STATUTORY UPDATES

Pre-packaged insolvency resolution process for MSMEs

  • The Finance Minister of India in the Union Budget for FY 2020-21 announced that in addition to the numerous relaxations and incentives given in the Budget 2021, the Government shall roll out a separate framework for Micro, Small and Medium Enterprises. In light of the same, in exercise of the powers conferred by Clause (1) of Article 123 of the Constitution, the President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (Ordinance) on April 04, 2021, to allow Pre-packaged Insolvency Resolution Process (PIRP) for Corporate Debtors classified as Micro, Small and Medium Enterprises (MSMEs) under the Micro, Small and Medium Enterprises Development Act, 2006.
  • The Ordinance alters the Insolvency and Bankruptcy Code, 2016 (IBC) by introducing the Ordinance as a part of Chapter IIIA of Part II of the IBC. Clause 2 of the Ordinance altered Section 4 of the IBC by adding a 'proviso' according to which the Central Government may, by notification, specify such minimum amount of default for matters relating to the pre-packaged insolvency resolution process of Corporate Debtors under Chapter III-A.
  • In view of the above, the Central Government vide notification dated April 09, 2021 notified the minimum amount of default for a debtor to opt for the pre-package route. According to the notification, a minimum of INR 10 lakh has been specified as the minimum limit for the matters relating to the PIRP of the Corporate Debtor under Chapter III-A of the IBC.

