Govt amends insolvency law; introduces pre-packaged resolution process for MSMEs

The central government has promulgated an ordinance to approve pre-packaged insolvency for smaller firms. As per the ordinance, medium and small-scale companies can opt for this instead of going through the longer route of corporate insolvency resolution process.

Through this, with the prior consent of the creditors, the debtor company and even the promoters can place a resolution plan. This is opposed to the resolution process where the promoters of the debtor company lose control once insolvency proceedings are initiated.

The process of finding a resolution plan will happen under the supervision of the resolution professional.

As per the ordinance, a base resolution plan will first be placed by the debtor company. If the creditors approve the plan, it goes further for the National Company Law Tribunal (NCLT)’s approval.

The ordinance goes on to give the creditors the opportunity to find other resolution plans as well. “Where the base resolution plan impairs any claims owed by the corporate debtor to the operational creditors, the resolution professional shall invite prospective resolution applicants to submit a resolution plan or plans, to compete with the base resolution plan, in such manner as may be specified,” reads the ordinance. This means that the pre-packed insolvency plan can be turned into a case of normal insolvency at any point in time.

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One of the reasons the government had been considering a pre-packaged insolvency process is to cut the time taken and litigations related to cases undergoing resolution under the insolvency and bankruptcy code.

“Pre-pack resolution plans are likely to facilitate adherence to the timelines prescribed under the IB Code,” says Sonam Chandwani, managing partner at KS Legal & Associates. “With the increase in threshold to Rs 1 crore, numerous operational creditors especially MSMEs were deprived of remedies under the Code.”

“However, the recent introduction of pre-packaged insolvency framework is likely to support MSMEs.”

Chandwani feels that MSMEs have suffered the most during the pandemic and placing a strict timeline of 120 days on the pre-pack model is likely to help out these distressed MSMEs. In order to help companies who default due to the pandemic from going to the insolvency court, the government at the centre had suspended the IBC.

“The Government has cautiously introduced the pre-pack regime only for the MSME sector at this point of time, which is welcome. Depending on the success of the pre-pack regime for the MSME sector, one can expect this regime to be made available for other corporate borrowers,” says L Viswanathan, partner at law firm Cyril Amarchand Mangaldas.