Prior to the introduction of the Insolvency and Bankruptcy Code, 20161 the economic insolvency structure was a blend of various statutes comprising of the Companies Act, 19562, the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 20023, the Sick Industrial Companies (Special Provisions) Act, 19854, the Recovery of Debts Due to Banks and Financial Institutions Act, 1993 etc., with no balanced outcome or a formula to resolve the situation. The Government of India had to act upon the predicament, as the surviving framework was insufficient to safeguard the interest of the promoter, creditor, stakeholders and shareholders. Likewise, the judicial designation was with the National Company Law Tribunal (NCLT), the National Company Law Appellate Tribunal (NCLAT) (in case of appeal), the High Courts and the Supreme Court. After the 2016 Insolvency Act, the floodgates of petition knocked the NCLT. The purpose behind the introduction of this legislature was to induce a consolidated opinion of recovery proceedings with a structured format, so as to have a consistency in the approach system while in default. However, the IBC, 2016 focused mainly on the multinational corporations (MNCs), corporate body, partnership, etc., while completely neglecting the major fund contributing part of the economy, the micro, small and medium enterprises. The notification by the Ministry of Micro, Small and Medium Enterprises on 26-6-2020 inserted the provisions under the Micro, Small and Medium Enterprises Development Act, 20065 (the MSME Act) to be classified as “MSME”. The notification lays down the revised financial threshold limit and investment plans as – (a) the investment in plant and machinery under the micro enterprises, shall not exceed Rs1 crore while the turnover amount shall not exceed Rs 5 crores; (b) the investment in plant and machinery for the small enterprises shall not exceed Rs10 crores while the turnover amount shall not exceed Rs 50 crores. The investment in plant and machinery under the medium enterprises shall not exceed Rs 50 crores while the turnover amount shall not exceed Rs 250 crores.
On 3-8-2021, the Rajya Sabha passed the amendment to the Insolvency and Bankruptcy Code, 2016 shielding the MSME sector in case of default. Although the House of Representatives turned a blind eye without discussing the Ordinance promulgated, the Bill yet received the presidential assent on 11-8-2021. Amidst the ruckus which surfaced in the lower house by the opposing alliance and the pandemic hit disruptions, the urge for an effective recovery mechanism became crucial. Prior to the Amendment, the Code highlighted its views on proposing a “feasible resolution plan” by the financial/operational creditors with other requirements suggested by the Insolvency and Bankruptcy Board of India (IBBI). The Insolvency and Bankruptcy Code (Amendment) Ordinance, 20216 promulgated by the President on 4-4-2021 was inter alia added to the Chapter III-A of the earlier Code (2016). With the initiation of corporate insolvency resolution process (CIRP), the debtor control regime swaps to become the creditor control business with the subsequent proposition of 66% of the voting rights by the committee of creditors. The rationale was to encompass all those companies with Rs 1 lakh of budget preposition for business management. Erstwhile, the 2021 Amendment alters its position by incorporating the MSME classified under the Micro, Small and Medium Enterprises Development Act, 20067 within its purview. The cumulative progress by the Government of India to enforce IBC stimulation with the significant heads has provided an extensive interpretation of the term “insolvency” and other related disputes. While the legislature mainly focuses on economising the debtor’s business operation through a resolution applicant for restructuring the corporate debtors insolvency mess. The authors intend to enunciate how the pre-packed insolvency emerged in India as a requisite factor in advancing and resolving the economic bankruptcy crisis.
According to the survey conducted by the MSME Ministry, approximately 29% of the GDP is contributed through both its national and international trade. During the pandemic outbreak, the previous 2 years in the country have interspersed and terminated the entire cash flow. At the end of the credit period, numerous debtors defaulted with their finances with the subsequent interest being tagged along with the principal sum, payable to their respective creditors.
