What is Pre-Packaged Insolvency Resolution Process
Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 has been promulgated to provide an alternative mechanism i.e., pre-packaged insolvency resolution process (“Pre-Pack”) for speedy insolvency resolution for corporate debtors classified as micro, small or medium enterprises (“MSME”). A Pre-Pack is the resolution of the debt of a corporate debtor through an agreement between financial creditors and potential investors instead of a public bidding process. Under the Pre-Pack, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal.
Eligibility of a Corporate Debtor for undergoing Pre-Packaged Insolvency Resolution Process
Certain eligibility criterion and requirements that needs to be met for undertaking Pre-Pack, amongst others, are listed below:
1. Presently, Pre-Pack can be undertaken by only companies or limited liability partnerships classified as micro, small or medium enterprises under the Micro, Small and Medium Enterprises Development Act, 2006.
2. Corporate debtor is eligible to submit a resolution plan under Section 29A of the Insolvency and Bankruptcy Code, 2016.
3. Corporate debtor has not undergone Pre-Pack before or completed the corporate insolvency resolution process in 3 (three) years preceding the Pre-Pack initiation date. Similarly, the corporate debtor is not currently undergoing corporate insolvency resolution process.
4. The financial creditors representing not less than 66% (sixty six percent) of the financial debt have approved the proposal. If the corporate debtor has no financial debt or where all financial creditors are related parties, the resolution applicant has to seek the approval of operational creditors who are not related parties in the manner prescribed in the regulations.
5. A majority of the directors or partners of the corporate debtor have made a declaration as prescribed under the regulations, which, amongst other things, requires the corporate debtor to affirm that the Pre-Pack is not being initiated to defraud anyone.
Threshold of Default for initiating a Pre-Packaged Insolvency Resolution Process
Pre-Pack can only be initiated if the default amount is more than INR 10,00,000 (Indian Rupees Ten Lakhs) and less than INR 1,00,00,000 (Indian Rupees One Crore).
Process of Pre-Packaged Insolvency Resolution Process
Some relevant aspects of the process of Pre-Pack as prescribed under the regulations are as follows:
1. Appointment of Resolution Professional: For initiating Pre-Pack, the resolution applicant shall have to serve notice of meeting to financial creditors who are unrelated parties. Thereafter, such financial creditors shall propose and approve the name of the resolution professional.
2. Identification of Insolvency Professional: The resolution professional shall then ascertain classes of creditors and identify insolvency professional and upon consent of creditors, the insolvency professional shall act as an authorised representative of the creditors.
3. Declaration by Directors / Partners: Thereafter, the majority of directors or partners of the corporate debtor shall make a declaration stating that: (i) the applicant shall file an application for initiating Pre-Pack within a time period not exceeding 90 (ninety) days from the date of such declaration; (ii) Pre-Pack is not being initiated to defraud any person; and (iii) name of the proposed/approved resolution professional.
4. Passing of Special Resolution: Thereafter, the members of the corporate debtor shall pass a special resolution or at least three-fourth of the total number of partners shall pass a resolution approving the filing of such application.
5. Filing of application with the Adjudicating Authority: After complying with the conditions mentioned above, an application for initiating the Pre-Pack needs to be filed with the adjudicating authority.
6. Admission of Pre-Pack: Where the adjudicating authority is satisfied that the application for initiation of Pre-Pack is complete, it will pass an order of admission commencing the Pre-Pack.
7. Public Announcement: A public announcement shall be made by the resolution professional within 2 (two) days from the commencement of the process upon admission of Pre-Pack.
8. Listing of the Claims to the Approval of a Resolution Plan by the Committee of Creditors: An updated list of claims will be maintained by the resolution professional. The resolution applicant shall submit the resolution plans prepared in accordance with the prescribed regulations and the committee of creditors shall compare the select resolution plan to base resolution plan and approve the one significantly better.
9. Application to Adjudicating Authority: Upon approval of the resolution plan by the committee of creditors, the resolution professional shall file an application for final approval. If the adjudicating authority is satisfied that the resolution plan approved by the committee of creditors meets the requirements as prescribed un the regulations, it shall pass an order within 30 (thirty) days for approving the resolution plan.
How we will Assist
We can work with MSMEs who are in distress and are desirous of resolving the stress through initiating and implementing pre-packaged insolvency resolution process as specified under the Insolvency and Bankruptcy Code, 2016. We can provide legal assistance to MSMEs for initiating the Pre-Pack, which can include, but not limited to:
1. Drafting and finalisation of notices, declarations and special resolutions approving the filing of a Pre-Pack application.
2. Preparation of resolution plans, process documents etc., and representations before the committee of creditors and the adjudicating authority.
3. Filing of Pre-Pack application and pleadings with the adjudicating authority.
4. Drafting and finalisation of public announcement regarding the admission of application.
5. Submission of the approved resolution plan to the adjudicating authority for approval.