Overview of Pre-Pack Insolvency Resolution Process

Why Pre-pack Insolvency Resolution Process is excellent for MSME borrowers.

This Pre-packaged insolvency process, informal, hybrid, and debtor-driven pre-insolvency process, will be applied in jurisdictions such as the US  & UK, and Singapore, under the Insolvency and Bankruptcy Code.

Earlier, The Govt suspended the CIRP for 1 Year earlier following the COVID-19 pandemic by increasing the minimum default threshold of the INR 1 lakh to INR 1 crore in the insolvency proceedings.

Why did the central government introduce the insolvency pre-pack resolution?

• The main objective of the pre-pack is to give MSMEs the opportunity to restructure and begin new. It provides sufficient protection while protecting stakeholders’ rights, to prevent possible misuse by companies in order to avoid payment to creditors.
• It will also help corporate debtors to consent with lenders and address the organization’s entire risk side.
• In the pandemic-Hit to MSMEs companies, the Govt has introduced an ordinance i.e Pre-pack Insolvency Resolution Process i.e insolvency solution framework within 120 days.
• A copy of the ordinance has been examined by Rajput Jain & Associates Chartered Accountants.
• the MCA said “It provides an effective alternative insolvency solution framework for businesses classified as MSMEs to resolve distress quickly, efficiently, and cost-effectively, thereby giving a positive signal to the debt market, preserving jobs, making it easier to conduct business and maintaining corporate capital,“

What are the provisions of the creditor’s protection ordinance?

• The central government pre-pack mechanism allows a swiss challenge to a resolution plan which states that duties for creditors are less than fully recovered.
• Furthermore, if creditors do not comply with the promoter’s resolution plans, they can request a third-party resolution plan.
• Under that Pre-pack Insolvency Resolution Process mechanism, a third party could submit a resolution plan for a company in distress and the original applicant could either go ahead or forgo the investment.
• Below are some of the basic characteristics of the new Pre-pack Insolvency Resolution Process framework specified in the Ordinance –

1. 1. Pre-packaged insolvency resolution process to be completed within 120 days
   2. Approval is required by not less than 66 % of the Unrelated financial creditors
   3. Govt may specify default thresholds (not more than INR 1 Cr ) for pre-pack eligibility (Insolvency and Bankruptcy Code has a threshold of INR 1 Cr and above )
   4. Management of firm to continue to vest in the board of directors, subject to conditions.

Why do most MSMEs not qualify for the process of pre-pack insolvency resolution?

• Most MSMEs are not eligible for the Pre-pack Insolvency Resolution Process established under the IBC by the Central Govt.
• In order to be able to prepack as stated in Chapter III-A of the Ordinance, the company debtor is required to be registered with a micro, small or medium enterprise pursuant to Section 7(1) of the Micro, Small, and Medium Enterprises Development Act of 2006.
• Udyam Registry MSME’s registration portal states that only 26,42 MSMEs are actually registered.
• Taking into account these figures, unregistered MSMEs are above those of registered MSMEs and could not benefit from the process of the Pre-pack Insolvency Resolution Process.
• Another limitation of the Pre-pack Insolvency Resolution Process is that only the companies and limited liability partnerships(LLP) are very few/ limited.
• MSMEs are not covered by the aforementioned procedure for single ownership, partnership or Hindu Undivided Family (HUF), which further restricts eligible MSMEs to Pre-pack Insolvency Resolution Process.

Advantages of Pre-pack Insolvency Resolution Process Over CIRP

• In recent years, due to its threshold period of 270 days, the Corporate Insolvency Process (CIRP) has been criticized.
• The pre-package is limited to 120 days compared with the CIRP, and the parties to bring the resolution plan to the NCLT will be given 90 days.
• A resolution professional in CIRP is in control of the debtor as the financial creditor representative while the current management retains control during pre-packaging activities.
• Experts believe that minimal business and employment disturbance will take place with the introduction of pre-packs.
• At the end of 2020, In the 1717 CIRP proceedings, more than 86% crossed the 270-day threshold.

Pre-pack Insolvency Resolution Process Come to an end in 4 ways

Once the application for initiation of Pre-pack Insolvency Resolution Process in respect of a CD is admitted by the Adjudicating Authority, it can only come to an end in 4 ways: –

1: the resolution plan approved by the CoC is submitted to the Adjudicating Authority and receives its approval.

2: the Adjudicating Authority passes an order of termination in the below Situation –

• • the CoC passes a resolution seeking termination;
  • a resolution plan is not submitted to the Adjudicating Authority within 90 days;
  • the resolution plan successful in the competition between the base resolution plan and the selected resolution plan is not approved by the CoC; and
  • a resolution plan approved by the CoC is rejected by the Adjudicating Authority.

3: The Adjudicating Authority passes an order to initiate CIRP, based on a resolution passed by the CoC seeking the same.

4: The Adjudicating Authority passes an order of liquidation if subsequent to an order vesting the management of the CD with the Resolution Professional, the CoC approves a resolution plan that does not envisage a change in control or management to a third-party or the pre-pack process is required to be terminated.

 

Popular blog:-

• Suspension of Fresh IBC for 1 Year declared By FM
• IBC ordinance 2020 after the impact covid-19 covid period defaults cannot be triggered by cirp
• Case laws & FAQs related to Personal Guarantee for initiation of Insolvency proceeding under IBC