PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS

The Central government on 04th April 2021, notified the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. The said ordinance was introduced to amend the Insolvency and Bankruptcy Code, 2016 (“Code”) by inserting chapter III-A (Section 54A to 54P) which will deal with the procedure for pre-packaged insolvency resolution.

Pre-Package Insolvency is a process wherein the Corporate Debtors (“CD”) can get into an informal arrangement between the secured creditors and investors before initiating Corporate Insolvency Resolution Process (“CIRP”) or Liquidation.

Pre-packaged insolvency resolution process (“PPIRP”) is applicable to those Companies who are classified as a micro, small or medium enterprise under sub-section (1) of Section 7i of the Micro, Small and Medium Enterprises Development Act, 2006. Soon after the Ordinance was notified, the Ministry of Corporate Affairs vide its separate notification dated 09th April 2021, has specified Rupees ten lakh as the minimum amount of default for invoking Pre-packaged Insolvency for MSME entities.

As per Chapter III A (Section 54A) the conditions that a CD needs to meet to be eligible for PPRIP are as follows:

1. The CD has not undergone the PPIRP or completed CIRP, as the case may be, during a period of 3 years preceding the initiation date;
2. CD is not undergoing any CIRP;
3. No order for liquidating CD is passed under Section 33;
4. CD is eligible to submit a resolution plan under the IBC (Section 29A);
5. The financial creditors of the CD, 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 CD, and the financial creditors of the CD, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, have approved such proposal;
6. Declaration by the majority of the directors/ partners of the CD in Form P6 of Regulation 16 of Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021
7. The members of the CD should pass a special resolution, or at least three-fourth of the total number of partners of the CD have passed a resolution, approving the filing of an application for initiating the PPIRP.
8. For initiating the PPIRP, it is essential that the corporate debtor obtains 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.

PIRP is required to be completed within 120 days, wherein 90 days’ time has been allotted to Resolution Professional to file the resolution plan with Adjudicating Authority and 30 days to Adjudicating Authority for approving the resolution plan. In case if no resolution plan is approved by the Committee of Creditors (“CoC”), then the Resolution Professional shall apply to the Adjudicating Authority for termination of PPIRP.

Adjudicating Authority on the pre-packaged insolvency commencement date or on the date of passing the order of admission under section 54C is required to declare moratorium and appoint Resolution Professional. Thereafter the Resolution Professional is required to carry out a public announcement for initiation of PPIRP.

Most importantly the incumbent management retains control over the affairs of the Corporate Debtor until the finalisation of the resolution plan. Unlike CIRP, this pre-pack framework for MSMEs will be, a debtor in possession and creditor in control model. Hence the debtor will continue to control and run the Corporate Debtor till resolution happens.

Pre-packaged procedure: Existing management can invoke PIRP, if no default has occurred or the financial creditors, post occurrence of default. The overview of the procedure is further described below-

1. Appointment of the Insolvency Professional by AA on the commencement PIRP
   • Public announcement and inviting claims against CD
   • Resolution Professional will Constitution of CoC
   • Assessment of the financial position of the CD & preparation of information memorandum
   • Invitation of resolution plans
   • Submission of resolution plan and approval of resolution plan by the CoC
   • Application to AA for approval of resolution plan
   • Distribution of the plan proceeds as per liquidation waterfall

Advantage of Pre-Packaged Insolvency: There are many companies in India which are classified under MSME’s and they significantly contribute towards the country’s gross domestic products besides providing employment to a sizeable population. Also, MSMEs in India have relatively suffered the most during the current pandemic times. Therefore, the newly introduced pre-packaged insolvency framework would benefit such companies to enter into an arrangement where the resolution of a company’s business is negotiated with a buyer before the appointment of an insolvency professional.

Further it can maximize value by combining the efficiency, speed, cost, and flexibility of workouts with the binding effect and structure of formal insolvency proceedings, since it will involve out of-court negotiations of resolution plans, but the approved resolution plan will receive the sanction of the Adjudicating Authority under the Code.

i Section 7: Classification of enterprises.- An enterprise shall be classified as a micro, small or medium enterprise on the basis of the following criteria, namely:–

• a micro enterprise, where the investment in plant and machinery or equipment does not exceed one crore rupees and turnover does not exceed five crore rupees;
• a small enterprise, where the investment in plant and machinery or equipment does not exceed ten crore rupees and turnover does not exceed fifty crore rupees; and
• a medium enterprise, where the investment in plant and machinery or equipment does not exceed fifty crore rupees and turnover does not exceed two hundred and fifty crore rupees.