Last year, the government, through an ordinance, had suspended initiation of fresh insolvency proceedings for corporate debtors under Sections 7, 9 and 10 of the IBC Code (2016) for defaults arising on or after March 25, 2020, for a period of six months which simply meant that no fresh insolvency filings could be made by financial creditors, operational creditors, and the corporate debtor itself in respect of such cases.
The ordinance also gave the government power to extend the IBC suspension up to one year. In September, 2020, the parliament approved the Insolvency and Bankruptcy Code (Second Amendment) Bill that replaced this ordinance. The IBC suspension was initially extended till December 25, 2020 and then till March 24, 2021 under the provisions of the Code.
Many Micro, Small and Medium Enterprises (MSMEs) in India were impacted by the covid19 pandemic quite adversely. Suspension of the fresh proceedings under the IBC Code was largely considered as a breather particularly for the MSMEs, which were otherwise viable but got into trouble because of Covid-19, from being pushed into insolvency or being liquidated as they struggled to cope up with the challenges posed by the resultant lock-down impeding both the factor and consumption markets for them. Such Companies were expected to revert to good health when the pandemic eventually is contained.
The outlook for Indian economy seen as getting better
The relief in the form of suspension of initiation of fresh insolvency proceedings for corporate debtors was not extended beyond the scheduled period that ended on March 24, 2021 in the backdrop of deceleration in the number of active covid19 cases, signs of progressive improvement in the vaccination drive and Indian economy seen as doing better in the economic arena as well.
Recently International Monetary Fund (IMF) had projected India to be the only economy to be able to achieve a double-digit growth for the fiscal year 2021-22 in its latest edition of World Economic Outlook. It had even raised its growth forecast for Indian economy by 100 basis points to 12.5 per cent for the current fiscal. However, how far the IMF projections may turn out to be close to actual performance would depend on the speed of production and deliverance of the vaccine to millions of its people and continued economic policy support. In a nutshell we may say that the economic outlook as projected by the IMF is bright but is contingent on several ifs and buts.
India’s pioneering role in the vaccine development is largely lauded but the sudden upsurge in the second wave of covid19 cases has made the situation all the more complex and difficult. While there is need to contain the Pandemic hit cases and casualties within reasonable limits, yet there is uncertainty about the extent and duration of mass lock downs in the severely affected cities and states.
Needless to say, it is getting difficult for the MSMEs to continue to operate at normal levels of capacity utilization or even to avoid complete shut down as the markets are closed for non-essential commodities in several states coupled with the problems of exodus of laborers away from urban/ industrial areas to their home towns.
Pre-packaged Insolvency Resolution Process is a welcome move.
The government has recently promulgated an ordinance to amend the Insolvency and Bankruptcy Code, 2016 (IBC), whereby the promoters of Micro, Small and Medium Enterprises (MSMEs) can seek timely and fast resolution for their financial stress through the pre-packaged process. This pre-packaged resolution mechanism also provides for legal sanction to a plan agreed upon between banks, promoters, and the buyer.
MSMEs play an important role in a highly populated Indian economy contributing substantially to India’s national income (GDP) and providing gainful employment opportunities to millions of laborers. The survival and health of the MSMEs is a major issue to reckon in the difficult pandemic times as the government has to protect not only the lives but also the livelihoods of people. In the given perspective, the introduction of the pre-packaged resolution process through an ordinance is a timely move as it is necessary to urgently respond to the specific requirements of MSMEs relating to the resolution of their insolvency due to the unique nature of their businesses and simpler corporate structures.
All resolution plans under the IBC need to be approved by the National Company Law Tribunal (NCLT). But what is unique under a pre-packaged process, is that the main stakeholders such as creditors and shareholders may come together to identify a prospective buyer and negotiate a resolution plan before submitting it to NCLT for formal approval. In other words, a pre-packaged process promulgated under the recent Ordinance is considered expedient to provide an efficient alternative insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) ensuring quicker, cost-effective and value maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.
The Ordinance inter alia has inserted a new Chapter-IIIA in the IBC 2016 to provide for making an application for initiating pre-packaged insolvency resolution process (PPIRP} by a corporate debtor classified as a micro, small or medium enterprise as defined under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.
Some provisions make PPIRP an attractive alternative for stressed out MSMEs
Some of the main provisions that make PPIRP an attractive resolution mechanism are enumerated as below:
- The Central Government, by notification, has specified the minimum amount of default as rupees ten lakhs for the matters relating to the pre-packaged insolvency resolution process of corporate debtor under Chapter III-A of the Code.
- The PPIRP shall be initiated by the corporate debtor who shall file an application along with the declaration, special resolution or resolution as the case may be under the applicable provisions of the Code after obtaining an approval from its financial creditors representing not less than sixty-six per cent in value of the financial debt due to such creditors.
- The Adjudicating Authority shall, within a period of fourteen days of the receipt of the application, by an order, admit the application, if it is complete; or reject the application, if it is incomplete as per the specified procedures. The pre-packaged insolvency resolution process shall commence from the date of admission of the application.
- The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date.
- During the pre-packaged insolvency resolution process period, the management of the affairs of the corporate debtor shall continue to vest in the Board of Directors or the partners, as the case may be, of the corporate debtor, subject to conditions specified. Further, the promoters, members, personnel and partners, as the case may be, of the corporate debtor are required to make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern; and exercise and discharge their contractual or statutory rights and obligations in relation to the corporate debtor, subject to the applicable provisions and such other conditions and restrictions as may be prescribed.
- However, committee of creditors, at any time during the pre-packaged insolvency resolution process period, by a vote of not less than sixty-six per cent of the voting shares, may resolve to vest the management of the corporate debtor with the resolution professional to be decided by the Adjudicating Authority.
This peculiar feature of debtor-in-possession approach thus has a balancing mechanism through grant of significant consent rights to the financial creditors, such that the mechanism cannot be misused by errant promoters. Further, the promoter may reasonably be expected to propose plans with least impairment to rights and claims of creditors.
Success depends on effective implementation
The IBC Amendment Ordinance 2021 makes available the pre-packaged route to genuine and viable MSMEs, to ensure least business disruption which is why it may be considered as a welcome move, given the exceptionally grave circumstance such as covid19 pandemic and its prolonged continuance at least till the vaccination drive catches momentum and the numbers of covid19 patients and casualties are well brought under control paving way for the normalization of the conditions good enough for opening up of the fully functional economy.
The pre-pack mechanism incorporates procedural checks and balances including the requirement of two-third creditors’ consent for both initiation and approval of the base resolution plan. Participation of eligible existing promoters is encouraged with the board continuing in control and the debtor proposing the base resolution plan.
Apparently, the intent of the ordinance is to provide for an alternative and efficient resolution mechanism especially for MSMEs by introduction of a new chapter in the statute. However, given a large number of MSMEs going for insolvency resolution under the IBC Code, it will be a challenge to expedite such resolutions within the stipulated time frame and the government may thus have to strengthen the NCLT’s infrastructure further so that pre-packs can be implemented in time-bound manner to benefit all the stakeholders as per the intent of the statute.