IBBI (Pre-package Insolvency Resolution Process) Regulations, 2021

  • Vide notification dated April 09, 2021, the Insolvency and Bankruptcy Board of India (IBBI) introduced the IBBI (Pre-packaged Insolvency Resolution Process) Regulations, 2021 (PPIRP Regulations). These Regulations can be considered to be an extension of, and are to be applied conjointly with, the recently introduced Chapter IIIA of the IBC.
  • The PPIRP Regulations provide for the mechanism to be followed while opting for the PIRP and have been divided in ten Chapters and can be viewed here.
  • A brief overview of the PIRP process basis a conjoint reading of the PPIRP Regulations with the relevant Sections under Chapter III A of the IBC is as under:
    • Applicability
      • As on date, PIRP is available only for Corporate Debtors which are classified as MSMEs under Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006.
      • This process will not be available to the Corporate Debtors which have undergone a PIRP or Corporate Insolvency Resolution Process (CIRP) in the three years preceding the date of the Application before the Adjudicating Authority.
    • Initiation of PIRP
      • As per the provisions provided under Chapter IIIA of the IBC, PIRP can be initiated by a Corporate Debtor by filing a requisite Application in cases where the default is not less than INR 10 lakh. For initiating the PIRP, the Corporate Debtor inter alia needs consent from (i) 66% of unrelated Financial Creditors and (ii) shareholders of the CD by special majority (75%).
      • After the above-mentioned conditions are met, a meeting of the unrelated Financial Creditors is convened in terms of Regulations 14(1), 14(2) and 14(3) of the PPIRP Regulations in order to appoint the Resolution Professional as required under Section 54A(2)(e) of the IBC.
      • It is pertinent to note that the eligibility criteria, fee, and the powers and duties of the Resolution Professional have been provided under Chapter III (Regulations 7 to 10) of the PPIRP Regulations.
    • Application before the Adjudicating Authority and appointment of Resolution Professional
      • Once the process as set out above is complete, an Application for the formal commencement of PIRP may be made by the Corporate Debtor before the relevant Adjudicating Authority under Form 1 of the Insolvency and Bankruptcy (pre-packaged insolvency resolution process) Rules, 2021.
      • The Application should inter alia be accompanied with:
        • Declarations which are to be filed in requisite forms as provided under Regulation 16 of the PPIRP Regulations.
        • Approvals by the Financial Creditors in terms of Regulation 14 of the PPIRP Regulations including the approval appointment of the proposed Resolution Professional, the terms and conditions of his appointment and Form P4 containing the approval for filing an Application for initiation of PIRP as required under Regulation 54A(3) of the IBC.
        • Upon approval of the Resolution Professional according to Section 54A(2)(e) of the IBC read with Regulations 14(5) and 14(6) of the PPIRP Regulations, the Resolution Professional has to file a Report as required under Section 54B (1) in Form P8 which is mentioned under Regulation 17 of the PPIRP Regulations. Such report shall contain the confirmation that the Corporate Debtor has met the requirements as mentioned under Section 54A (2) to file an Application for initiation of PIRP and, that the Base Resolution Plan is in consonance with the requirements as mentioned under Section 54K of the IBC.
        • A declaration regarding any avoidance transactions under Chapter III of the IBC or fraudulent or wrongful trading under Chapter VI of the IBC read with the terms provided under Regulation 41 of the PPIRP Regulations.
        • Information relating to books of account of the Corporate Debtor, audited financial statements of the Corporate Debtor for the last two financial years and provisional financial statements for the current financial year made up to a date not earlier than fourteen days from the date of the Application.
    • PIRP after admission of the Application
      • As per Regulation 19 of the PPIRP Regulations, upon admission of the Application for commencement of PIRP, a Public Announcement has to be made by the Resolution Professional in Form P9 of the PPIRP Regulations.
      • Thereafter, according to Section 54G of the IBC and Regulations 20 and 21 provided under Chapter V of the PPIRP Regulations, the Corporate Debtor has to submit a preliminary list of claims along with the details of the respective creditors, their security interest and guarantees, if any, with the Resolution Professional within a period of two days from the Insolvency Commencement Date. The Resolution Professional shall then confirm the details received from the records maintained by the Corporate Debtor and the documents provided and maintain a list of claims. The Resolution Professional is also required to inform every creditor regarding its claims, as confirmed by the Resolution Professional, and seek objections, if any.
      • Once the claims are verified by the Resolution Professional, a Committee of Creditors (CoC) of the Corporate Debtor has to be constituted by the Resolution Professional in terms of Section 54-I of the IBC and Regulations 24 to 26 of the PPIRP Regulations. As per the said Regulations, in case the Corporate Debtor has only creditors in a class and no other Financial Creditors who are unrelated to the Corporate Debtor, in such case, the CoC shall only consist of Authorized Representatives. Further, in case the Corporate Debtor does not have any Financial Creditor, then the CoC shall consist of only Operational Creditors and the CoC shall be formed according to the procedure provided under Regulation 25 of the PPIRP Regulations.
      • The Corporate Debtor has to prepare a preliminary Information Memorandum containing information relevant for formulation of a Resolution Plan as provided under Regulation 40 of the PPIRP Regulations and submit it to the Resolution Professional within a period of 2 (two) days from the Insolvency Commencement Date in terms of Section 54G(1)(b) of the IBC. Pursuant to the same, in terms of Regulation 40(3) of the PPIRP Regulations, the Resolution Professional finalizes the Information Memorandum and submits it before the CoC within fourteen days of the pre-packaged Insolvency Commencement Date.