The threshold in the increase of the number of insolvency matters in the MSME precinct, coerced the Government to secure the rights of creditors, exploited during the nationwide crisis. Parliament had to be considerate about this amendment, as it would be the first-ever legal platform including both “manufacturing and service” providing industries under the single framework. The combination of three market standard positions (micro, small and medium enterprise) would be strenuous and also burdensome to the judiciary, when evaluating all these areas on a single platform would have different modus operandi of transactions. So, the Ministry of Corporate Affairs in regulation with the Insolvency and Bankruptcy Board of India guidelines set up an open platform for these marketers to initiate the insolvency procedure against the corporate debtor. In case of default operating through the new scheme of the “pre-packaged insolvency”, the corporate debtor himself could initiate the insolvency proceedings. This was a pivotal step required to safeguard the strata of the community.
Enforcement of pre-packaged insolvency resolution process (PPIRP)
The nationwide crisis due to the Covid-19 pandemic, led to the conception of bringing forth the sentinel for many business sectors which were exposed to dreadful financial distress. Accordingly, the investment plan8maintained under the Code enhances the fluctuating turnover rates for each enterprise defining the classifications and the term “MSME”. The Ordinance was promulgated to limit its applicability only to those corporate debtors who qualified under the framework of MSME. On the other hand, the Ordinance does not define MSME. The Indian MSME insolvency envisaged both formal and informal ways of settlement in order to encounter unspecified circumstances during the proceedings. The pre-packaged insolvency was initiated to incorporate all those business areas, irrespective of financial default caused (threshold mentioned in the notification), and subsequently ensure the moratorium for recovery. While the pre-packaged insolvency application concentrated mainly on the key aspects of speedy disposal and flexibility to ensure maximum efficiency. In order to protect the small businesses from being dragged into insolvency proceedings, the Government of India through a delegating authority constituted a sub-committee for the enhancement of the insolvency framework. However, the lack of funds flowing in the economy created havoc in the judicial chambers. On March 2020 the Committee issued a notification9cumulating the minimum threshold to be Rs 1 crore or more (as may be notified by the Central Government) from the primary limit of Rs 1 lakh, required for initiating CIRP were altered. The default, in general generated a multitude of financial obligations towards corporate debtors across. Erstwhile major part of the MSME sector comprised of the operational creditors. As a matter of fact, the suspension of Sections 710, 811 and 912 caused financial distress to these creditors with the additional economic breakdown. These circumstances plunged the Central Government to reduce the out-of-court workouts by constituting a sub-committee for the advancement of an ecosystem, mandatory checks and balances, etc. for ensuring a prearranged insolvency resolution mechanism.
The report to the Ministry of Corporate Affairs submitted by the Insolvency Law Committee dated 31-10-2020 held the inclusion of only corporate debtors, who were a part of the MSME sector, following the pre-packed framework. The Sub-Committee delineated few basic components to be unfiltered that ensured the stability to guide the pre-packaged insolvency proceedings. The Code highlights, “creditor’s control”, “approval of the resolution plan” and “the moratorium period” to be unfettered. Further, the Central Government notified the initiation of the Insolvency and Bankruptcy Code (Amendment) Ordinance introduced in the lower house for MSME focusing on securing the debtor’s interest and rights via the pre-packaged insolvency resolution process. Interestingly, in spite of the Insolvency and Bankruptcy Code, 2016 being commenced, it took over 5 years to propose the amendments catering to the needs of only the MSME sectors, following the Code’s suspension for a year.
Long overdue in the inception for the pre-packaged insolvency
After the cataclysm, following the mutatis mutandis and the suggestions put forth by the Sub-Committee, the Government rejuvenated the economic speculation through the pre-packaged insolvency. Although the pre-packaged Insolvency Code is in motion in European countries, India started with the insolvency programme off lately during 2016. It practically took the Government five years to begin with the pre-packaged insolvency, irrespective of the introduction of this Code would not had been a newfangled process. The Government of India held the 2016 Act to be congruous and at the same time was reassured about the MSME Developmental Act, 2006 being satisfactory to save the MSME sector from insolvency crisis. It was the 2021 pandemic hit, where innumerable manufacturers had a downslide with their businesses which edged them towards the insolvent position. Also, due to the threshold for insolvency application in these sectors being too stunted, the Government was coerced to bring a subsequent act for withholding the piling of default cases.
