Important Provisions of MSME Pre-packaged Insolvency Resolution Process

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Important Provisions of Pre-packaged Insolvency Resolution Process under the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

(The Ordinance shall come into force at once)

I. Default Limit

Central Government will specify such minimum amount of default of higher value, which shall not be more than one crore rupees for matters relating to the pre-packaged insolvency resolution process of corporate debtors

II. Who can initiate pre-packaged Insolvency against whom?

An application for initiating pre-packaged insolvency resolution process may be made by a corporate applicant with the Adjudicating Authority in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006. As per Section 5(5), corporate applicant means:

(a) corporate debtor; or

(b) a member or partner of the corporate debtor who is authorised to make an application for the corporate insolvency resolution process under the constitutional document of the corporate debtor; or

(c) an individual who is in charge of managing the operations and resources of the corporate debtor; or

(d) a person who has the control and supervision over the financial affairs of the corporate debtor.

III. Who is a MSME under MSMED Act, 2006

As per Notification S.O. 2119(E) dated 26th June 2020, classification of the MSMEs as under:

S. No. Category Criteria 
Investment in plant and machinery or equipment Turnover
1 Micro Enterprise not exceed Rs. 1 crore not exceed Rs. 5 Crore
2 Small Enterprise not exceed Rs. 10 Crore not exceed Rs. 50 Crore
3 Medium Enterprise not exceed Rs. 50 Crore not exceed Rs. 250 Crore

For more details, refer the Notification here1

IV. Conditions to initiate pre-packaged insolvency resolution process

An application for initiating pre-packaged insolvency resolution process may be made in respect of a corporate debtor, who commits a default referred to in section 4, subject to the following conditions:

1. Pre-conditions:

(a) it has not undergone pre-packaged insolvency resolution process or completed CIRP, as the case may be, during the period of 3 years preceding the initiation date;

(b) it is not undergoing a CIRP;

(c) no order requiring it to be liquidated is passed under section 33;

(d) it is eligible to submit a resolution plan under section 29A;

2. Declaration from majority directors/partners:

The majority of the directors or partners of the corporate debtor, as the case may be, have made a declaration stating, inter alia, –

(i) that the corporate debtor shall file an application for initiating pre-packaged insolvency resolution process within a definite time period not exceeding 90 days;

(ii) that the pre-packaged insolvency resolution process is not being initiated to defraud any person; and

(iii) the name of the insolvency professional proposed and approved to be appointed as resolution professional.

3. Special Resolution:

The members of the corporate debtor have passed a special resolution, or at least 3/4 of the total number of partners, as the case may be, of the corporate debtor have passed a resolution, approving the filing of an application for initiating pre-packaged insolvency resolution process.

4. Approval from Financial Creditors:

The corporate debtor shall obtain an approval from its financial creditors, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, for the filing of an application for initiating pre-packaged insolvency resolution process. Where a corporate debtor does not have any financial creditors, not being its related parties, the approval under this sub-section shall be provided by such persons as may be specified.

Prior to seeking approval from financial creditors, the corporate debtor shall provide some information to such financial creditors.

[Reference Sec.54A, 54C]

 V. Admission or Rejection of application

The Adjudicating Authority shall, within a period of 14 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. The Adjudicating Authority shall, before rejecting an application, give notice to the applicant to rectify the defect in the application within 7 days from the date of receipt of such notice from the Adjudicating Authority.

Commencement Date: The pre-packaged insolvency resolution process shall commence from the date of admission of the application.

[Reference Sec. 54C]

VI. Time limit for completion of MSME pre-packaged Insolvency

All-over: The pre-packaged insolvency resolution process shall be completed within a period of 120 days from the pre-packaged insolvency commencement date.

Submission of Resolution Plan to AA: The resolution professional shall submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority within a period of 90 days from the pre-packaged insolvency commencement date.

Failure to submit Resolution Plan to AA: Where no resolution plan is approved by the committee of creditors within the period of 90 days, the resolution professional shall, on the day after the expiry of such time period, file an application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution process.

[Reference Sec.54D]

(Image source: IBBI Newsletter Jan-Mar,2021)

VII. Moratorium

Moratorium under section 14 shall, mutatis mutandis apply, to the proceedings under pre-packaged insolvency resolution process. The order of moratorium shall have effect from the date of such order till the date on which the pre-packaged insolvency resolution process period comes to an end.

