Highlights of pre-pack scheme for MSMEs
The government has given a go-ahead to the pre-pack scheme for micro, small and medium enterprises (MSME) through an ordinance on 4 April 2021.
Here are some of the key highlights of the ordinance.
Threshold limit
The minimum default value has been capped at Rs 1 crore. The ordinance inserts a new provision to section 4 of the Insolvency and Bankruptcy Code, 2016 which says that the Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the prepackaged insolvency resolution process of corporate debtors under Chapter III-A.
Eligibility
The ordinance provides that an application for initiating pre-packaged insolvency resolution process may be made by a corporate debtor classified as a micro, small or medium enterprise under section 7 (1) of the Micro, Small and Medium Enterprises Development Act, 2006.
The ordinance lays down conditions for a corporate debtor to initiating pre-packaged insolvency resolution process. For a corporate debtor to initiate pre-pack resolution process:
It has not undergone pre-packaged insolvency resolution process or completed corporate insolvency resolution process during the preceding 3 years; b) It is not undergoing a corporate insolvency resolution process; c) No order requiring it to be liquidated has been passed; (d) It is eligible to submit a resolution plan under section 29A.
Creditors’ nod
Financial creditors (who are not related parties) of the corporate debtors need to approve the initiation of pre-pack scheme by not less than 66% vote share.
In case the where a corporate debtor does not have any financial creditors, not being its related parties, the proposal and approval should be provided by the majority of the directors or partners of the corporate debtor, as the case may be.
Debtor in control
The management of the affairs of the corporate debtor during the pre-pack resolution process will 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.
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.
However, the new law provides that if 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 should make an application for this purpose to the Adjudicating Authority.
Time limits
The pre-packaged insolvency resolution process should be completed within a period of 120 days from the pre-packaged insolvency commencement date.
If no resolution plan is approved by the committee of creditors within this time period, the resolution professional should, 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 in such form and manner as may be specified.
The corporate debtor should within two days of the pre-packaged insolvency commencement date, submit to the resolution professional the following information, updated as on that date the list of claims, along with details of the respective creditors, their security interests and guarantees, if any; and a preliminary information memorandum containing information relevant for formulating a resolution plan.
The resolution professional should, within seven days of the pre-packaged insolvency commencement date, constitute a committee of creditors, based on the list of claims confirmed.
The corporate debtor should submit the base resolution plan to the resolution professional within two days of the pre-packaged insolvency commencement date, and the resolution professional shall present it to the committee of creditors.
If the Adjudicating Authority is satisfied that the resolution plan as approved by the committee of creditors, it should within thirty days of the receipt of such resolution plan, by order approve the resolution plan.
Moratorium
Moratorium begins from the day the adjudicating authority passes an order of initiation of the process and remains in force till the date on which the prepackaged insolvency resolution process period comes to an end.
Duties of resolution professional
The resolution professional should confirm the list of claims submitted by the corporate debtor; inform creditors regarding their claims; maintain an updated list of claims; monitor management of the affairs of the corporate debtor; inform the committee of creditors in the event of breach of any of the obligations of the Board of Directors or partners, as the case may be, of the corporate debtor, under the provisions of this Chapter and the rules and regulations made thereunder; constitute the committee of creditors and convene and attend all its meetings; and prepare the information memorandum on the basis of the preliminary information memorandum submitted under section 54G and any other relevant information, in such form and manner as may be specified.
Powers of resolution professional
A resolution professional can have the powers to access all books of accounts, records and information available with the corporate debtor; access the electronic records of the corporate debtor from an information utility having financial information of the corporate debtor; access the books of accounts, records and other relevant documents of the corporate debtor available with Government authorities, statutory auditors, accountants and such other persons as may be specified; attend meetings of members, Board of Directors and committee of directors, or partners, as the case may be, of the corporate debtor; appoint accountants, legal or other professionals in such manner as may be specified; collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor and the existence of any transactions that may be within the scope of provisions relating to avoidance of transactions.