The seven-member panel was appointed to scrutinise the prerequisite factors required to reduce the burdens upon the NCLTs. Subsequently, the Sahoo Panel Report suggested the need for “pre-packaged insolvency” to reduce the “out-of-court settlements” and for the overall Code efficiency. The Panel aimed at providing a faster resolution mechanism compared to the traditional CIRP. The approval of Atmanirbhar Bharat funds for MSME sector paved the way to energise a new regime investment threshold. Subsequently, with the nationwide lockdown the Government sheltered these enterprises by the expansion of the term “MSME” along with other incentives following the principle of “nova constitution futuris formam imponere debet, non praeteritis”. The moot point being, whether the Government delays in these enforcements was worth the wait. Affirmatively, the Insolvency Law Committee proposition was to protect the interest of the stakeholders by blending both the formal and informal theories of insolvency procedure to ensure flexibility without any haircut in the bankruptcy claims.
For an impenetrable structure, the Government started following the systemised implementation alongside maintaining the obligatory instructions for its perusal. It first instituted with the increase in the threshold limit, under Section 413of the Code from Rs 1 lakh to 1 crore. The foremost objective of increasing the amount was to substantiate that the creditors shall not file for a petition, ensuring termination of the liquidation process under the Code. On the other hand for initiating PPIRP the minimum threshold of default was of Rs 10 lakhs. This would empower the debtors to have adequate time for the repayment, alongside it would hoard these businessmen from being tagged in the pre-packaged insolvency resolution process (PPIRP). Successively the second stage starting from 25-3-2020, where the Insolvency Ordinance submitted the suspension of Sections 7, 8 and 9 against the corporate debtor for a period of 6 months, restraining the creditors from filing the petition. This would shelter the corporate debtor’s assets against the initiation of insolvency process, the insertion under Section 66(3) of the Code14 have barricaded the adjudicating authority from making any application. However, the insertion of Section 10-A15was a major setback. On 4-6-2020 to safeguard the interest and the welfare of MSME, the Ministry of Micro, Small and Medium Enterprises tried to revise the definition of MSME, in order to encompass a more number of enterprises within this framework. Meanwhile the Insolvency Bankruptcy Code with the MSME Development Act, 2006 incited its way for the “pre-packaged insolvency process” in India.
Safeguarding the nation’s interest through MSME workouts
The intention behind this Code was to minimise the number of insolvency cases knocking the NCLT. Apart from the first resolution mechanism, the Government had three major outlines to be involved, that is regarding the informal structure setups, the employment generation through these sectors which indeed encouraged many for startups. Quintessentially the issue was to substitute the traditional approach of the Insolvency and Bankruptcy Code, 2016. The highlighting attribute of this Amendment stands for its “informal structure” while dealing without muddling up with the existing Code. The motive behind the commencement of informal mechanism was to make it cost efficient, flexible and speedy maintaining the transparency which assists in reducing the overall tax burden plan. Fundamentally since India has never dealt with any immature bankruptcy dealings, the question arises whether the marketers are ready to opt for an “informal way of settlement. Pre-packaged insolvency opts for an informal plan which operates without the involvements of courts and tribunals. It is a type of restructuring which idealises the debtor and the creditor to discuss for informal workouts and then submit its resolution plan for the approval. However pre-packaged insolvency is hybrid mechanism of the earlier insolvency structure which lacks the statutory sanctity, which in turn breaks down the conflicts post the approval. It is essential to note that approximately 14,510 applications were withdrawn from the NCLT at the pre-admission stage after the relevant parties discussed their workouts through the informal way. Interestingly, unlike the corporate insolvency resolution process the base resolution plan is entirely framed by the corporate debtor. This informal structure has opened gates for a unique way of proposing the resolution plan. While there is no compulsion for the parties to opt for this mechanism, provided it was consensual. This format lowers the burdens on tribunals safeguarding the rights of the parties involved in the insolvency proceedings. The implementation of these amendments gave birth to the long-awaited insolvency procedure.
For the growth of the MSME sector, the Government has bestowed them with granting bank loans without securities, lower electricity bills with promotional subsidies for the overall development. The public sector Bank of India announced the reduction of repo rates from 5.15 per cent to 4.40 per cent ensuring the secularisation of loans at lower rate of interest which is linked to Reserve Bank of India. It is not incorrect to say that “MSME” is the third wheel of the society, contributing majorly towards the socio-economic development. The liberties granted under this scheme have widened the scope of startups in India as the State Government guides in entailing tax benefits, tariffs, capital investment facilities. This sector needs to be carefully nourished and brought up, as it bolsters just not the economy but also the employment. Accordingly, the MSME sector in India has attained position one by generating over 35% employment rates through its different programmes. Consequently, the MSME’s role as an ancillary industry, complementary to the large-scale industries has enhanced the need to safeguard their positions in the markets.