[Reference Sec.54E]

VIII. Appointment of Resolution Professional

The financial creditors of the corporate debtor, not being its related parties, representing such number and such manner as may be specified, have proposed the name of the insolvency professional to be appointed as resolution professional, and the financial creditors of the corporate debtor, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, have approved such proposal. Where a corporate debtor does not have any financial creditors, not being its related parties, the proposal and approval under this clause shall be provided by such persons as may be specified.

[Reference Sec.54A(2)(e)]

IX. Duties of resolution professional before initiation of pre-packaged insolvency resolution process

The proposed insolvency professional shall have the following duties commencing from the date of the approval of Financial Creditors:

(a) prepare a report confirming whether the corporate debtor meets the requirements of section 54A, and the base resolution plan;

(b) file such reports and other documents, with the Board; and

(c) perform such other duties as may be specified.

The above duties of the insolvency professional shall cease, if,-

(a) the corporate debtor fails to file an application for initiating pre-packaged insolvency resolution process within the time period as stated under the declaration of majority of the directors or partners of the corporate debtor (referred to in clause (f) of subsection (2) of section 54A); or

(b) the application for initiating pre-packaged insolvency resolution process is admitted or rejected by the Adjudicating Authority,

Insolvency Professional  Fees: The fees payable to the insolvency professional in relation to the duties performed before initiation of pre-packaged insolvency resolution process shall be determined and borne in such manner as may be specified and such fees shall form part of the pre-packaged insolvency resolution process costs, if the application for initiation of pre-packaged insolvency resolution process is admitted.

[Reference Sec.54B]

X. Duties and powers of resolution professional during pre-packaged insolvency resolution process

The resolution professional shall conduct the pre-packaged insolvency resolution process of a corporate debtor during the pre-packaged insolvency resolution process period. Duties of the RP such confirm the list of claims submitted by the corporate debtor, maintain an updated list of claims, constitute the committee of creditors and convene and attend all its meetings, file applications for avoidance of transactions under Chapter III or fraudulent or wrongful trading under Chapter VI, if any, prepare the information memorandum etc. and power are defined in under section 54F.

[Reference Sec.54F]

XI. List of claims and preliminary information memorandum

The corporate debtor shall, within 2 days of the pre-packaged insolvency commencement date, submit to the resolution professional the following information, updated as on that date namely:-

(a) a list of claims, along with details of the respective creditors, their security interests and guarantees, if any; and

(b) a preliminary information memorandum containing information relevant for formulating a resolution plan. Preliminary information memorandum means a memorandum submitted by the corporate debtor.

[Reference Sec.54G]

XII. Management of affairs of corporate debtor

During the pre-packaged insolvency resolution process period:

(a) 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 such conditions as may be specified;

(b) the Board of Directors or the partners, as the case may be, of the corporate debtor, shall 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

(c) the promoters, members, personnel and partners, as the case may be, of the corporate debtor, shall exercise and discharge their contractual or statutory rights and obligations in relation to the corporate debtor, subject to the provisions of this Chapter and such other conditions and restrictions as may be prescribed.

[Reference Sec.54H]

XIII. Vesting management of corporate debtor with resolution professional

Where the committee of creditors, at any time during the pre-packaged insolvency resolution process period, by a vote of not less than 66% of the voting shares, resolves to vest the management of the corporate debtor with the resolution professional, the resolution professional shall make an application for this purpose to the Adjudicating Authority.

On an application, if the Adjudicating Authority shall pass an order vesting the management of the corporate debtor with the resolution professional, in case of:

(a) the affairs of the corporate debtor have been conducted in a fraudulent manner; or

(b) there has been gross mismanagement of the affairs of the corporate debtor.

The provisions of (a) sub-sections (2) and (2A) of section 14; (b) section 17; (c) clauses (e) to (g) of section 18; (d) sections 19 and 20; (e) sub-section (1) of section 25; (f) clauses (a) to (c) and clause (k) of subsection (2) of section 25; and (g) section 28, shall, mutatis mutandis apply, to the proceedings under this Chapter, from the date of the above order, until the pre-packaged insolvency resolution process period comes to an end.

