The ministry of corporate affairs (MCA) has proposed to extend the so-called pre-packaged insolvency scheme — currently meant to resolve stress in only micro, small and medium enterprises (MSMEs) — to a certain category of larger firms as well, and simplify the extant framework that has failed to gather traction so far.
The MCA has also suggested a special insolvency regime for real estate under which resolution process would be restricted to only those projects where the default has occurred, and won’t extend to the entire company or other solvent projects. It also proposed to enable the resolution professional to transfer the ownership and possession of a plot or house to the buyers with the consent of the committee of creditors.
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Similarly, the ministry plans to allow multiple resolution plans for a single stressed firm (for all sectors) to maximise realisation. It has sought comments by February 7, which means it may introduce the such a Bill in Parliament in the later part of the Budget session itself.
These are part of a plethora of amendments to the Insolvency and Bankruptcy Code (IBC) that the ministry has proposed with an aim to expedite the resolution process and prevent erosion of stressed asset value, as recovery for creditors has taken a knock in recent years.
The pre-packaged framework, which allows only the debtor to trigger its own bankruptcy process and promoters to retain the control of the MSMEs during the resolution period, has been invoked in only two cases so far, although the scheme has been operational since April 2021. According to sources, lenders are not enthused by the extant framework that involves substantial informal negotiations, as they fear any decision on the admission of a case or the voluntary haircut by them may lead to subsequent scrutiny or investigations.
The ministry, however, has cited demand from stakeholders and similar mechanism in other jurisdictions for its proposal to expand the pre-pack scheme to a broader range of firms.
To make it work, the ministry has proposed that the 66% voting threshold for unrelated financial creditors, currently mandated to approve the initiation of insolvency process at the pre-commencement stage, be lowered to 51%, among others.
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Importantly, the ministry has sought to clarify in no unclear terms that the National Company Law Tribunal (NCLT) has to admit an insolvency case if the occurrence of default is established, and it need not get into other aspects, including the reasons for default, for allowing it. The clarification comes after the Supreme Court, in a default case involving Vidarbha Industries Power had indicated that the adjudicating authority has the discretion to admit or reject despite existence of a default.
“Consequently, it is observed that the AAs delve into detailed factors relating to the solvency and financial health of the corporate debtor, which is not required as per the original intent of the law,” it said.
The ministry has stated that several stakeholders challenge resolution plans after its approval, which leads to delays in the implementation of the plan. “To mitigate such delays and value destruction, it is being considered that the CoC may be mandated to transparently consider competing plans through an appropriately designed challenge mechanism,” it suggested.
To ensure greater discipline among stakeholders, the MCA has proposed to empower the NCLT to impose hefty fines on relevant entities for contravening the IBC rules during the resolution process. The fines may be as much as three times of the losses caused or gains made, whichever is higher.
The ministry has proposed to rework the fast-track insolvency resolution process, currently applicable to small firms and start-ups with total asset of under `1 crore. It suggests that unrelated financial creditors of a stressed firms may approve a resolution plan through an informal out-of-court process and involve the NCLT only for its final approval (or a moratorium, if needed). It has also proposed the setting up of an electronic platform, which can handle several processes under the IBC with minimum human interface and expedite the resolution process. It said such an e-platform will provide for a case management system, automated processes to file applications with the NCLT and delivery of notices, thus enabling interaction of insolvency professionals with stakeholders.