New law on pre-pack resolution plans under IBC

The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, which provides for pre-packaged insolvency resolution processes (PPIRP), has received assent and replaces the Insolvency and Bankruptcy (Amendment) Ordinance, 2021.

The bill inserts a new chapter, III-A, into the Insolvency and Bankruptcy Code, 2016, to facilitate and regulate the PPIRPs of micro, small and medium enterprises (MSME). New sections 54A to 54P provide penalties in cases of fraudulent or malicious initiation of PPIRPs or the fraudulent management of corporate debtors (CD), a minimum threshold of not more than INR10 million (USD135,000) for the initiation of the PPIRP, and the simultaneous disposal of applications for the corporate insolvency resolution process (CIRP) and PPIRP for the same CD.

A PPIRP may be instituted under the new section 54A in respect of a CD that is an MSME under section 7(1) of the MSME Act, 2006, and which has committed default within the meaning of section 4 of the code. Section 54A provides that the CD should not have undergone a PPIRP or completed a CIRP during the three years preceding the initiation date; there should be no liquidation order made within the meaning of section 33 of the code and it has to be eligible to submit a resolution plan within the meaning of section 29A of the code. The declaration for initiating a CIRP must confirm that the CD will apply for the PPIRP within 90 days; that the PPIRP is not being initiated to defraud any person, and that the name of the insolvency professional designated as the resolution professional (RP) has been submitted and accepted.

The application for the PPIRP must be accepted or rejected by the adjudicating authority (AA) within 14 days of the receipt of the application under section 54B(4). The AA is also required to inform the applicant of the need to rectify any defect within seven days of the receipt of such notification.

The PPIRP has to be completed within 120 days from its commencement date and the RP is required to submit the resolution plan to the AA within a period of 90 days. If the committee of creditors (CoC) does not approve the resolution plan, a further application has to be filed with the AA for the termination of the PPIRP on the expiry of the time frame. The AA on the commencement date of the PPIRP together with the admission of the application is required to declare a moratorium, which shall apply to the process once the necessary changes have been made.

The financial creditors are required to propose the name of the insolvency professional to be appointed as the RP. The RP must prepare a report confirming whether the requirements of section 54A have been met before the initiation of the PPIRP by the insolvency professional. During the PPIRP, the RP has to confirm the list of claims submitted by the CD; inform the creditors regarding their claims; maintain an updated list of claims; constitute the committee of creditors, and convene meetings, prepare the information memorandum and perform other specified duties.

If the AA is satisfied that the resolution plan, as approved by the CoC, satisfies the requirements of section 30(2) and makes provision for its effective implementation, it may approve the plan.

In contrast to the CIRP, the PPIRP is an out of court settlement wherein the interested parties facilitate the entire resolution mechanism before filing an insolvency resolution application with the AA. The PPIRP enhances flexibility in the resolution mechanism and makes insolvency proceedings more efficient and viable by alleviating the burden on the insolvency professionals. At the same time, it maintains the authority of the CoC in the approval of the resolution plan. As opposed to the lengthy CIRP, the PPIRP speeds up the process by allowing 90 days to agree on a resolution plan. This informal process ensures that a business continues as a going concern and does not undergo unnecessary asset value depreciation.

India has 65 million MSMEs contributing about half of India’s exports. On the one hand, they have helped the economy survive the pandemic; on the other, MSMEs have been largely unable to access the IBC framework due to numerous challenges which the present bill seeks to address. Under this bill, MSMEs can now take advantage of pre-packed options for faster insolvency resolution under the code.

Manoj Kumar is the founder and managing partner at Hammurabi & Solomon Partners