The instant article is divided into two parts; part one highlights the notable features of the Pre-packaged Insolvency Resolution Process whereas part two demonstrates the step-wise process.
In an effort to ease the difficulties faced by micro, small or medium enterprises ('MSMEs') in the aftermath of the tumultuous past year, the Ministry of Law and Justice by way of an Ordinance dated 04.04.2021 amended the Insolvency and Bankruptcy Code, 2016 ('IBC/the Code') to introduce pre-packaged insolvency resolution process exclusively for MSMEs as defined under Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006. Pre-packaged insolvency resolution process ('PPIRP') is regulated by Chapter III-A of Part II of IBC [Sections 54A-58] read with 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').
The distinguishing feature of PPIRP is that a resolution plan is agreed by the Corporate Debtor and its creditors prior to filing an application with the Adjudicating Authority seeking initiation of PPIRP. It is pertinent to note that PPIRP is merely an additional option in the scheme of IBC to expedite the process of insolvency resolution for MSMEs in contrast to the corporate insolvency resolution process ('CIRP'). Since some tasks of insolvency proceedings are completed before the formal process is initiated and certain elements of formal process are avoided, PPIRP is considered to be a semi-formal process that is faster, more flexible, less disruptive and more cost-efficient which results in higher returns for creditors. It further reduces litigation costs and delays and helps decongest overburdened Tribunals. Given the expedited and relatively quiet nature of PPIRP, the market image of the Corporate Debtor is also protected. Other notable features of PPIRP are:
- Debtor in possession
PPIRP entails the least business disruptions owing to the unique 'debtor in possession' feature where the management of affairs of the Corporate Debtor continues to vest with the Board of Directors or the partners of the Corporate Debtor who continue to manage the operations of the Corporate Debtor as a going concern. This contributes to ensuring a high-resolution value and increased viability of the entity. Owing to the 'debtor in possession' nature of PPIRP, the Resolution Professional in PPIRP predominantly monitors the affairs of the Corporate Debtor as opposed to stepping into the shoes of the Corporate Debtor and exercising operational control as done in CIRP. However, as per Section 54J, the Adjudicating Authority on application from the Resolution Professional pursuant to the decision of the Committee of Creditors ('CoC') by vote of at least 66%, if satisfied that the affairs of the Corporate Debtor have been conducted in a fraudulent manner or there has been gross mismanagement of the affairs of the Corporate Debtor, is to pass an order vesting the management of the Corporate Debtor with the Resolution Professional.
- Shorter time-frame
PPIRP envisages stringent timelines for completion of the process at every stage, with no room for extensions. PPIRP in its entirety is to be completed within 120 days from commencement date. Within 90 days from commencement, a resolution plan is to be submitted to the Adjudicating Authority for approval after being selected by the CoC. Failure of the CoC to select a plan within 90 days compels the Resolution Professional to file an application to the Adjudicating Authority seeking termination of the PPIRP.
- Corporate Debtor plays a larger role and faces higher liability threshold
PPIRP is initiated by the Corporate Debtor as opposed to the creditors in CIRP. Further, in PPIRP the Corporate Debtor plays a more proactive role throughout the process such as obtaining approval from its creditors to file an application initiating PPIRP, filing necessary declarations, special resolution, submission of list of claims and the base resolution plan among other responsibilities.
The Corporate Debtor is also required to bear the PPIRP costs, if any, upon termination of PPIRP.
It is essential that the Corporate Debtor exercises adequate care and caution in fulfilling their responsibilities owing to the heavy penalties imposed under Section 77A. If the Corporate Debtor intentionally provides information which is false or omits material facts in their application or list of claims or the preliminary information memorandum submitted, the Corporate Debtor is liable with imprisonment for a term of 3 to 5 years and/or fine of one lakh rupees to one crore rupees. Furthermore, any willful contravention of the provisions of Chapter IIIA by a director or partner of the Corporate Debtor is punishable with imprisonment for a term of 3 to 5 years and/or fine of one lakh rupees to one crore rupees.