[Reference Sec.54J]

XIV. Committee of creditors

The resolution professional shall, within 7 days of the pre-packaged insolvency commencement date, constitute a committee of creditors, based on the list of confirmed claims. The first meeting of the committee of creditors shall be held within 7 days of the constitution of the committee of creditors. Provisions of section 21, except sub-section (1) thereof, shall, mutatis mutandis apply, in relation to the committee of creditors.

[Reference Sec.54-I]

XV. Consideration and approval of resolution plan [Sec. 54K]

1. Base Resolution Plan

  • The corporate debtor shall submit the base resolution plan to the resolution professional within 2 days of the pre-packaged insolvency commencement date, and the resolution professional shall present it to the committee of creditors.
  • The corporate debtor being a resolution applicant under clause (25) of section 5, may submit the base resolution plan either individually or jointly with any other person.
  • The committee of creditors may provide the corporate debtor an opportunity to revise the base resolution plan prior to its approval or invitation of prospective resolution applicants.
  • The resolution plans and the base resolution plan, submitted under this section shall conform to the requirements referred to in sub-sections (1) and (2) of section 30, and the provisions of sub-sections (1), (2) and (5) of section 30 shall, mutatis mutandis apply, to the proceedings under this Chapter.
  • The committee of creditors may approve the base resolution plan for submission to the Adjudicating Authority if it does not impair any claims owed by the corporate debtor to the operational creditors. [Sub-section (4)]

2. Invitation of Resolution Plan

The resolution professional shall invite prospective resolution applicants to submit a resolution plan or plans, to compete with the base resolution plan, if:

(a) the committee of creditors does not approve the base resolution plan; or

(b) the base resolution plan impairs any claims owed by the corporate debtor to the operational creditors.

3. Resolution Plan

  • The resolution applicants submitting resolution plans pursuant to invitation (in case of the committee of creditors does not approve the base resolution plan or the base resolution plan impairs any claims owed by the corporate debtor to the operational creditors) fulfil such criteria as may be laid down by the resolution professional with the approval of the committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor and such other conditions as may be specified.
  • The resolution professional shall provide to the resolution applicants the basis for evaluation of resolution plans and the relevant information referred to in section 29, which shall, mutatis mutandis apply, to the proceedings under this Chapter, in such manner as may be specified.
  • The resolution professional shall present to the committee of creditors, for its evaluation, resolution plans which conform to the requirements referred to in sub-section (2) of section 30.
  • The committee of creditors shall evaluate the resolution plans presented by the resolution professional and select a resolution plan from amongst them.[Sub-section (9)]

4. Comparison between Base Resolution Plan Vs. Resolution Plan

Where, on the basis of such criteria as may be laid down by it, the committee of creditors decides that the resolution plan selected under sub-section (9) is significantly better than the base resolution plan, such resolution plan may be selected for approval under subsection (12) [Sub-section (10)]

Where the resolution plan selected under subsection (9) is not considered for approval or does not fulfil the requirements of sub-section (10), it shall compete with the base resolution plan, in such manner and subject to such conditions as may be specified, and one of them shall be selected for approval under subsection (12). [Sub-section (11)]

The resolution plan selected for approval under sub-section (10) or sub-section (11), as the case may be, approved by the committee of creditors for submission to the Adjudicating Authority. Where the resolution plan selected for approval under sub-section (11) is not approved by the committee of creditors, the resolution professional shall file an application for termination of the pre-packaged insolvency resolution process. [Sub-section (12)]

5. Final Resolution Plan

  • The approval of the resolution plan under subsection (4) or sub-section (12), as the case may be, by the committee of creditors, shall be by a vote of not less than sixty-six per cent. of the voting shares, after considering its feasibility and viability, the manner of distribution proposed, taking into account the order of priority amongst creditors as laid down in sub-section (1) of section 53, including the priority and value of the security interest of a secured creditor and such other requirements as may be specified. [Sub-section (13)]
  • While considering the feasibility and viability of a resolution plan, where the resolution plan submitted by the corporate debtor provides for impairment of any claims owed by the corporate debtor, the committee of creditors may require the promoters of the corporate debtor to dilute their shareholding or voting or control rights in the corporate debtor. Where the resolution plan does not provide for such dilution, the committee of creditors shall, prior to the approval of such resolution plan under sub-section (4) or sub-section (12), as the case may be, record reasons for its approval. [Sub-section (14)]
  • For the purposes of sub-sections (4) and (14), claims shall be considered to be impaired where the resolution plan does not provide for the full payment of the confirmed claims as per the updated list of claims maintained by the resolution professional.
  • The resolution professional shall submit the resolution plan as approved by the committee of creditors under sub-section (4) or sub-section (12), as the case may be, to the Adjudicating Authority. [Sub-section (15)]