Commencement of the new regime – The 2021 Amendments
The recommendation of the Insolvency Bankruptcy Amendments16 was to shift the burdens from the tribunals to the outside court settlements through informal discussion between the parties. Nirmala Sitharaman had tabled the Bill in Parliament to have an “effective alternative” mechanism to the traditional insolvency procedure. It alongside would have a kick-start to the new pre-packaged insolvency procedure, by liberating the collapse of the MSME’s. Chapter III-A of the Insolvency Code from Sections 54-A to 54-P enlarged the management crisis happening within the corporate debtors company.
- The corporate debtors termed as MSME under the MSME Development Act, 2006 stands eligible to initiate for pre-packaged insolvency resolution process. Unlike CIRP, the debtors shall have the entire management control. The corporate debtor alone or at least with the consent of three-fourth of the partner’s approval submit the base resolution plan17. Meanwhile, Section 54-A(1) of the Code18 grant only the corporate debtors to initiate the pre-packaged insolvency procedure after obtaining 66% of approval from their respective creditors, for submitting the resolution plan to the adjudicating authority for the approval. The NCLT has to either approve or reject the resolution plan with 14 days of its receipt submitted. During the initiation of these proceedings, the corporate debtor mandatory shall come in clean chit without undergoing any prior liquidation under CIRP, as an obligatory field required under Section 3319.
- The submission of the base resolution plan by the corporate debtor through the nomination process under Section 54-A(4) must comply with provisions under Sections 30(1) and (2) of the Code20. After the completion of the nomination process, the resolution professional is required to submit a report, confirming the condition precedent adhering under the above sections.
- There must be no record of a completed CIRP for past 3 years or the initiation of PPIRP during the previous year.
- Application under PPIRP should be approved by at least 66% of the “unrelated creditor” obtaining the green signal for the submission of the base resolution plan. In addition to the resolution plan, the creditor must approve for the appointment of the resolution professional. Subsequently, the debtor should also provide the name of the resolution professional to the financial creditors. In case, the corporate debtor does not have an unrelated party, then the corporate debtor is required to hold a similar meeting for operation creditor (major part contribution and comprising MSME) and attain the approval of all the members in the meeting in the same manner conducted for the “unrelated financial creditors”.
- The Code includes Section 29-A21 as a prerequisite factor. The Code barricades the related party to the corporate debtor to be a part of the Committee of Creditors while voting for the feasible plan. It is necessary to amputate the related party rights to ensure that company would not regain its control via the liquidation process by stepping through the backdoor mechanism.
- Under Section 54-A(2)(f), the declaratory terms and conditions be filed by the majority of the partners or directors of the corporate debtors.
- On 24-3-2020, the number of insolvency cases increased as a result the minimum threshold (for default) for initiating CIRP was increased from Rs 1 lakh to Rs 1 crore, which may vary as per the notification from the Central Government. A second proviso inserted under Section 4 stated, minimum thresholds for initiating the application under the PPIRP was Rs 10 lakhs against the MSME.
- The penalising of the officer-in-charge (resolution professional) who manages the debtor’s claims under Section 67-A22, with the intend or commit the gross mismanagement to defraud the creditors.
- The resolution professional, after the commencement of the Committee of creditors has to submit the plan to the adjudicating authority within a period of 120 days. The completion of the entire process must be within 90 days.
- Usually for the withdrawal of CIRP, under Section 12-A23 requires 90% of the approval from the Committee of creditors. Unlikely, under PPIRP anytime from commencement but before the approval of the resolution plan, PPIRP can be terminated for the initiation of CIRP with the approval of at least 66% of the creditors.
