The government has promulgated an ordinance to introduce a pre-packaged insolvency resolution process for stressed micro, small and medium enterprises (MSMEs). It will allow the stressed debtor- in this case the MSMEs- and its creditors to quickly work out a plan to revive the company outside the bankruptcy process, which would then be sanctioned by the courts.
“It is considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, cost-effective and value-maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs… in order to achieve these objectives. It is considered expedient to introduce a pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises,” the IBC ordinance signed by President Ram Nath Kovind on Sunday read.
The pre-pack framework will be applicable for MSMEs with a maximum default value of Rs 1 crore only. It can be filed under a newly inserted Section 54C of the IBC. For defaults of more than Rs 1 crore, IBC or other resolution mechanisms can continue to be used.
A pre-packaged insolvency resolution process or PIRP cannot run in parallel to another corporate insolvency resolution process (CIRP), and must have a three-year cooling-off period from the closure of any other pre-pack or CIRP, as per the rules notified.
If a pre-pack application is filed within 14 days of the filing of any application under section 7 or section 9 or section 10 which is pending, then the Adjudicating Authority would have to first dispose of the application under section 54C. If more than 14 days have passed since an IBC plea was filed under Sections 7, 9, or 10, then the court would have to give the existing plea a preference. Sections 7, 9 and 10 deal with the initiation of the corporate insolvency resolution process by financial creditors, operational creditors and the corporate debtor himself respectively.
The framework has been modelled on the debtor-in-possession approach. The debtor would have to have a base resolution plan in place before approaching creditors to initiate a PIRP.
The financial creditors can initiate the PIRP in case of a default by an MSME if a minimum of 66 percent creditors vote in favour, and file an application with the adjudicating authority for the same. Alternatively, if a corporate debtor does not have any financial creditors, the company may approve the application filing through a special resolution with a 75 percent majority, and move the court to initiate PIRP. An insolvency resolution professional, as approved by creditors, is then appointed by the court.
The entire pre-packaged insolvency resolution process would have to be completed within 120 days from the commencement date. The resolution professional is expected to submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority within 90 days of the commencement date. If the plan is not approved by the committee of creditors (CoC) within the time period, the PIRP would be terminated.
Control of company during PIRP
Unlike the IBC, under the pre-pack framework, the management of the affairs of the corporate debtor will continue to vest in the Board of Directors or the partners of the corporate debtor. If the CoC at any time during the process feels the company’s affairs are not being run in a transparent, or there is a fraud, it can vote by 66 percent majority to transfer the management powers to the resolution professional instead.
Section 29A of the IBC, which prohibits defaulting promoters/wilful defaulters from participating in the resolution process would also apply in the case of PIRP. A corporate debtor is required to submit a “base resolution plan” to the resolution professional within two days of PIRP commencement, and changes are allowed prior to the approval by the CoC. However, in case the resolution plan is not approved by creditors or does not pay the operational creditors in full, new bids can be invited.
However, there are conditions attached. If promoters not diluting equity as part of the resolution, lenders need to record reasons for it.
“While considering the feasibility and viability of a resolution plan, where the resolution plan submitted by the corporate debtor provides for impairment of any claims owed by the corporate debtor, the committee of creditors may require the promoters of the corporate debtor to dilute their shareholding or voting or control rights in the corporate debtor: Provided that where the resolution plan does not provide for such dilution, the committee of creditors shall, prior to the approval of such resolution plan under sub-section (4) or sub-section (12), as the case may be, record reasons for its approval,” the law states.
“Adopting plan evaluation process akin to Swiss Challenge, it retains competitive tension such that promoters propose plans with least impairment to rights and claims of creditors. The ability of the committee of creditors to require dilution of promoter shareholding/ control, in cases resolution plans submitted by the corporate debtor provides for impairment of any claims owed by such corporate debtor, should also be a significant deterrent against unreasonable terms in resolution plans,” said Soumitra Majumdar, Partner, J Sagar Associates.
The Pre-pack resolution must be approved by financial creditors with a minimum 66 percent voting share by value.
Pre-pack insolvency resolution framework vs normal IBC process
|Criteria||Pre-Packaged Insolvency Resolution Process (PIRP)||Corporate Insolvency Resolution Process (CIRP)|
|Eligibility||Only MSMEs||All corporate debtors|
|Default threshold||Upto Rs 1 crore||Over Rs 1 crore|
|Initiation by||Only Corporate Debtor (CD), post approval by shareholders & unrelated Fin Creditors||Financial Creditor/Operational Creditor/Corporate Debtor|
|Timeline||90 days to submit resolution plan to adjudicating authority, 120 days for entire process. No extension||180 days extendable upto max 330 days|
|Management Control||Corporate Debtor-in-Possession with Creditor-in-Control||Creditor in control|
|Resolution plan||CD to submit Base Resolution Plan. If CoC rejects, or if Operational Creditors not paid in full, competing bids can be invited.||EOIs invited from all prospective resolution applicants.|
|Section 29A applicability||Section 29A applicable||Section 29A applicable|
|Consequence of failure||Termination of PIRP, or liquidation or initiation of CIPR||Liquidation|
|Moratorium||Moratorium protection from date of commencement||Moratorium protection from date of filing of plea|
|Termination||Can terminate process with min 66% CoC votes||Section 12A to withdraw from CIRP with 90% vote of CoC|
|Other terms||*If promoters not diluting equity as part of resolution, CoC needs to record reasons for it|
|*PIRP cannot run in parallel to CIRP|
|*3-year cool-off period from any other PIRP, CIRP|