Govt changes insolvency legislation; introduces pre-packaged MSMEs settlement. The change permits the Center to inform the prepackaged insolvency resolution process of the minimal amount of default, not more than the 1 crore rupees.
Many MSMEs suffered from the coronavirus epidemic, and experts considered the new change, which is less than two weeks following the end of the suspension of some IBC rules, to be a positive gesture.
The suspension – in which a year has not been permitted for further insolvency procedures beginning on 25 March 2020 – was carried out in the context of an economically disruptive coronavirus pandemic.
The Government has established a pre-packaged resolution process for such companies in order to deliver a speedier and more value-maximization result for stressed MSME by modifying the Insolvency Law.
In the pre-packaged insolvency and bankruptcy Code procedure, Micro, Small, and Medium Enterprises can now seek resolution to their stress (IBC). Last year, after six months of a national lockdown, the government stopped further insolvency procedures amidst the spread of coronaviral diseases. The suspension had been extended twice to 24 December 2020 and then 24 March 2021.
In accordance with the law — which created the pre-packaged resolution procedure — special MSMEs’ insolvency requirements in view of the distinctive nature of their companies and simpler corporate structures are deemed urgently to be addressed.
In general, key players including creditors and shareholders meet to identify a possible purchaser in a pre-packaged process and negotiate a resolution plan before presenting the plan to NCLT for formal approval.
The national company law court must approve all IBC resolution plans (NCLT). In line with the regulation, the provision of an alternative effective insolvency resolution process is considered expedient for microenterprises to ensure faster, more cost-effective and more cost-effective results for all stakeholders, in a way that less damages the continuity of their business and preserves jobs. “…the implementation of a pre-packed insolvency procedure for companies categorised as micro-, small- and medium-sized firms is considered expedient in order to achieve these aims,” he added.
Revised Insolvency Laws in India: A Brief Account
The following are the main changes including some new insolvency and insolvency legislation in India (hence referred to as the Code for Insolvency and Bankruptcy). In the following:
The threshold increase under Section 4
The financial lender or a Corporate Debtor’s Operational Creditor may now begin the Corporate Insolvency Resolution Process when the minimum of Rupees One Crore defaults occur. The change was made because of the pandemic COVID-19. What remains unknown is the status of the outstanding cases that have still not reached the admission stage before the Adjudicating Authority. Given the current practice of the code, cases admitted might remain unimpacted while cases still not admitted could be refused on the grounds of the aforesaid notification.
Interpretation of Section 43 and Section 44 of the Code
A judgement dated 1 August 2019 by the Calling Authority in relation to the avoidance of transactions under Sects 43, 45 and 66 of the Code by which the corporate indebtedness (JIL) mortgaged its properties for financial assistance from the holding company is taken by the Supreme Court of Anuj Jain, Interim Resolution Professional for Jaypee Infratech Limited vs. Axis Bank Limited etc (JAL). The Supreme Court of Anuj Jain has for the first time set forth some criteria for preventing transactions in accordance with the Code.
Whether the offer should match the liquidation value by a resolution applicant?
The resolution appellant (Maharashtra Seamless Ltd.) inter alia claimed that the appellate Authority has executed its jurisdiction with instructions that the value of the resolution plan should correspond to the winding-up value in Maharasthra Seamless Limited v. Padmanabhan Venkatesh & Ors.2,2 appeal. In this connection, the Supreme Court, amongst others, highlighted that there are no provisions in the Code requiring the applicant for a resolution to offer equal liquidation. The assessment procedure according to the Code rules and regulations only helps the Creditor Committee pick an appropriate and effective resolution plan. The Code rules and regulations apply.
Code applicability to a public company (more specifically the NHAI)
A constitutional challenge to the code was raised in Hindustan Construction Company Limited & Anr. v. Union of India & Ors.3. The Code’s provisions were contended to be applicable to the petitioner arbitrated as, on the one hand, an automatic stay in favour of arbitral awards would be granted under the 1996 Law of Arbitration and Conciliation, which prevented the money from being used to repay the debts of the creditors of the petitioner.
Any debt of INR One Lakh owing to a yet unpaid financial or operational crediting party would, on the other hand, attract arbitrary, discriminatory and violative provisions of Articles 14 and 19(1)(g) of the Indian Constitution by the Code against the Petitioner. The Code against the Petitioner. It was argued, therefore, that the definition of “corporate person” in Section 3(7) of the Code should be read, either without “limited liability” in Section 3(23)(g) or that Section 3(23)(g) of the Code in the foregoing provision should also be read in order to allow the petitioner to recover money from GOI Company and NHAI.
Process of Corporate Reverse Insolvency
The ‘Winter Hills Flat Buyers Association -77, Gurgaon’ and the original applicants (i.e. allottees) desired a resolution of the Corporate Insolvency Process but did not wish the endorsement of a third-party scheme (Resolution Applicant). The purpose of the project was to collaborate with Uppal Housing Pvt. Ltd. (one of the proponents) and make payments from the outside as the loan (the financial creditor) to guarantee that the project will conclude on a schedule set in such circumstances.