      • During the PIRP, in terms of Section 54H of the IBC, the management of the affairs of the Corporate Debtor would continue with the erstwhile board of directors or the partners, subject to fulfilment of certain conditions provided under Regulation 50 of the PPIRP Regulations. At the same time, the Resolution Professional has to inter alia monitor the management of Corporate Debtor and inform the CoC in the event the erstwhile management breaches any of its obligations. However, on an Application made under Section 54J (1) of the IBC in Form P14 provided in the PPIRP Regulations, if it is found by the Adjudicating Authority that the affairs of the Corporate Debtor have been conducted in a fraudulent manner or there has been gross mismanagement of the affairs, then the Adjudicating Authority may pass an order vesting the management of the Corporate Debtor with the Resolution Professional.
    • Invitation to prospective Resolution Applicants and submission of Resolution Plans
      • The Corporate Debtor has to submit a Base Resolution Plan to the Resolution Professional within a period of two days from the Insolvency Commencement Date. The Base Resolution Plan can be considered and approved by the CoC if it discharges the debts owed to Operational Creditors in full.
      • However, if the CoC does not approve the Base Resolution Plan then the Resolution Professional has to invite prospective resolution applicants (PRAs) in terms of Regulation 43 of the PPIRP Regulations to submit a Resolution Plan for the Corporate Debtor (by competing with the Base Resolution Plan). The invitation for resolutions plans has to be published in Form P11 (provided under the PPIRP Regulations) and shall:
        • Detail each step in the process, and the manner and purposes of interaction between the Resolution Professional and the resolution applicant, along with corresponding timelines.
        • Include- (i) the basis for evaluation i.e., the parameters to be applied and the manner of applying such parameters, as approved by the committee, for evaluating a Resolution Plan to assign a score to the plan; (ii) basis for considering a Resolution Plan significantly better than another Resolution Plan; (iii) tick size i.e., minimum improvement over another Resolution Plan in terms of score; and (iv) the manner of improving a Resolution Plan.
      • Regulations 44 and 45 of the PPIRP Regulations provide the mandatory contents of the Resolution Plans. Further, in terms of Section 54K(3) of the IBC, the Resolution Plans have to comply with the requirements under Section 30(1) and (2) of the IBC. Thereafter, if it is concluded that the Resolution Plans are compliant with the provisions of the IBC and the PPIRP Regulations, then they are placed before the CoC, which would evaluate the Resolution Plans presented by the Resolution Professional, according to the basis of evaluation and in terms of Regulation 47 of the PPIRP Regulations, select the Resolution Plan with the highest score (H1 Plan).
    • Approval of Resolution Plan for the Corporate Debtor MSME
      • Section 54K of the IBC and Regulation 48 of the PPIRP Regulations provide the procedure for approval of Resolution Plan by the CoC. According to the same, if the H1 Plan is found to be significantly better than the Base Resolution Plan, then the H1 Plan may be considered by the CoC for approval. However, if the aforesaid condition is not met, then the Resolution Professional would disclose the score allotted to the H1 Plan based on the Evaluation Matrix and the Base Resolution Plan to the concerned PRA and the Corporate Debtor respectively and invite them to improve the respective plans within a time window of 48 (forty-eight) hours. The plan having a higher score on completion of the aforesaid time period would be considered by the CoC for approval.
      • Pertinently, in terms of Section 54K(7)(b) of the IBC, the Corporate Debtor / PRAs should meet the requirements as under Section 29A of the IBC as applicable to MSMEs.
      • Once a Resolution Plan is approved by the CoC, then in terms of 54K(15) of the IBC and Regulation 49 of the PPIRP Regulations, the Resolution Professional has to apply, along with a compliance certificate in Form P12, to the Adjudicating Authority for approval of the said Resolution Plan.
    • Time period for completion of the PIRP
      • In terms of Section 54D of the IBC, a Resolution Plan is required to be approved by the CoC within a period of 90 (ninety) days from the Insolvency Commencement Date, failing which the PIRP may be terminated.
      • Further, the PIRP (formal process) has to be completed within a period of 120 (one hundred and twenty) days from the Insolvency Commencement Date.
    • Relevant Forms provided under the PPIRP Regulations
      • The following table provides some of the relevant forms which are required to be filed as per the relevant provisions of the IBC read with the relevant PPIRP Regulation(s):
      • S. No. Relevant provision Form
        1. Regulation 7: Written consent by an insolvency professional confirming his eligibility to be appointed as the Interim Resolution Professional/ Resolution Professional. Form P1
        2. Regulation 14(3): List of creditors along with their claims. Form P2
        3. Regulation 14(5): Approval of the terms of appointment of the Resolution Professional under clause (e) of sub-section (2) of Section 54A of the IBC. Form P3
        4. Regulation 14(7): Approval of Financial Creditors for initiating PIRP of Corporate Debtor under Section 54A(3) of the IBC. Form P4
        5. Regulation 15(d)(iii): Written Consent of the insolvency professionals to act as the authorised representative of creditors in the class. Form P5
        6. Regulation 16(1): Declaration under Section 54A(2)(f) of the IBC by directors/partners. Form P6
        7. Regulation 16(2): Declaration regarding existence of avoidance transactions as mentioned under Section 54C(c) of the IBC. Form P7
        8. Regulation 17: Report by Resolution Professional as required under Section 54B(1)(a) of the IBC. Form P8
        9. Regulation 19(2)(a): Public announcement inviting claims from the creditors of the Corporate Debtor. Form P9
        10. Regulation 20: List of claims filed by the Resolution Professional. Form P10
        11. Regulation 43: Invitation for Resolution Plan Form P11
        12. Regulation 49(1): Compliance Certificate filed by Resolution Professional along with the Application for approval of Resolution Plan. Form P12
        13. Regulation 49(4): Application by Resolution Professional for termination of PIRP. Form P13
        14. Regulation 51: Application for vesting management with Resolution Professional. Form P14