[Reference Sec.54K]

XVI. Approval of Resolution Plan [Sec. 54L]

  • If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors under sub-section (4) or sub-section (12) of section 54K, as the case may be, subject to the conditions provided therein, meets the requirements as referred to in sub-section (2) of section 30, it shall, within 30 days of the receipt of such resolution plan, by order approve the resolution plan.
  • The Adjudicating Authority shall, before passing an order for approval of a resolution plan, satisfy itself that the resolution plan has provisions for its effective implementation.
  • The order of approval of Resolution Plan shall have such effect as provided under sub-sections (1), (3) and (4) of section 31, which shall, mutatis mutandis apply, to the proceedings under this Chapter.
  • Where the Adjudicating Authority is satisfied that the resolution plan does not conform to the requirements referred as above, it may, within 30 days of the receipt of such resolution plan, by an order, reject the resolution plan and pass an order under section 54N.
  • Notwithstanding anything to the contrary contained in this section, where the Adjudicating Authority has passed an order under sub-section (2) of section 54J and the resolution plan approved by the committee of creditors under sub-section (4) or subsection (12), as the case may be, of section 54K, does not result in the change in the management or control of the corporate debtor to a person who was not a promoter or in the management or control of the corporate debtor, the Adjudicating Authority shall pass an order:

(a) rejecting such resolution plan;

(b) terminating the pre-packaged insolvency resolution process and passing a liquidation order in respect of the corporate debtor as referred to in subclauses (i), (ii) and (iii) of clause (b) of sub-section (1) of section 33; and

(c) declaring that the pre-packaged insolvency resolution process costs, if any, shall be included as part of the liquidation costs for the purposes of liquidation of the corporate debtor.

[Reference Sec.54L]

XVII. Termination of pre-packaged insolvency

The Adjudicating Authority in below cases shall within 30 days of the date of application filed by resolution professional terminate the pre-packaged insolvency resolution process and provide for the manner of continuation of proceedings initiated for avoidance of transactions under Chapter III or proceedings initiated under section 66 and section 67A, if any:

(a) Where the resolution plan selected for approval under sub-section (11) is not approved by the committee of creditors, the resolution professional shall file an application for termination of the pre-packaged insolvency resolution process. [under the proviso to sub-section (12) of section 54K]; or

(b) Where no resolution plan is approved by the committee of creditors within the period of 90 days, the resolution professional shall, on the day after the expiry of such time period, file an application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution process. [under sub-section (3) of section 54D.]

Cost of pre-packaged insolvency resolution process cost: Where the Adjudicating Authority passes an order under sub-section (1), the corporate debtor shall bear the pre-packaged insolvency resolution process costs, if any.

Where the resolution professional, at any time after the pre-packaged insolvency commencement date, but before the approval of resolution plan under subsection (4) or sub-section (12), as the case may be, of section 54K, intimates the Adjudicating Authority of the decision of the committee of creditors, approved by a vote of 66% of the voting shares, to terminate the pre-packaged insolvency resolution process.

Where the Adjudicating Authority has passed an order under sub-section (2) of section 54J and the pre-packaged insolvency resolution process is required to be terminated under sub-section (1), the Adjudicating Authority shall pass an order:

(a) of liquidation in respect of the corporate debtor as referred to in sub-clauses (i), (ii) and (iii) of clause (b) of sub-section (1) of section 33; and

(b) declare that the pre-packaged insolvency resolution process costs, if any, shall be included as part of the liquidation costs for the purposes of liquidation of the corporate debtor.