Under MSME sector, the filing of an application under the PIRP involves the following methodology. Firstly, the minimum threshold amount of default must be 10 lakh rupees. The base resolution plan must be proposed by the corporate debtor or with the consent of the three-fourth of total partners. During the PPIRP the entire management control shall be with the corporate debtor, unlike CIRP. Subsequently, the appointment of the resolution professional and shall be approved by 66% of the unrelated party of the corporate debtor. The debtor is required to submit prior claims24 and prerequisite details regarding to whom the company owes money. If default or any omission of preliminary information memorandum is suspected, then the promoter, director shall be liable to pay without any prejudice to the damage caused to the individual. After the approval of the base resolution plan by Committee of Creditors, the resolution professional shall submit the proposal to the adjudicating authority for approval. If NCLT is satisfied with the submitted proposal the liquidation process maybe decreed. Consequently, the restructuring scheme rejuvenates the MSME’s depreciating assets through regaining of the creditor’s trust by informal proceedings under the pre-packaged insolvency mechanism. These Amendments have curtailed the debtors from being dragged into the lengthy insolvency procedure and simultaneously reduced the burden on the Company Tribunals.
The UNCITRAL path
The model law was regulated to enhance the betterment of bilateral agreement, happening between the nations in a manner suitable for them while adapting to assertions prescribed by law. While restructuring the Code, to secure the agreement made with creditors, the United Nations Commission on International Trade Law (UNCITRAL) used a formal base progressing with an informal structure. The negotiation and the proposing of the resolution plan remains the top notch in practices of “pre-packaged insolvency”. The court proceedings are scarcely just a formality for attainting the consent for the liquidation process. Under the pre-packaged insolvency mechanism, the informal plan discussion between the parties, in a manner that permits the resolution professional to rehabilitate and maximise the assets value, prior to the initiation of liquidation process guides them to have manifesto for negotiation on the pre-agreed sale of business assets. This authentication is sanctioned by the governing laws protecting the interest and rights of the demanding party. The model law describes pre-packaged insolvency25 as “the expedited reorganisation proceedings”, to address those situations that follow the procedure of reorganisation, but on an expedited basis, combining voluntary restructuring negotiations, where a plan is negotiated and agreed by the majority of affected creditors, with reorganisation proceedings commenced under the insolvency law to obtain court confirmation of the plan in order to bind dissenting creditors. This shall protect the rights of the parties, ensuring a balanced framework without compromising the other parties’ statement. Countries like Singapore, UK, USA, etc. who have adapted insolvency model law is obligatory to follow the pre-insolvency priorities on condition of co-equal opportunities to both the parties. Although, UNCITRAL is not incorporated in India, but under the recommendation of the Indian Insolvency Joint Committee 2015 it follows a cross-border insolvency process under Sections 23426 and 23527. The model insolvency law is indispensable to most of the countries around as it promotes the uniform code of insolvency proceedings. It defines the pre-packaged insolvency to be a “voluntary restructuring process” manifesting the settlement beyond the courts charter. The Indian system needs to adapt the model law guide in order to have an effective insolvency resort. Subsequently it must adapt to these guidelines for ensuring the coordination and harmony between cross-border nations and to avoid encumbrance of cash flow in the economy.
Is India late to the pre-packaged insolvency game
When compared to the traditional way of corporate insolvency resolution process, the restructuring scheme has been the most effective way of sustainability to those distressed firm seeking recovery within the shortest span. Although the Insolvency Bankruptcy Code, 2016 does not cover within its ambit numerous areas of bankruptcies like trust insolvency, the corporative insolvency, etc., but why has the pre-packaged insolvency been added under Chapter III-A, sidelining the rest of the insolvency areas. Erstwhile why did India fail to scrutinise the insolvency grievances of the MSME sector, when many countries under the model law had incorporated the practice of PPIRP. Whether was it the pandemic that urged the Central Government with the proposition or whether this Code has been the long-waited requirement under the Indian Insolvency Code. Affirmatively, the commencement of the pre-packaged insolvency for MSME has rescued the economies major contributing sector from turning insolvent. In countries like UK, Singapore, USA, Canada and South Korea, the PPIRP system has been a common practice shielding the distressed firms from undergoing the liquidation process.
