Introduction
In the Lok Sabha, the government proposed the Insolvency and Bankruptcy Code (Amendment Bill) 2021. The Bill will take the place of the Insolvency and Bankruptcy Code Amendment Ordinance 2021, which was passed in April. The Pre-packaged Insolvency Resolution Process was created as an alternative insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 million (PIRP). A panel of the Insolvency Law Committee (ILC) advocated a pre-pack architecture as part of the basic layout of the Insolvency and Bankruptcy Code (IBC), 2016, in March 2021.
The corporate insolvency resolution process, established by the Code, is a time-limited approach to solving the insolvency of corporate debtors (within 330 days) (CIRP). In the case of a default of at least one lakh rupees, the debtor or its creditors may petition for the beginning of CIRP. A committee of creditors is formed under CIRP to decide on the insolvency resolution. The council may evaluate a resolution process, which often involves the company's debt is paid off through a merger, acquisition, or reorganisation. The corporation is liquidated if a resolution plan is not approved by the committee of creditors within the time limit. During CIRP, the resolution professional (RP) who is appointed to perform CIRP manages the company's business.
Key features of the new law
Pre-packaged insolvency resolution: The Ordinance establishes a new insolvency resolution process for micro, small, and medium-sized businesses (MSMEs) known as pre-packaged insolvency Unlike CIRP, PIRP can only be started by debtors. A basic settlement plan should be in place for the debtor. During the PIRP, the company's management will remain with the debtor.
Minimum default amount: In the event of a default of at least one lakh rupees, an application for PIRP can be submitted. By issuing a notification, the national government could raise the minimum default level to one crore rupees. Debtors eligible for PIRP: In the case of a default by a corporate debtor categorised as an MSME under the MSME Development Act of 2006, PIRP may be commenced. An MSME is now defined as a business with a yearly production of up to Rs 250 crore and investment in plant and machinery or equipment of up to Rs 50 crore, as defined by the 2006 Act. The corporate debtor must apply to the arbitrating body to start the PIRP process (National Company Law Tribunal). Within 14 days of receiving the application for PIRP, the administration must accept or disapprove it.
Consent of financial creditors: In order to apply for PIRP, the debtor must get the consent of at least 66 per cent of its financial creditors who are not related to the debtor (in terms of the debt owing to creditors). Before obtaining approval, the debtor must submit a basic resolution plan to creditors. Along with the PIRP application, the debtor must also propose the name of the RP. At least 66 per cent of the financial creditors must support the proposed RP.
Procedures under the PIRP: Within two days of the PIRP's start, the debtor must submit the base resolution plan to the RP. Within seven days of the PIRP's start date, a board of lenders will be formed to review the base resolution plan. The debtor may be given the option to alter the plan by the committee. Other people's resolution plans may be invited by the RP. If the base plan (1) is not accepted by the committee, or (2) is unable to settle functional creditors' debts, other resolution plans may be invited (claims related to the provision of goods and services). The committee must approve a resolution proposed by a vote of at least 66 per cent of the voting shares. Within 90 days after the start date of PIRP, the committee must agree on a resolution plan. The adjudicating authority will review the resolution plan authorised by the committee. If the committee does not approve a resolution plan, the RP may request that PIRP be terminated. In less than 30 days of receiving the plan, the authority must either approve it or order the PIRP to be terminated. The corporate debtor will be liquidated if the PIRP is terminated.
Moratorium: The debtor will be granted a moratorium during the PIRP process, during which certain measures against the debtor will be forbidden. Suits can be filed or continued, court orders can be carried out, and property can be recovered.
Debtor management during PIRP: During the PIRP, the debtor's executive board or associates will continue to handle the debtor's affairs. If there has been fraudulent activity or egregious mismanagement, the debtor's management may be vested in the RP.
CIRP Initiation: The committee of creditors may opt to terminate PIRP and instead initiate CIRP in respect of the debtor at any point after the PIRP begins even before the resolution plan is approved (by a vote of at least 66 per cent of the voting shares).
Difficulties
Due to the sheer danger of not being able to recover the money granted by these lenders and investors, CDs may not be able to support new funds or loans from Investors or Banks at first. The PIRP Resolution Plan is 90 days long, plus 30 days for the AA (Adjudicating Authority) to support the plan. It is difficult for members of the CoC (Committee of Creditors) to make a decision on the Base Resolution Plan in such a short time frame because there are no wide parameters on which the Resolution Plan must be accepted.
Conclusion
Whilst PIRP is a timely duty to protect viable MSMEs, it is likely that implementing it just for MSMEs now is merely the first step toward a good Pre-pack, leading to much broader coverage in the future, which, like the IBC, will expand with time and jurisprudence. To guarantee that pre-pack resolution plans are carried out in a systematic way, the government could consider creating special NCLT benches to deal with them.
The establishment of a PIRP framework is unquestionably beneficial to the MSME sector. It envisions a cooperative approach. The provisions of PIRP have been favoured over CIRP procedures in the amendment, probably because they strive to balance the interests of creditors while safeguarding bankrupt MSMEs from the economic ripple effect produced by Covid-19. The modifications aim to give the Board of Directors more control over the Corporate Debtor. The success of the PIRP is likely to be determined by how quickly the application is processed, in a contrast to the substantial backlog of CIRP applications now in the system.
Endnotes
1. Shaikh, N., 2021. The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 -
Insolvency/Bankruptcy/Restructuring - India. [online] Mondaq.com. Available at:
<https://www.mondaq.com/india/insolvencybankruptcy/1109138/the-insolvency-and-bankruptcy-
codeamendment-bill-2021> [Accessed 28 November 2021].
2.PRS Legislative Research. 2021. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. [online]
Available at: <https://prsindia.org/billtrack/the-insolvency-and-bankruptcy-code-amendment-ordinance2021>
[Accessed 28 November 2021].
3.2021. [online] Available at: <https://www.drishtiias.com/daily-updates/daily-news-analysis/insolvency-
andbankruptcy-code-amendment-bill-2021> [Accessed 28 November 2021].
References
2. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (prsindia.org)
3. Insolvency and Bankruptcy Code (Amendment Bill), 2021 (drishtiias.com)