Parliament Clears Changes To Insolvency Law

Pre-packaged insolvency provisions cleared by the parliament.

<div class="paragraphs"><p>Parliament House on the opening day of the Monsoon session. (Photographer. T. Narayan/Bloomberg)<br></p></div>
Parliament House on the opening day of the Monsoon session. (Photographer. T. Narayan/Bloomberg)

The Rajya Sabha cleared the Insolvency and Bankruptcy Code (Amendment) Bill, 2021 today which gives legislative nod to the pre-packaged insolvency resolution process for micro, small, and medium scale enterprises. The lower house of the parliament had passed the Bill on July 28.

The bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, promulgated on April 4 this year.

The salient features of the pre-packaged insolvency are captured below:

Pre-Pack Resolution

The bill allows MSMEs to initiate pre-packaged insolvency for defaults up to Rs 1 crore. While there's no specific statutory definition, a pre-pack process will allow the creditor and debtor to informally work on a resolution plan.

Prior approval of at least 66% of the unrelated financial creditors of the MSME is required before applying for pre-pack. At this stage, the MSME must also provide creditors with a base resolution plan.

A pre-pack application must be accompanied by the name of a resolution applicant as approved by at least 66% of the financial creditors.

An MSME opting for pre-pack, must, however, not be hit by Section 29A of the Code. This section prohibits promoters of non-performing assets, willful defaulters and certain other class of persons from submitting a resolution plan for a corporate debtor.

Experts had earlier told BloombergQuint that complete exclusion of promoters—those that get hit by the Section 29A—may not bode well for the pre-pack process.

Misha, partner at Shardul Amarchand Mangaldas & Co., had said there is commercial justification for diluting the mandate of the Section 29A for pre-packs. The insolvency process has become highly litigious because of direct confrontation between the promoters and creditors’ interests. “Pre-packs are intended to be less formal and not a strict, statutory platform to resolve pre-insolvency,” she had said.

Abizer Diwanji, partner and national leader for financial services at EY, had agreed. He had also warned that if promoters are entirely debarred, every pre-pack will become a situation of hostile M&A.

Moratorium, Management During Pre-Pack

Once a pre pack application is admitted, a moratorium will be effected similar to that available under the standard insolvency process.

The board of directors or partners of the MSME will continue to manage the affairs of the company. However, the management of the debtor may be vested with the resolution professional if there has been fraudulent conduct or gross mismanagement.

Pre-Pack Prcoess

The committee of creditors must be constituted within seven days to consider the base resolution plan submitted by the MSME.

The committee may provide the MSME with an opportunity to revise the plan. The resolution professional may also invite resolution plans from other persons if the base resolution plan submitted by the MSME:

  • Isn't approved by the committee,

  • Is unable to pay the debt of operational creditors.

The base plan, revised plan or the plan submitted by any other person has to be in conformity with Section 30 of the IBC, keeping in mind the priority order of re-payment. A resolution plan must be approved by the committee within 90 days.

The NCLT is mandated to either approve the plan sanctioned by the creditors' committee or order termination of insolvency process within 30 days, bringing the total time allowed for pre-pack insolvency to 120 days. Termination of insolvency will result in the liquidation of the corporate debtor.