The United Nation follows and recognises the pre-packaged insolvency through voting, rescheduling, negotiating and formulating the plan by the debtor. Therefore, the rights of the stakeholders, creditors are protected before the company files for a petition under Chapter 11 of the Code. It authorises the administrator for the partial or complete sale of the corporate debtor’s business. By summoning all the interested parties to object to the proposed deal put forth, it notifies that the business is clear-cut not involved in the its assets. Section 36328 deals with the pre-arranged insolvency proceedings. Interestingly, both the United Nations and the United Kingdom follows the same principle of Code of permitting the stakeholders of the corporate debtor to initiate the insolvency proceedings. However, the United Kingdom insolvency tricked the debtors for a long time, as only the judicial system supported this process. Contrarily the UK Insolvency Code, 1986 neither provided for nor operated the insolvency process. While this process mainly focused on selling of business assets on “going concern” without the approval of the creditors. Once the administrator was appointed, the entire process would be shut down with no claims being entertained from any side. Addressing this concern, Graham Committee was constituted to analyse this mishap within the process ensuring the stability to avoid transactions to the connected party and the tracking of “serial pre-packing”. Restoring the said provisions under the Insolvency Code, 1986 within a period of 5 years span, on November 2015 the amendments aimed to empower the Government and the pre-pack sale occurring to the connected party. Enlarging the view of pre-pack mechanism in UK, it revived its policy under the Corporate Insolvency and Governance Act, 2020. In comparison to the other countries, Singapore, under its High Court orders sanctioned its first insolvency on January 2018. This Code traces its background from the pre-packaged insolvency procedure of Chapter 11 under the US Bankruptcy laws with the compilation of the Singapore’s formula schemed under Section 211I of the Companies Act. However, the bankruptcy does not strictly claim for the “creditors support agreement”.
The detail reading of the aforementioned provisions above provides a jigsaw of the insolvency proceedings of various countries. Indian pre-packaged insolvency is a blend of both the UK and the US bankruptcy laws, certifying the Code to have an indestructible base. Yet, these structures differ from one another.
- The motive behind proposing the “pre-packaged” insolvency regime was to protect the rights of the creditors and the corporate debtor’s company from running insolvent. While comparing this stimulation with USA and Indian insolvency, it is noted that the interest of the shareholders is compromised in India and UK. Although UK and USA follow the same principle and guidelines for the insolvency practice, during the insolvency procedure only the creditors’ claims are considered. In USA, the shareholders’ rights are considered although they are prioritised below the creditors during repayment.
- India and USA justices have wide discretionary powers subjected to their restructuring process. India has only two regulatory authorities, NCLT and the Supreme Court practising its inherent powers under Rule 11 of the NCLT Rules29, with the NCLAT being only for appeals. While the other alternative for the MSME sector (creditors) would be the Debts Recovery Tribunal. The Indian courts have limited its scope with only 2 or 3 approaches. Under the USA insolvency base, the jurisdiction is vested in every District Court which issues an “order of reference30”. These are specialised Judges dealing with the core matter of the pre-packaged insolvency proceedings.
- Under USA pre-packaged insolvency, the administrator is entitled to wholly or sustainably sell the corporate debtor’s assets, after notifying the interested parties. The insolvency trustee must mandatorily provide the opportunity to all classes of creditors to object. Following the objection, it must then obtain consent from the bankruptcy court as these dealings are operated normal outside the routine cycle, ensuring that the business is not involved in its assets. In India, after the proposition of plan by the corporate debtor (under PPIRP), the Committee of creditors has to approve the plan by at least 66.6% while there is no objection raised by the creditors during the process. The interim resolution professional who is later confirmed as resolution professional submits the plan to the Tribunal which may reject or accept the application.
- The Bankruptcy Code of USA does not prescribe a proper structure on how these pre-sale transactions must be conducted and concluded outside the courts. Under the Indian pre-packaged insolvency, it mentions a structured format on how these “pre-planned” transactions must function.
Though India has delayed its inception of pre-packaged insolvency, it has addressed the major issues faced by the MSME sector and accordingly, sheltered their needs. By keeping the base of CIRP intact, the legislators have scrutinised the structure of Insolvency Bankruptcy Code, 2016 and thereby made it less burdensome to the courts with simultaneous commencement of PPIRP. Whilst it also provides for an option to the creditors where they could shift their claims from PPIRP to CIRP.