IBBI (Pre-package Insolvency Resolution Process) Rules, 2021

  • Vide notification dated April 09, 2021, IBBI introduced the IBBI (Pre-packaged Insolvency Resolution Process) Rules, 2021 (PPIRP Rules). These rules shall apply to the matters relating to the PIRP.
  • As per Rule 4 of the PPIRP Rules, the Corporate Debtor applying for initiation of PIRP shall make an application under sub-section (1) of Section 54C of the IBC in Form 1, accompanied with affidavit, documents or records as referred in Annexures therein, in electronic form, along with a fee of INR 50,000. It is pertinent to note that the Application shall be filed before the Adjudicating Authority in accordance with Rules 20, 21, 22, 23, 24 and 26 of the National Company Law Tribunal Rules, 2016 and a copy of the application shall be served to the IBBI by registered post or speed post or by hand or by electronic means, before filing it with the Adjudicating Authority.
  • The proviso to said Rule states that in case electronic facility is not available for filing such application, the application and the accompanying documents may be filed in physical form, and wherever the accompanying documents are bulky, the same may be submitted in scanned portable document format in a data storage device such as a compact disc or a USB flash drive acceptable to the Adjudicating Authority. Form 1, for filing the Application for initiation of PIRP can be viewed here.

IBBI (Insolvency Professionals) (Amendment) Regulations, 2021

  • In exercise of the powers conferred by sections 196, 207 and 208 read with Section 240 of the IBC, IBBI on April 27, 2021 notified the following amendments into the IBBI (Insolvency Professionals) Regulations, 2016 (Principal Regulations).
  • Insertion of proviso in Clause (ca) of Sub-Regulation (2) of Regulation 7 of the Principal Regulations providing that for the financial year 2020-2021, an insolvency professional shall pay the fee under the said clause on or before June 30, 2021.
  • The IBBI inserted various provisos to Sub-Regulation (2) of Regulation 13 of the Principal Regulations which provides the conditions for recognition of insolvency professional entities, which are as follows:
    • The proviso to Clause (b) of the said Sub-Regulation (2) provides that when an individual ceases to be its director or partner, then, on and from April 27, 2021 till December 31, 2021, the insolvency professional entity shall inform IBBI, within thirty days of such cessation.
    • Further, the proviso to Clause (c) of the said Sub-Regulation (2) provides that when an individual joins as its director or partner, then, on and from April 27, 2021 till December 31, 2021, the insolvency professional entity shall inform IBBI, within thirty days of such joining.
    • Lastly, the proviso to Clause (ca) of the said Sub-Regulation provides that for FY 2020-2021, an insolvency professional entity shall pay the fee under the said clause on or before June 30, 2021.
  • These amendments provide clarity especially on the conditions to be fulfilled for recognizing insolvency professional entities under the IBC and makes it more efficient.

IBBI (Information Utilities) (Amendment) Regulations, 2021

  • In exercise of the powers conferred by Section 196 read with Section 240 of IBC, IBBI on April 13, 2021 notified the following amendments into the IBBI (Information Utilities) Regulations, 2017 (IU Regulations).
  • Insertion of Clauses (ba) and (bb) to Sub-Regulation (3) in Regulation 15 of the IU Regulations. The newly inserted clauses directs that the byelaws of Information Utilities must provide for minimum service quality standards and adoption of quality standards and quality standards certifications.
  • Substitution of Sub-Regulation (1) in Regulation 27 with 'A user, who has submitted information in Form C of the Schedule to an information utility, shall submit the information updated as on the last day of every month, in the first week of following month: Provided that information of default shall be updated within seven days of occurrence of default.' It is pertinent to highlight that prior to the present amendment, there were no such timelines, and the only requirement was that a user must expeditiously update the information submitted by it to an information utility.
  • Further, Regulation 36A 'Publication of statistical information' has been inserted after Regulation 36 'Provision of information to the Board' of the IU Regulations. The Regulation 36A directs that an information utility shall publish statistics relating to debt related information in its possession, quarterly and such statistics shall provide distribution of debts in terms of currency, geography, sector, size, tenor, type, lending arrangement, and incidence of default.
  • In addition to the above, the amendment substitutes Form C i.e., for acceptance and receipt of information, in the Schedule of the IU Regulations. The same can be found here.

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