The Covid-19 pandemic has impacted businesses all around the world including India. In India, the MSME sector is very important to the economy not only in its contribution to the GDP but also in the generation of employment. Hence, it is for this reason that the government has proposed an amendment to the IBC, 2016 to address the MSME sector by providing, what the government calls, efficient and alternative framework under the Code for a quicker, cost-effective insolvency resolution process that is least disruptive to business among other objectives. The IBC, 2016 was amended by an Ordinance in April 2021 since the Parliament was not in session. Now the Insolvency and Bankruptcy Code (Amendment) Bill, 2021 have been passed by the Loksabha and Rajyasabha, seeks to replace the Ordinance and it provides the following mechanism for MSMEs:
Pre-packaged insolvency resolution: An new chapter, Chapter III-A is proposed which provides an alternate insolvency process i.e. pre-packed insolvency resolution. The striking feature is that this can be initiated only by the debtors provided that the debtor has a base resolution plan. Further, the management of the company will remain with the debtor.
Minimum default: The Bill proposes that the minimum amount of default to initiate the pre-packed insolvency process is Rs. 1 lakh and the central government can increase this to Rs.1 crore.
Eligibility: This process can be initiated only by debtors who are classified as corporate debtors under the MSME Development Act, 2006 in the event of default.
Approval of creditors: The debtor needs to obtain the approval of at least 66% of its creditors (these are financial creditors). Also before approval, the debtor must have a resolution plan which he must provide to the creditors. If the resolution plan is not approved, the resolution professional can apply for termination of this pre-packaged insolvency resolution.
Resolution professional: The debtor must propose an RP that must be approved by 66% of the financial creditors.
Moratorium: Interestingly, the debtor will be given a moratorium and hence certain actions are prohibited.
Management of affairs: Interestingly, the debtor, his partners or his board of directors will be allowed to continue the management of the affairs however this power will be vested in the RP if there is any fraudulent or mismanagement.
Power to terminate: At any time from the commencement of pre-packed insolvency resolution but before the approval of the resolution plan, the CoC may decide to end this pre-packed insolvency resolution and go back to Corporate Insolvency Resolution Process. However, this requires the approval of at least 66% of the creditors.
The debtor has to submit his resolution plan to the RP within 2 days after the pre-packaged insolvency resolution began. CoC will be constituted within a week which will consider the plan. The RP can also invite resolution plans from other third parties. Any resolution plan has to be approved by the CoC.
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