The pandemic destructions in the MSME sectors have left the judicial system cumbersome, which was later surpassed by the enforcement of the pre-packaged mechanism in India. The authors appreciate this proposition to be magnificent as the pre-packaged insolvency process covers major loopholes found in the corporate insolvency process 2016. Although the pre-packaged insolvency has no suitable statutory definition, yet the legislation has been moving ahead in full-swing since inception. The overall perception about pre-packaged insolvency makes it necessary to have a straitjacket formula in order to avoid the uncertainty and to have an anticipation of the upcoming matters while embracing the judicial assessments. However, the amendment is silent on how the assets of the third party shall be dealt with during the pre-packaged insolvency process. On the other hand, the altered and controlled system reassures the flexibility in the restructuring process, balancing the societal needs. Therefore, in circumstances of puzzlement and overlapping of issues, it is advisable to have a separate tribunal dedicated only to resolve the pre-packaged insolvency issues and to accordingly address them.
*Principal Associate, Saraf and Partners, Law Offices.
**4th year student, BA LLB , SDM Law College, Mangalore.
1Insolvency and Bankruptcy Code, 2016.
2Companies Act, 1956.
3Securitisation and Reconstruction of Financial Assests and Enforcement of Security Interest Act, 2002.
4Sick Industrial Companies (Special Provisions) Act, 1985.
5Micro, Small and Medium Enterprises Development Act, 2006.
6Insolvency and Bankruptcy (Amendment) Ordinance, 2021.
7Micro, Small and Medium Enterprises Development Act, 2006, S. 7(1).
- Classification of enterprises.—(1) Notwithstanding anything contained in S. 11-B of the Industries (Development and Regulation) Act, 1951, the Central Government may, for the purposes of this Act, by notification and having regard to the provisions of sub-ss. (4) and (5), classify any class or classes of enterprises, whether proprietorship, Hindu Undivided Family, association of persons, cooperative society, partnership firm, company or undertaking, by whatever name called,—
(a) in the case of the enterprises engaged in the manufacture or production of goods pertaining to any industry specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, as—
(i) a micro enterprise, where the investment in plant and machinery does not exceed twenty-five lakh rupees;
(ii) a small enterprise, where the investment in plant and machinery is more than twenty-five lakh rupees but does not exceed five crore rupees; or
(iii) a medium enterprise, where the investment in plant and machinery is more than five crore rupees but does not exceed ten crore rupees;
(b) in the case of the enterprises engaged in providing or rendering of services, as—
(i) a micro enterprise, where the investment in equipment does not exceed ten lakh rupees;
(ii) a small enterprise, where the investment in equipment is more than ten lakh rupees but does not exceed two crore rupees; or
(iii) a medium enterprise, where the investment in equipment is more than two crore rupees but does not exceed five crore rupees.
Explanation 1.—For the removal of doubts, it is hereby clarified that in calculating the investment in plant and machinery, the cost of pollution control, research and development, industrial safety devices and such other items as may be specified, by notification, shall be excluded.
Explanation 2.—It is clarified that the provisions of S. 29-B of the Industries (Development and Regulation) Act, 1951, shall be applicable to the enterprises specified in sub-cls. (i) and (ii) of cl. (a) of sub-s. (1) of this section.
8Expln. 2.1 from the RBI Notification (Noti. No. FIDD.MSME & NFS.BC.No.3/06.02.31/2020-21) defining investment plan as under—
2.1.Classification of enterprises.—An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:
(i) a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
(ii) a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and
(iii) a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.
9Explanation of the proviso inserted under S. 4 of the Insolvency and Bankruptcy Code, 2016 ((F. No. 30/9/2020-Insolvency) S.O. 1205(E).—In exercise of the powers conferred by the proviso to Section 4 of the Insolvency and Bankruptcy Code, 2016, the Central Government hereby specifies one crore rupees as the minimum amount of default for the purposes of the said section.
10Insolvency and Bankruptcy Code, 2016, S. 7.
11Insolvency and Bankruptcy Code, 2016, S. 8.
12Insolvency and Bankruptcy Code, 2016, S. 9.
