On April 4th, 2021, the Insolvency and Bankruptcy Board of India (“IBBI”) notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (“Ordinance”) that introduces the Pre-packaged Insolvency Resolution Process (“PPIRP”) for micro, small and medium entities (“MSMEs”). The Ordinance comes into effect from April 4th, 2021.
Earlier, on March 25th, 2020, the Government in light of the pandemic stressed economy, had suspended
filings of applications for initiation of the Corporate Insolvency Resolution Process (“CIRP”) in respect of defaults arising within a period of one year from the above date. The suspension was lifted on March 24th, 2021 and the Ordinance was notified on the heels of the same. The main aim of the Ordinance is to provide relief to MSMEs by way of an alternative efficient process of insolvency, in a manner which is least disruptive to the continuity of their businesses.
The Ordinance introduces Chapter III-A to the Insolvency and Bankruptcy Code, 2016 (“IBC”) and this chapter sets forth the framework for the PPIRP.
Pre-packaged insolvency or pre-pack, as known globally, is a form of restructuring that allow creditors and debtors to work out an informal plan and then submit it for approval. A pre-pack is an informal arrangement for the resolution of the debt of a distressed company through an agreement between secured creditors and investors that relaxes the whole process of corporate liquidation and insolvency, thereby relieving the corporate debtor of the stress attached. This system of insolvency resolution has become an increasingly popular mechanism in the UK and Europe over the past decade and has immense potential for India, given that its boasts of benefits such as being cost effective and quicker.
Currently, the PPIRP route in India and the benefits thereto have been made available only to MSMEs, thus an application for initiating pre-packaged insolvency resolution process may be made only in respect of a corporate debtor classified as a MSME. Soon after the Ordinance was notified, the Government has also now notified ₹10 lakh as the minimum amount of default for which PPIRP can be initiated for corporate MSMEs.
The Ordinance, under Section 11A, sets forth the mechanism that needs to be followed for disposal of simultaneous applications made for initiation of the PPIRP and the CIRP, pending against the same corporate debtor. It lays down the following:
- If an application for the PPIRP is pending, the adjudicating authority will need to first pass an order to admit or reject such application, before considering any application for CIRP in respect of the same corporate debtor.
- If an application for PPIRP is filed within 14 days of filing of any application for CIRP which is pending, in respect of the same corporate debtor, then, the adjudicating authority is to first dispose off the PPIRP
- If however, an application for the PPIRP is filed after 14 days of the filing of any CIRP application, in respect of the same corporate debtor, the Adjudicating Authority is to first dispose off the CIRP application.
The framework of the PPIRP set forth in Chapter III A enumerates the conditions that a corporate debtor needs to meet to be eligible for PPRIP. Some of these conditions are as follows:
- The corporate debtor has not undergone the PPIRP or completed CIRP, as the case may be, during a period of 3 years preceding the initiation date;
- The corporate debtor is not undergoing any CIRP;
- No order requiring the corporate debtor to be liquidated is passed;
- The corporate debtor is eligible to submit a resolution plan under the IBC (Section 29A);
- The prescribed number of financial creditors of the corporate debtor, not being its related parties, have proposed the name of the insolvency professional to be appointed as resolution professional for conducting the PPRIP of the corporate debtor, and the financial creditors of the corporate debtor, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, have approved such proposal;
- The majority of the directors/ partners of the corporate debtor have made a declaration providing the prescribed details; and
- The members of the corporate debtor have passed a special resolution, or at least three-fourth of the total number of partners of the corporate debtor have passed a resolution, approving the filing of an application for initiating the PPIRP.
For initiating the PPIRP, it is essential that the corporate debtor obtain an approval from its financial creditors, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors.
The PPIRP is required to be completed within 120 days from the commencement of the process, out of which 90 days’ time has been given to the resolution professional to file the resolution plan with the adjudicating authority and 30 days’ time has been given to the adjudicating authority to approve the resolution plan. If no resolution plan is approved by the committee of creditors, then the resolution professional shall apply to the adjudicating authority to terminate the PPIRP.
On the commencement date of the PPIRP, the adjudicating authority will be required to declare a moratorium as under the CIRP, appoint the proposed resolution professional and publicly announce the initiation of the PPIRP. Thereafter the resolution professional is to carry out the PPIRP and is empowered with several powers and duties for the same. The PPIRP largely follows the same process as the CIRP, with the formation of the committee of creditors and the submission of a resolution plan.
It is worthwhile to note that during the PPIRP, the management of the affairs of the corporate debtor shall continue to vest in the Board of Directors or the partners of the corporate debtor, subject to the prescribed conditions. Further, the Board of Directors or the partners, need to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern.
Business continuity, speed, efficiency and cost effectiveness are some of the unique selling propositions of PPIRP. With CIRP being riddled with deficiencies such as being time consuming and with the upward trend of out of court settlements and arbitrations, pre-packaged insolvency resolution could be an alternate efficient route for stressed corporate MSMEs in India.