Insolvency & Bankruptcy Code (IBC) – Pre-Packaged Insolvency Resolution Process: Synopsis

Standardizing and Strengthening Policies on Provisional Rating by Credit Rating Agencies (CRAs) for Debt Instruments
April 27, 2021
April 27, 2021
R.B.I. Monetary Policy Committee
Meeting Highlights
June 04, 2021
June 4, 2021
INSOLVENCY AND BANKRUPTCY, BEACON TRUSTEESHIP, DEBENTURE TRUSTEE,

Micro, Small & Medium Enterprises (MSMEs) play a significant role in the development of the economy by enabling job creation & boosting entrepreneurial innovations on a mass scale at the local level of a given economy. The MSMEs in India have been continuously widening their domain of services & product offerings to domestic & global markets. Considering the huge potential & pivotal role played by the MSMEs, it is of utmost importance that an environment be created which enables promotion & growth of this sector in all aspects.

The past has seen introduction of diverse means enabling ease of setting up & ease of doing business in India. April 4, 2021 saw a step taken towards enabling ease of exit with the promulgation of The Insolvency & Bankruptcy Code (Amendment) Ordinance, 2021, alongside Insolvency and Bankruptcy Board of India (Pre-Packaged Insolvency Resolution Process) Regulations, 2021 (‘Regulations’) and Insolvency and Bankruptcy (Pre-Packaged Insolvency Resolution Process) Rules, 2021 (‘Rules’) on April 9, 2021. The amendments introduced a pre-packaged insolvency resolution process (PPIRP) for corporates classified as MSMEs with the aim of providing an efficient alternative insolvency resolution process. The PPIRP is aimed at giving quicker, cost-effective and value maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and promotes employment preservation.

The PPIRP has pegged the minimum default threshold for initiating the process at INR 10 Lakh in contrast to the threshold of INR 1 crore for Corporate Insolvency Resolution Process (CIRP). This has opened a gateway for MSMEs to access a more effective resolution process under the PPIRP. Another differentiator is the shift of emphasis from creditors to the corporate debtor enabling the MSMEs to resolve their stress as a going concern. PPIRP also requires the corporate debtor & its creditors to agree to a resolution plan prior to applying for PPIRP initiation with the Adjudicating Authority. Time conserving, expeditious process, economic costs & muffled approach of PPIRP help the corporate debtor to protect his market image.

Some significant aspects of the PPIRP can be stated as below:

1. Corporate Debtor – amplified role & liability

The PPIRP lays huge emphasis on providing debtor centric solutions. The Corporate Debtor has been given the option to initiate the process by itself after acquiring requisite approvals from its members by way of a special resolution or 3 ⁄ 4th of the partners, as the case may be and its unrelated Financial Creditors representing 66% or more of the financial debt. In absence of Financial Creditors or them being related, such approval is to be taken from the Operational Creditors.

The management of affairs of the Corporate Debtor stays with the Board of Directors or the partners of the Corporate Debtor allowing them to manage the operations on a going concern basis. In contrast to CIRP, the Resolution Professional plays the role of a monitor in PPIRP rather than an incoming managerial incumbent of operational activities. This is however subject to no fraudulent activities or gross mismanagement being conducted by the Corporate Debtor.

Considering the weight of role being played by the Corporate Debtor in PPIRP, impetus has also been laid on penalizing any contradicting or contemptuous acts. Any willful contravention of the Act or intentional provision of false information or omission of material facts in the application, claims list, or the preliminary information memorandums can subject the Corporate Debtor for an imprisonment of 3 to 5 years and/or a fine the range of INR 1 Lakh to INR 1 Crore.

Furthermore, the directors / promoters / partners of the Corporate Director will be liable for paying compensation to every person who has suffered loss or damage owing to any omission of material facts or inclusion of any misleading information in communications & documents exchanged.

2. Reduced Timelines

Considering the significance of time value of the debtor’s assets, an impetus has been laid on restricting the timeline for the entire process to an effective 120 days from the commencement date of the PPIRP.

After the Corporate Debtor makes an application to the Adjudicating Authority for initiating the PPIRP, the latter is required to either admit or reject the application within 14 days of receipt of the same. Simultaneously, the Adjudicating Authority is also required to confirm the appointment of Resolution Professional as nominated by the creditors or as per a recommendation of itself.

Resolution Plan as selected by the Committee of Creditors has to be submitted to the Adjudicating Authority within 90 days of the commencement. Failure in doing so leads to the Resolution Professional filing an application with the Adjudicating Authority for termination of the process. The remaining 30 days are reserved for the Adjudicating Authority to approve or reject the resolution plan.

3. PPIRP-CIRP: Side by Side

A Corporate Debtor for being eligible to initiate PPIRP is required to not be undergoing a CIRP or a liquidation order already. A time gap of 3 years is also required to be observed before initiating a fresh PPIRP from completion of previous CIRP or PPIRP. Hence, a side by side use of CIRP & PPIRP is restricted. However, the Committee of Creditors may at any point of time prior to approval of the resolution plan, resolve to initiate a CIRP against the corporate debtor. Such resolution will require consent of at least 66% of the total creditors. In such a case, the Adjudicating Authority may approve termination of the PPIRP & subsequent initiation of the CIRP.

4. Termination Scenarios

The PPIRP may be terminated if the Resolution Professional intimates the Adjudicating Authority of the decision of at least 66% of the Committee of Creditors consenting to the same. This however, must happen before the approval of the resolution plan by the Committee of Creditors. Subsequently, the Adjudicating Authority will have a time period of 30 days to pass an order for termination in confirmation with the extant sections of the Act.

Failure to achieve approval for a Resolution Plan by the Committee of Creditors within a period of 90 days leads to Resolution Professional filing an application on the day after the 90 day period for termination of the PPIRP. Similarly, if the Resolution Plan selected for approval after comparing with the Base Resolution Plan is not approved by the Committee of Creditors, the Resolution Professional is required to file for termination with the Adjudicating Authority.

The PPIRP may also be terminated if the Committee of Creditors resolves to initiate a CIRP against the Corporate Debtor and the same is approved by at least 66% of the Committee of Creditors with the Adjudicating Authority subsequently approving termination of the PPIRP.

5. Liquidation Scenarios

An order of liquidation is passed under certain specified circumstances. The first such scenario being wherein the resolution plan as approved by the Committee of Creditors does not result in the change of management or control of the Corporate Debtor to a person who was not a promoter or in the management or control of the Corporate Debtor. In such a case the Adjudicating Authority will pass an order rejecting such a resolution plan followed by a termination order of the PPIRP & a liquidation order in respect of the Corporate Debtor.

Similarly, in cases where the Resolution Professional has been vested with the powers to manage the Corporate Debtor & has subsequently applied for termination of the PPIRP, a liquidation order will be passed by the Adjudicating Authority following an order for termination of the PPIRP.

In both the cases, the pre-packaged insolvency costs shall be included as part of the liquidation costs for the purposes of liquidation of the Corporate Debtor.

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