development of the nation. It generates opportunities and works in the development of backward and rural areas. 

What is an MSME?

MSME, being the backbone of the Indian Economy, has been defined and classified under Section 7 of MSME Development Act of 2006, which reads as under:

"MSME are defined as (i) a micro enterprise, where the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees; (ii) a small enterprise, where the investment in plant and machinery does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; (iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.”

The importance of MSMEs is evident from the definition itself. The MSME Act of 2006 seeks to provide an additional benefit to the MSMEs registered under the MSME Act of 2006.  There is no doubt that the MSMEs have been adversely impacted by the onset of the COVID-19 global pandemic. Keeping in mind the importance that the MSMEs pose for economy like our country, certain changes have been made to the Insolvency and Bankruptcy Code (IBC) by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (2021 Ordinance), notified with effect from April 4, 2021.

The 2021 Ordinance intends to achieve an alternative insolvency procedure that is inexpensive, time-saving, speedy, and transparent in order that the MSMEs are rehabilitated in a structured manner. The 2021 Ordinance makes a significant effort towards minimizing the problems encountered during the earlier process of Corporate Insolvency Resolution Process (CIRP)[1].

What is a Pre-Packaged Insolvency Resolution Process?

The Pre-packaged Insolvency Resolution Process (PPIRP), mentioned in Chapter III A of the 2021 Ordinance, is a procedure that is adopted prior to the formal initiation of the insolvency process that includes the sale and purchase of the assets of the corporate debtor by any potential buyer/applicant who proposes to restructure the liabilities of the Corporate Debtor. It is a consensual restructuring with lenders and addresses the entire liability side of the Company.

There is no doubt that this is a stark deviation from the procedure existing prior to the notification of 2021 Ordinance as against the need to approach the court to initiate this process under Section 7, 9 or 10 IBC, which continues to exist for Corporate Debtors other than MSMEs.  Under Section 11 A of the IBC, the pre-packaged deal is presented to the Adjudicating Authority and if accepted, a moratorium may be declared under Section 14 IBC. This process proves to be beneficial for the MSMEs as it allows the directors/promoters of the Corporate Debtor to retain control of the Corporate Debtor/MSME, which is, otherwise, lost in the CIRP. 

The brief outline of the procedure pursuant to the 2021 Ordinance is as under: 

1.     Base Resolution Plan: Preparation of the pre-packaged resolution for rehabilitation of the MSME, which is presented to the shareholder and other stakeholders of the MSME, in terms of Section 54(A)(2)(g) of IBC.  If the same is accepted, and accorded approval, then an application is filed under Section 54(A)(3) of IBC, before National Company Law Tribunal.

2.     Moratorium: After the application is heard and admitted, the Adjudicating Authority is at liberty to order a moratorium in terms of Section 14 of the Code.

3.     Approval or rejection of plan: A plan must be approved or rejected in 30 days, as per Section 54L(1) of IBC. However, if the plan is rejected and the directors/promoters/partners are removed from the management on account of fraud or any illegality or irregularity or an application is filed seeking termination of the pre-pack insolvency resolution process, the Adjudicating Authority may order the corporate debtor to be liquidated in terms of Section 33 of IBC.

4.     Role of CoC: In addition to the role, power and duties of the Committee of Creditor, the Committee of Creditors (CoC) has the discretion to convert the pre-package insolvency process to the corporate insolvency resolution process by a vote of atleast 66% (Sixty Six percent) majority at any time under Section 54-O of the Ordinance 2021.

5.     Time period: A time period of 90 days is provided under Section 54A(2)(f)(i) of the IBC for completing claims, Resolution Plan, Public Announcement, Registered Valuers, COC constitution & meetings, Information Memorandum, Avoidance transactions, Resolution Plan etc, unlike 330 days provided for completion of CIRP process.

6.     Appeal: Any appeal from such order shall lie before National Company Law Appellate Tribunal, under Section 61(3) of the Code

7.     Cooling-off period: There is a cooling-off period of 3 years between two PPIRPs as per Section 54A(2)(a) of the IBC. This is done in order to make PPIRP successful in a single attempt and further, to disallow repeated proposals of PPIRP, curbing frivolous applications by disgruntled promoters.

With this process, the main focus of the lawmakers was to rehabilitate the MSMEs. The Government of India has been promoting the business of MSMEs at several instances, due to their significant contributions towards the GDP and employment opportunities. This may, in many ways, prove to be advantageous for the MSMEs as compared to the normal corporate insolvency resolution process.

Advantages of this process

1.     Saves time: It saves a lot of time as it only takes up to 120 (One hundred and twenty) days, whereas, the corporate insolvency resolution process is allowed 330 (Three Hundred and Thirty) days.

2.     Cost effective: There are various settlement mechanisms involved before taking the matter before the Adjudicating Authority. This makes the process not only speedier but the exposure is also limited.

3.     Judicial intervention: There is restricted judicial intervention.

4.     Control over business and ease of operation: The pre-packaged resolution process allows the actual owner and management of the company to continue dealing with the business of such MSMEs as the board continues to retain control till the process is completed but on the other hand, once the corporate insolvency resolution process is started, the Resolution Professional is in charge of handling the matters and that too with the guidance of financial creditors.

Initiation of a Pre-pack Insolvency Resolution Process 

This process can be initiated by any corporate debtor which is registered as a Micro, Small and Medium Enterprises under the MSME Development Act of 2006, however, there are certain eligibility criteria prior to initiation of a Pre-pack Insolvency Resolution Process:

1.     The corporate debtor initiating the process should not have undergone a Pre-pack Insolvency Resolution Process or a corporate insolvency resolution process in the last 3 years.

2.     The corporate debtor should not have any order of liquidation that is already passed by the Adjudicating Authority.

3.     The corporate debtor should have passed a Special Resolution approving the filing of a pre-pack resolution.

4.     The corporate debtor should not have a resolution process undergoing at the time of filing for a pre-pack resolution.

Effect of Pre-pack Ordinance on Section 29A of the Code

The 2021 Ordinance added Section 54A to the Code, which lays down the conditions for the MSME to commence the pre-pack process. As per Section 54A(2)(d), MSME may commence the procedure and submit the base resolution plan only when it is eligible to submit a resolution plan as per Section 29A, excluding Section 29A(c)

[states that a person shall be eligible to file its plan in PIRP process, when the account of said person has been declared NPA, one year prior from the date of filing of the plan and the said person had made payments of all overdue amounts along with interest and all charges relating to NPA accounts before submissions of the resolution plan] and 29A(h) [person who executed a guarantee in favour of a creditor and the same has been invoked by the creditor and remains unpaid either in part or full] of IBC, which is provided under Section 54A(2)(d) IBC

Hence, apart from Sections 29A(c) and 29A(h), an MSME must comply with Section 29A for commencement of the pre-packaged insolvency resolution process.

Conclusion

I conclude this article by saying that the 2021 Ordinance is a welcome step for resolution/ rehabilitation of MSMEs in a speedy, easy and transparent manner. While there is no doubt that there would be a requirement for the Adjudicating Authority to iron out the creases, which can be done during implementation of the 2021 Ordinance by the Adjudicating Authority. 

Further Information:

1.     About the IBC- https://ibbi.gov.in/legal-framework/act

2.     About MSMEs- https://msme.gov.in/

[1]Corporate Insolvency Resolution Process or CIRP was the method of resolution used prior to PPIRP. In CIRP, the creditor and the resolution professional (RP) work on a resolution plan, while the debtor’s organisation is put under a moratorium. The organisation is under the control of the Resolution Professional.