Additionally, in the event a person has sustained loss or damage as a consequence of omission of any material information or inclusion of misleading information in the list of claims or preliminary information memorandum submitted by the Corporate Debtor, every promoter or director or partner of the Corporate Debtor at the time of submission of the mentioned information or every person who has authorized the submission of the mentioned information is without prejudice to Section 77A, liable to pay compensation to every person who has suffered loss or damage in accordance to Section 54G(2).
- Conversion of PPIRP to CIRP
Section 54O permits that the Resolution Professional may after commencement date and before the approval of the resolution plan by the CoC intimate the Adjudicate Authority of the decision of at least 66% of the CoC to initiate CIRP of the Corporate Debtor, if eligible. Accordingly, the Adjudicating Authority will pass an order within 30 days terminating the PPIRP and initiating CIRP. Such order is deemed to be an order of admission of an application under Section 7 and CIRP commences from the date of such order.
- Termination of PPIRP
Resolution Professional may after commencement date and before the approval of the resolution plan by the CoC intimate the Adjudicate Authority of the decision of at least 66% of the CoC to terminate the PPIRP. Accordingly, the Adjudicating Authority will pass an order within 30 days terminating the PPIRP in conformity to Section 54N(2). Similarly, if no resolution plan has been approved by the CoC within a period of 90 days from commencement date, as per Section 54D(3) the Resolution Professional on the day after expiry of the 90 day period, is to file an application with the Adjudicating Authority for termination of the PPIRP. Further, if the resolution plan selected for approval after competing with the base resolution plan, is not approved by the CoC, the Resolution Professional is to file an application with the Adjudicating Authority for termination of the PPIRP in accordance to Section 54K(12).
- Continuation of avoidance proceedings
An order of termination will also provide the manner for continuation of the proceedings initiated for avoidance transactions initiated under Section 66 and Section 67A, as stipulated by Section 54N(1)(b)(ii).
Under PPIRP the order of liquidation may be passed in specified circumstances. As per Section 54L(4), an order of liquidation under Section 33 is passed on rejection of the resolution plan by the Adjudicating Authority when the order of the resolution plan approved by the CoC does not result in the change in the 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. Apart from this, as specified in Section 54N(4), if the Adjudicating Authority has passed an order vesting the management of the Corporate Debtor with the Resolution Professional and the Resolution Professional has filed an application with the Adjudicating Authority seeking termination of PPIRP on grounds that no resolution plan was approved by the CoC within the stipulated 90 day period or that the selected resolution plan was not approved by the CoC after competing with the base resolution plan, an order of liquidation under Section 33 is passed.
End of part one. Part two will demonstrate the step-wise process of pre-pack insolvency resolution process.
Based in the Hyderabad office, Amir Ali Bavani is a Principal Associate in the firm. He is a post graduate in MBA from ICFAI University and completed his LLB from Osmania University in 2014. His core expertise lies in Dispute Resolution especially involving Insolvency & Bankruptcy Code 2016, Banking Laws and General Corporate. He regularly appears before various judicial/quasi-judicial authorities including High Court, Debt Recovery Tribunal and National Company Law Tribunal. He advises significant number of companies, creditors, other stakeholders to identify and adopt the most suitable approach to deal with a complex web of possible outcomes and legal strategies to effectively deal with the aspects of corporate insolvency and restructuring process.
Rhea Jayakumar is an Associate with the firm. She is a law graduate from Jindal Global Law School. Her core expertise lies in commercial litigation and dispute resolution particularly Insolvency and Bankruptcy Code, 2016 and banking laws. She is adept in legal drafting, research, and writing on contemporary developments of laws related to insolvency and bankruptcy. She also attends proceedings and appears before various judicial/quasi-judicial authorities including National Company Law Tribunal, Debt Recovery Tribunal and High Court.
This article is for information purpose only. It is not intended to constitute, and should not be taken as legal advice, or a communication intended to solicit or establish commercial motives with any. The firm shall not have any obligations or liabilities towards any acts or omission of any reader(s) consequent to any information contained herein. The readers are advised to consult competent professionals in their own judgment before acting on the basis of any information provided hereby.