The paying by Uppal Housing Pvt. Ltd and the payable in the course of the CIRP was ordered to be placed in the account of the firm (corporate debtor) so that the company remains a concern. The payment is made by Uppal Housing Pvt. Ltd.
Interpretation of Section 32A
The resolution plan presented by JSW Steel Limited (‘Resolution Applicant’) was accepted by the Adjudicating Authority video order on September 5th, 2019 under specific restrictions in the interpretation of Section 32A of Bhushan Power & Steel Limited’s CIRP. The Division for Enforcement of Core Government annexed the assets of the corporate debtor to Section 5 of the Prevention of Money Laundering Act of 2002 following the adoption of the plan while the monitoring committee monitored the change in management.
The NCLT has the competence to investigate claims of fraud but does not have jurisdiction over administrative action to examine them.
Under Section 7 or 9 of the Code, may Sole Proprietors Company file an application?
The NCLT, ND, previously decided that a sole company would not be subject to the “person” concept as defined in the Insolvency and Bankruptcy Code, in the context of R.G. Steels vs. Berry Auto Ancillaries (P) Ltd. Nevertheless the NCLAT overruled this judgement recently on the subject of Neeta Saha v. Ram Niwas Gupta,7 and concluded that Section 2 of the Code would also apply to single proprietorship companies. The Appellate Authority further remarked that the definition of “person” is not exclusive, but rather inclusive, under Section three(23) of the Code.
The Financial Creditor is prevented from initiating procedures under Section 7 of the Code if SARFaESI Act is initiating proceedings, and is the insolvency petition attractive for section 65 of the Code in such a case?
The NCLAT found that both the SARFAESI Act, 2002 and the Insolvency and Bankruptcy Code allow the financial lender to continue concurrently. The Council noted that, in the absence of any contradiction contained in any other legislation for the time being in force or any instrument which has effect according to that law, the provisions of the Code shall have an effect. Therefore, for the moment the I&B Code’s non-obstante clause will prevail above any other legislation.
In addition, NCLAT noted that both the SARFAESI Act and the Code had begun simultaneous action against the corporate debtor. It can only be concluded on that account that procedures have been flawed or malicious against the Corporate Debtor.
Consequently, Section 65 of the Code does not draw simply filing of the parallel procedure.
Let’s Explore Experts Opinion
The Ordinance stated that microfinance companies have critical implications for the economy of India as they significantly contribute to its gross domestic product and provide employment for a large population and that the specific requirements of microfinance companies concerning their insolvency resolution are urgently required, because of the unique nature of their companies and simple corporate structures.
- Soumitra Majumdar, J Sagar Associates Partner, informs PTI news agency that the IBC amendment Ordinance of 2021 provides the prepared road to real and viable cases to guarantee the least economic dislocation. “Although modelled on the debtor-in-possession strategy, the financial creditors have substantial consent rights, which prevent irresponsible promoters from misusing the process. Further, after the Swiss Challenge-like plan review procedure, the competitive tension remains that developers offer plans that have the least impact on creditors’ rights and claims, Majumdar added.
- The Insolvency and Bankruptcy Code (IBC) ensures that stressed assets are solved in time and in a tied way in the market.
- Cyril Amarchand Mangaldas Partner, L. Viswanathan, remarked that the government at the present juncture, which is commendable, carefully implemented the pre-pack system for MSMEs exclusively. “The pre-pack scheme includes procedural checks and balances, including application for the commencement and approval of the basic resolution plan under Section 29A and two thirds of creditors’ assent.
- The board continues its control and the debtor proposes the basic resolution plan, adding “the involvement of qualified current promoters is welcomed.” In general, IBC Section 29 attempts to prohibit defaulting developers from putting their businesses into the process of resolution. The creditor board may, at all times or by the intervention of NCLT, stop controlling fraud or maladministration by the existing management by converting the pre-pack procedure into the ordinary insolvency process of 66 percent, told L. Vishwanathan.
- The government seems to be trying to offer for an alternate and expedient resolution process, specifically for MSMEs, by introducing a new chapter into the Statute, stated Misha, partner of Shardul Amarchand Mangaldas & Co. This is undoubtedly a good move, however, it was anticipated that non-MSMEs would also have access to this framework, added Misha.
- The implementation of the pre-pack structure intended to coincide with lifting the moratorium on filing additional cases of bankruptcy, according to Rajiv Chandak, a partner at Deloitte India.
- “Pre-packs will enable corporate debtors to agree on a restructuring process with lenders and handle the whole aspect of corporate responsibility. In order for pre-packages to be deployed on time, the government has to continue to increase the infrastructure of NCLT, Rajiv Chandak told.
It is considered useful for companies classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code 2016 to provide an effective, alternative insolvency process to ensure faster, cheaper, and more value-driven outcomes for all players, so that their continuity is less disruptive and that jobs are preserved.