13Insolvency and Bankruptcy Code, 2016, S. 4 (hereinafter referred to as “the principal Act”). In S. 4, after the proviso, the following proviso shall be inserted, namely: “Provided further 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 pre-packaged insolvency resolution process of corporate debtors under Ch. III-A.”
14Insolvency and Bankruptcy Code, 2016, S. 66(3).
15Insolvency and Bankruptcy Code, 2016, S. 10-A
10-A. Suspension of initiation of corporate insolvency resolution process.—Notwithstanding anything contained in Ss. 7, 9 and 10, no application for initiation of corporate insolvency resolution process of a corporate debtor shall be filed, for any default arising on or after 25-3-2020 for a period of six months or such further period, not exceeding one year from such date, as may be notified in this behalf:
Provided that no application shall ever be filed for initiation of corporate insolvency resolution process of a corporate debtor for the said default occurring during the said period.
Explanation.—For the removal of doubts, it is hereby clarified that the provisions of this section shall not apply to any default committed under the said sections before 25-3-2020.
16Insolvency and Bankruptcy Code (Amendment) Bill, 2021.
17Insolvency and Bankruptcy Act, 2016, S. 5(2-A), after cl. (2), the following clause shall be inserted, namely: “(2-A) ‘base resolution plan’ means a resolution plan provided by the corporate debtor under cl. (c) of sub-s. (4) of S. 54-A.”
18Insolvency and Bankruptcy Code, 2016, S. 54-A(1).
19Insolvency and Bankruptcy Code, 2016, S. 33.
20Insolvency and Bankruptcy Code, 2016, Ss. 30(1) and (2).
21Insolvency and Bankruptcy Code, S. 29-A.
22Insolvency and Bankruptcy Code, S. 67-A.
23Insolvency and Bankruptcy Act, S. 12-A.
24 Insolvency and Bankruptcy Code, 2016, S. 54-G
54-G. List of claims and preliminary information memorandum.—(1) The corporate debtor shall, within two days of the pre-packaged insolvency commencement date, submit to the resolution professional the following information, updated as on that date, in such form and manner as may be specified, 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.
(2) Where any person has sustained any loss or damage as a consequence of the omission of any material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum submitted by the corporate debtor, every person who—
(a) is a promoter or director or partner of the corporate debtor, as the case may be, at the time of submission of the list of claims or the preliminary information memorandum by the corporate debtor; or
(b) has authorised the submission of the list of claims or the preliminary information memorandum by the corporate debtor, shall, without prejudice to S. 77-A, be liable to pay compensation to every person who has sustained such loss or damage.
(3) No person shall be liable under sub-s. (2), if the list of claims or the preliminary information memorandum was submitted by the corporate debtor without his knowledge or consent.
(4) Subject to S. 54-E, any person, who sustained any loss or damage as a consequence of omission of material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum shall be entitled to move a court having jurisdiction for seeking compensation for such loss or damage.
25Explanation defining pre-packaged insolvency under the UNCITRAL—The expedited reorganisation proceedings discussed in the Guide to address those situations follow the procedure of reorganisation, but on an expedited basis, combining voluntary restructuring negotiations, where a plan is negotiated and agreed by the majority of affected creditors, with reorganisation proceedings commenced under the insolvency law to obtain court confirmation of the plan in order to bind dissenting creditors.
26Insolvency and Bankruptcy Code, 2016, S. 234.
27Insolvency and Bankruptcy Code, 2016, S. 235.
28United Nations Bankruptcy Code, S. 363. S. 363 defines “cash collateral” as cash, negotiable instruments, documents of title, securities, deposit accounts, or other cash equivalents, whenever acquired, in which the estate and an entity other than the estate have an interest. It includes the proceeds, products, offspring, rents, or profits of property and the fees, charges, accounts or payments for the use or occupancy of rooms and other public facilities in hotels, motels, or other lodging properties subject to a creditor’s security interest.
29National Company Law Tribunal Rules, 2016, R. 11.
3028 US Code S. 157 Procedures under US Codes – (a) Each District Court may provide that any or all cases under Title 11 and any or all proceedings arising under Title 11 or arising in or related to a case under Title 11 shall be referred to the bankruptcy Judges for the district.