Insolvency and Bankruptcy (Amendment) Ordinance, 2021: A Potential Framework to Bailing Out the MSMEs from Bankruptcy

Author: Mr A K Mylsamy, Managing Partner, AK Mylsamy & Associates LLP

In the upcoming years, the year 2020 will always be remembered for the Covid-19 pandemic as this pandemic has caused incalculable loss to human life and the economy. The financial situation has become highly distressed and a severe blow has been hit to different world economies even including the stronger economies like the USA, Europe, etc. The impact of the pandemic has resulted in heavy business losses making the closure of businesses a matter of routine. High scale financial distress has been observed in the operations of Micro, Small and Medium Enterprises  (MSME) as these businesses do not have strong capital backing and have a less annual turnover. Their business operations are spread to a limited extent and hence, frequent lockdowns and curfews have severely hurt the economic sentiments of MSMEs. 

As per the Annual Report of the Ministry of Micro, Small, and Medium Enterprises 2020-21, MSMEs have a share of 30.27% of All India GDP. Moreover, as per an estimate, there are almost 633.88 lakhs MSM Enterprises in India out of which 630.52 lakhs enterprises fall under the criteria of Micro Enterprises[i] by which means that in 99% of the enterprises, the investment in Plant and Machinery or Equipment does not exceed one crore rupees and turnover does not exceed five crore rupees[ii]. Therefore, it can be deduced that MSMEs being highly scattered in numbers yet small in business operations have suffered the plight of a pandemic the most, and hence, their expectations from the government to provide reliefs becoming higher is no wrong.

One such financial relief which may bail out the MSMEs from financial distress is found in the Insolvency and Bankruptcy (Amendment) Ordinance, 2021 which further amends the Insolvency and Bankruptcy Code, 2016. This Ordinance has been enforced to specifically and urgently address the requirements of MSMEs relating to the resolution of their Insolvency. The Ordinance intends to provide an efficient alternative resolution process that ensures quicker, cost-effective, and value-maximizing outcomes for different stakeholders and most importantly the corporate persons classified as MSMEs under the IBC. The aim is to ensure that the ship of MSMEs can sail through these tough times with few disruptions and that they are not financially forced to close their businesses so that the jobs can be preserved and workers are saved from joining the pool of unemployed people. 

Through this Ordinance, a new chapter has been added in the Code i.e. Chapter III-A that deals with the Pre-Packaged Insolvency Resolution Process (PPIRP). Pre-Packaged Insolvency Process is a different process compared to Corporate Insolvency Resolution Process and unlike in India, such process is common in the USA, Singapore, France, and the UK. This process is termed to be a liberal process where the focus is comparatively put on debtors as the application for initiating PPIRP can be made by a corporate debtor. 

Basically, the PPIRP can be understood as a flexible mode of insolvency process in which an agreement is made on an application by the debtor for the resolution of the debt of a distressed company between secured creditors and investors. As per the Finance Ministry, “pre-pack for MSMEs is a hybrid corporate rescue process, which blends elements and virtues of both formal and informal insolvency proceedings. A resolution plan is negotiated between debtor and its creditors before commencement of formal proceedings”[iii]. The process is a voluntary consensual process between debtors and creditors, as the debtor can only move the application but the application can only proceed further when financial creditors who are unrelated parties amounting to 66% of the financial debt approve for the same. Therefore, the process ensures an opportunity for the stakeholders to find a resolution on their own in a more informal manner thereby, avoiding the complications and technicalities of taking a formal path.

Seemingly, the process is simple and allows the stressed borrower to prepare a plan for restructuring the debt while still retaining managerial control over the enterprise. Only those corporate debtors can initiate the application for pre-packaged process who are not undergoing or who has not undergone PPIRP or CIRP during the last three years, or there has been no order for liquidation has already been passed. The process also seeks a declaration from the majority of the directors or partners of the corporate debtor stating that the corporate debtor will file an application for initiating the PPIRP within a definite period of 90 days and that the whole process is not being initiated to defraud any person.

