The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 shall be deemed to have come into force on April 4, 2021. It amends the Insolvency and Bankruptcy Code, 2016.
The object of the bill is to expedite and provide an efficient alternate insolvency resolution process for corporate persons classified as micro, small and medium enterprises (MSMEs) under the Insolvency and Bankruptcy Code, 2016. The bill was introduced to replace The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 dated 04th April, 2021.
The bill was passed in the Lok Sabha on July 28, 2021 and in Rajya Sabha on August 03, 2021.
The minimum threshold for initiating Pre-packaged Insolvency Resolution Process ("PIRP") shall be wherein, default is not be less than INR 10 Lakhs and not more than INR 1 crore (Section 4).
Who can initiate PIRP?
(Section 11A) The Corporate Applicant may file an application under section 54C before the Adjudicating Authority (National Company Law Tribunal) for initiation of PIRP within 90 days of filing of an application under section 7, 9 of 10.
- Where an application under section 54C is filed within 14 days of filing of an application under sections 7, 9 or 10, which is pending, then notwithstanding anything contained in the said sections 7, 9 or 10, the Adjudicating Authority shall first dispose of the application filed under 54C. On the contrary, if the application under section 54C is filed after 14 days, the Adjudicating Authority shall first dispose of the application under sections 7, 9 or 10.
Who is not entitled to make an application for initiation of PIRP?
(Section 54A) The Corporate Debtor shall be eligible for initiation of PIRP provided:
- It has not undergone PIRP or completed Corporate Insolvency Resolution Process ("CIRP") during the preceding three years.
- It is not undergoing a CIRP.
- No order requiring the Corporate Debtor to be liquidated has been passed under section 33 of the code.
- It is eligible to submit a resolution plan under section 29A of the code.
- Its Financial Creditor/s is/are not related party/s.
- Its Financial Creditors are representing not less than 66% for making an application for initiation of PIRP.
Further, the Corporate Debtor is barred from making an application for initiation of PIRP wherein, resolution plan (under the PIRP) has been approved in the preceding twelve months from the date of making of the application (Section 4).
Initiation of PIRP (Section 54C)
The Corporate Applicant alongwith the application shall furnish
- Declaration, special resolution or resolution.
- The approval of Financial Creditors representing not less than 66%.
- Written consent of Insolvency Resolution Professional proposed to be appointed as Resolution Professional.
- Report of the Resolution Professional confirming the Corporate Debtor meeting the requirements for initiation of PIRP and the base resolution plan.
- Declaration regarding existence of any transactions of the Corporate Debtor that may be within the scope of provisions in respect of avoidance of transactions under the liquidation process or fraudulent or wrongful trading.
- Information relating to the books of accounts of the Corporate Debtor;
- Such other documents in such form as may be specified.
An application for initiating PIRP may be made under section 54A in respect of the Corporate Debtor classified as MSMEs. Upon initiation of PIRP, the Resolution Professional shall constitute Committee of Creditors ("CoC") and conduct first CoC meeting with 7 days (Section 54I) from the PIRP commencement date.
Commencement of PIRP does not absolve the Board of Directors from the management of the Corporate Debtor. The Resolution Professional does not take over the management of the Corporate Debtor (section 54H).
Time frame for completion of PIRP (Section 54D)
PIRP shall be completed within a period of 120 days from the PIRP commencement date.
- The Corporate Debtor shall submit the base resolution plan within a period of 2 days to the Resolution Professional from the PIRP commencement date (Section 54 K).
- The Resolution Professional shall submit the resolution plan approved by the CoC to the Adjudicating Authority within a period of 90 days from the PIRP commencement date.
- The CoC may provide an opportunity to the Corporate Debtor to revise the base resolution plan. If the CoC does not approve the base resolution plan, the Resolution Professional shall invite prospective Resolution Applicants to compete with the base resolution plan. The approval of the Resolution Plan by the CoC shall be by a vote of not less than 66%.
Declaration of moratorium (Section 54E)
The Adjudicating Authority shall on the PIRP commencement date alongwith the order of admission shall declare moratorium for the purposes referred to in section 14(3)(1) of the code, which shall mutatis mutandis apply.
Powers of Resolution Professional in PIRP (Section 54F)
While in PIRP the Resolution Professional shall have access to:
- All books of accounts, records available with the Corporate Debtor.
- Electronic records of the Corporate Debtor.
- Relevant documents available with the Government authorities, statutory auditors accountants and such other persons as may be specified;
- Attend meetings of members, Board of Directors and Committee of Directors and committee of directors, or partners, as the case may be of the Corporate Debtor.
- Appoints accountants, legal or other professionals in such manner as may be prescribed;
- Collect all information relating to the assets, finances and operations of the Corporate Debtor for determining the financial position of the Corporate Debtor.
- Business operations and financial and operational payments for the previous two years from the date of the PIRP commencement date.
Termination of PIRP
- The CoC by a vote of not less than 66% at any time during the PIRP resolves to vest the management of the Corporate Debtor with the Resolution Professional, the Resolution Professional shall make an application for this purpose to the Adjudicating Authority (Section 54N).
Upon Application by the Resolution Professional, if the Adjudicating Authority is of the opinion that:
- The affairs of the Corporate Debtor have been conducted in a fraudulent manner; or
- Gross mismanagement of the affairs of the Corporate Debtor
It shall pass an order vesting the management of the Corporate Debtor with the Resolution Professional (Section 54J).
If such an order is passed and the Adjudicating Authority is of the opinion that the PIRP is to be terminated, the Adjudicating Authority shall pass an order of liquidation and declare that the PIRP costs, if any, shall be included as part of the liquidation cost (Section 54L).
- The CoC at any time during the PIRP by voting share of 66% can file an application before the Adjudicating Authority for initiating Corporate Insolvency Resolution Process in respect of the Corporate Debtor (Section 54O).
Appeal (Section 54M)
Appeal from an order of the Adjudicating Authority initiating Liquidation or Corporate Insolvency Resolution Process thereby terminating PIRP may be filed on grounds of material irregularity or fraud committed in relation to the orders.
The introduction of a PIRP mechanism is definitely a welcome
move for the
MSME sector. It envisages a consensual process. A perusal of the amendment shows that the provisions of PIRP have been prioritized over CIRP mechanisms possibly because they seek to balance needs of creditors whilst protecting insolvent MSMEs inter alia from the economic ripple effect caused by Covid-19. The amendments seek to empower the Board of Director with the management of the Corporate Debtor. The success of the PIRP is likely to depend upon faster disposal of the Application as opposed to the severe backlog of the CIRP applications already checking the system.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.