[Reference Sec.54N]

Section 54L(4) also provides that where the Adjudicating Authority has passed an order under sub-section (2) of section 54J and the resolution plan approved by the committee of creditors under sub-section (4) or subsection (12), as the case may be, of section 54K, does not result in the change in the management or control of the corporate debtor to a person who was not a promoter or in the management or control of the corporate debtor, the Adjudicating Authority shall pass an order terminating the pre-packaged insolvency resolution process and passing a liquidation order in respect of the corporate debtor as referred to in subclauses (i), (ii) and (iii) of clause (b) of sub-section (1) of section 33.

XVIII. Contradiction between Application u/s 7, 9, 10 and MSME pre-packaged- Sec. 54C: [Sec. 11A]

  • The provisions of pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises (In short “MSME Pre-packaged Insolvency”) shall not apply where an application under section 7 or section 9 or section 10 is filed and pending as on the date of the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021.
  • Where an application filed under section 54C is pending, the Adjudicating Authority shall pass an order to admit or reject such application, before considering any application filed under section 7 or section 9 or section 10 during the pendency of such application under section 54C, in respect of the same corporate debtor.
  • Where an application under section 54C is filed within fourteen days of filing of any application under section 7 or section 9 or section 10, which is pending, in respect of the same corporate debtor, then, notwithstanding anything contained in sections 7, 9 and 10, the Adjudicating Authority shall first dispose of the application under section 54C.
  • Where an application under section 54C is filed after fourteen days of the filing of any application under section 7 or section 9 or section 10, in respect of the same corporate debtor, the Adjudicating Authority shall first dispose of the application under sections 7, 9 or 10.

[Reference Sec.11A]

XIX. Initiation of CIRP [Sec. 54-O)

The committee of creditors, at any time after the pre-packaged insolvency commencement date but before the approval of resolution plan under sub-section (4) or sub-section (12), as the case may be, of section 54K, by a vote of 66% of the voting shares, may resolve to initiate a CIRP in respect of the corporate debtor, if such corporate debtor is eligible for CIRP under Chapter II.

Where the Adjudicating Authority passes such order, it shall be deemed to be an order of admission of an application under section 7 and shall have the same effect.

[Reference Sec.54-O]

XX. Application of provisions of Chapters II, III, VI, and VII to this Chapter [Sec. 54P]

The provisions of sections 24, 25A, 26, 27, 28, 29A, 32A, 43 to 51, and the provisions of Chapters VI and VII of this Part shall, mutatis mutandis apply, to the pre-packaged insolvency resolution process, subject to some conditions.

[Reference Sec.54P]

XXI. Fraudulent management of corporate debtor during pre-packaged insolvency resolution process [Sec. 67A]

On and after the pre-packaged insolvency commencement date, where an officer of the corporate debtor manages its affairs with the intent to defraud creditors of the corporate debtor or for any fraudulent purpose, the Adjudicating Authority may, on an application by the resolution professional, pass an order imposing upon any such officer, a penalty which shall not be less than one lakh rupees, but may extend to one crore rupees.

[Reference Sec.67A]

XXII. Punishment for offences related to pre-packaged insolvency resolution process [Sec. 77A]

(1) Where:

(a) a corporate debtor provides any information in the application under section 54C which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material; or

(b) a corporate debtor provides any information in the list of claims or the preliminary information memorandum submitted under sub-section (1) of section 54G which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be material; or

(c) any person who knowingly and wilfully authorised or permitted the furnishing of such information under sub-clauses (a) and (b), such corporate debtor or person, as the case may be, shall be punishable with imprisonment for a term which shall not be less than three years, but which may extend to five years or with fine which shall not be less than one lakh rupees, but which may extend to one crore rupees, or with both.

(2) If a director or partner of the corporate debtor, as the case may be, deliberately contravenes the provisions of Chapter III-A, such person shall be punishable with imprisonment for not less than three years, but which may extend to five years, or with fine which shall not be less than one lakh rupees, but which may extend to one crore rupees, or with both.

Explanation.–For the purposes of this section, and sections 75, 76 and 77, an application shall be deemed to be false in material particulars in case the facts mentioned or omitted in the application, if true, or not omitted from the application as the case may be, would have been sufficient to determine the existence of a default under this Code.

[Reference Sec.77A]

 

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Reference:
  1. https://ibclaw.in/classification-of-enterprises-under-the-micro-small-and-medium-enterprises-development-act-2006-n-no-s-o-2119e-dated-26-06-2020/[]
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