Further, as a requirement, financial creditors who are not a related party to the corporate debtor have to propose the name of the insolvency professional (IP) who will be appointed as a resolution professional (RP) for conducting the PPIRP. The appointed RP will have to monitor the process initiated by the corporate debtor and has to see that whether the corporate debtor has met all the requirements and whether his base resolution plan is in conformity with the procedure. It is pertinent to mention that the RP will not handle and manage the affairs of the firm as a going concern unlike CIRP and will act only as a watch guard. The management of the affairs of the Corporate Debtor shall continue to vest in the Board of Directors or Partners. Apparently, the role of RP will cease to operate when a corporate debtor fails to file an application for PPIRP within the specified period as mentioned or if the application for initiating the process is admitted or rejected by the Adjudicating Authority.

Once, the procedural aspect is in compliance, the corporate debtor then has to file an application with the Adjudicating Authority for initiating the PPIRP showing that the special resolution has been passed and the same has been approved by the financial creditors. If satisfied, the Adjudicating Authority will admit the application within a period of 14 days and the same process shall commence from the date of admission which shall be required to be completed within 120 days. For such a period, the Adjudicating Authority will also declare a moratorium. 

At the onset, within the first 90 days of this period, the resolution plan will be created and the same shall be approved by the committee of creditors failing to which the process shall be deemed to be terminated. A Committee of creditors will be formed by the resolution professional within 7 days of the date of commencement of the process. It is further the duty of RP to submit the resolution plan duly approved by the committee of creditors to the Adjudicating Authority within such 90 days from the date of commencement of PPIRP. Then, the Adjudicating Authority after being satisfied that the plan has met procedural requirements and has provisions for effective implementation will approve the resolution plan within the next 30 days. While the process is undergoing, the Adjudicating Authority will also declare a moratorium which will remain in force till the time PPIRP comes to an end.

Most importantly, it can be observed that the role of Resolution Professional remains significant as he has been given the task of conducting the PPIRP of a corporate debtor. Although it is the duty of the board of directors to make every endeavour to protect and preserve the value of the property of the corporate debtor and to manage the operation of the firm as a going concern, the RP also essentially has to verify that proper records of debtors and creditors are brought forward so that a correct and updated list of claims of creditors can be made. Therefore, it can be analyzed that the process entails a comprehensive framework with enough safeguards to ensure that the process does not vitiate the interest of any of the stakeholders.

Certainly, the process is a cost-effective and rapid mode of determining a resolution however, the framework still impedes the speed of the process because of the provisions which ensure the interference of NCLT and RP at every stage of the process. Essentially, the role of NCLT in observing the process would be an advantage for ensuring a higher success rate, nonetheless, it may potentially slow down the process due to NCLT being overburdened and it would fail the objective of the PPIRP of providing speedy redressal in a time-bound manner. 

Apart from this, the PPIRP seems to be a win-win situation for the MSME sector at least in the current market situation which is constantly being troubled by unstable results of spread in Coronavirus. The flexibility coupled with an effective regulatory scheme has the potential to find honest resolutions in the coming future. Additionally, if the results are favourable to the expectations of the government, the government would try to incorporate such a process for corporations as well. All in the entire framework matches the reasonable standard and now the onus is shifted on the stakeholders and beneficiaries to ensure the efficient functioning of the new redressal mechanism. 




About the Author: 

A K Mylsamy is the Founder, Managing Partner and anchor of  AK Mylsamy & Associates LLP. He holds a Degree in law and a Degree in Literature. He is enrolled with the Bar Council of Tamil Nadu.

With over 53 years of standing at the Bar, he is known for his professional integrity and expertise in corporate and civil law.

He heads the litigation and arbitration practice of the Firm and regularly appears before various High Courts, the National Company Law Tribunals, the National Company Law Appellate Tribunal and the Supreme Court. He specializes in civil and commercial litigation with specific focus on shareholders litigation and the Insolvency and Bankruptcy practice of the Firm.

Around The World