The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated by the President of India on 4^th April 2021 introducing a Pre-packaged Insolvency Resolution Process (“PIRP”) for micro, small and medium enterprises (“MSME”)[1]. In this article, we analyse the provisions of this Amendment Ordinance to reflect upon its effectiveness in pre-packed resolution for MSMEs.

Overview of the PIRP

The PIRP, introduced by way of addition of Chapter III-A, is broadly based on the Corporate Insolvency Resolution Process (“CIRP”) provided under Chapter II of the Insolvency and Bankruptcy Code, 2016 (“IBC”) with customized tweaks for a “quicker, cost-effective and value maximising outcomes for all the stakeholders”.[2] To begin with, certain provisions relating to moratorium, resolution professional and Committee of Creditors (“COC”) are extended mutatis mutandis to this scheme.[3]

The Amendment Ordinance is prospective as PIRP cannot be initiated in cases where an application under Section 7, 9 or 10 of IBC is filed and pending at the date of commencement of the said Ordinance.[4] Further, Rs. 10 Lacs has been specified by the Central Government as the minimum amount of default for initiating the PIRP.[5] The timelines have also been compressed and the entire process has to be completed in 120 days, within the resolution plan approved by the COC has to be submitted within 90 days, and the remaining 30 days available to the Adjudicating Authority to improve or approve the resolution plan.[6] In the event no resolution plan is approved within this time frame, the resolution professional is required to file an application for termination of PIRP.[7]

One important and distinct feature of PIRP is the process of its initiation. Unlike CIRP, PIRP can be initiated under Section 54C[8] by a MSME (addressed as corporate debtor or corporate applicant) who is in default under Section 4 of the IBC, provided the following conditions are satisfied:[9]

1. The corporate debtor has not undergone PIRP or CIRP during the period of three years preceding the initiation date;
2. The proceedings of CIRP are not pending against the corporate debtor;
3. It is eligible to submit a resolution plan under Section 29A;[10]
4. The majority directors/partners of the corporate debtor have passed a declaration in terms of Section 54A (2) (f) of IBC;[11]
5. The members of the corporate debtor have passed a special resolution approving the initiation of PIRP;
6. A base resolution plan (in terms of Section 54K) has been submitted by the corporate debtor to its financial creditors along with the aforementioned declaration and special resolution; and
7. The financial creditors of the corporate debtor by atleast 66% in value of their financial debt have approved the name of insolvency resolution professional for conducting PIRP,[12] and initiation of PIRP on the basis of base resolution plan and other documents submitted to them.[13] It should be noted that a meeting of the financial creditors of the corporate debtor is to be convened for these approvals in terms of the provisions of the Insolvency Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.[14]

Thus the PIRP is, broadly, an arrangement whereby the corporate debtor proposes a resolution plan to the financial creditors before the initiation of resolution process. It is on this account that its referred as a ‘pre-pack’ scheme.

In the event the application to initiate the PIRP is admitted,[15] the Adjudicating Authority declares moratorium under Section 14 of IBC while appointing a resolution professional.[16] In contrast to CIRP, the management of the affairs of the corporate debtor / MSME during PIRP vests with the Board of Directors or partners,[17] the resolution professional being limited to monitoring of its affairs.[18] However, the COC can by a vote of minimum 66% of the voting shares, resolve to vest the management of the corporate debtor with the resolution professional, subject to the decision of the Adjudicating Authority. The Adjudicating Authority can allow such transfer in cases of gross mismanagement or fraudulent conduct of the affairs of the corporate debtor.[19] This is another important distinct feature of PIRP.

After the initiation of PIRP, the corporate debtor is obligated to submit the base resolution plan to the resolution professional,[20] who then presents it to the COC.[21] It is at this stage that the PIRP becomes complicated with diverse options available to the COC:

1. Firstly, the COC can either choose to revise the base resolution plan before its approval, or invite resolution plans from prospective resolution applicants.[22] Nevertheless, the latter option can be exercised by the COC only in events that the base resolution plan is not approved or it impairs the claims of the operational creditors.[23]
2. In case the prospective resolution plans are invited, the COC evaluates the plans presented by the resolution professional and selects a resolution plan therefrom.[24]
3. The COC has an additional option to compare the selected resolution plan (in point no. 2 above) with the base resolution plan on the criteria laid down by it.[25] The Ordinance also provides that the selected resolution plan necessarily has to be compared with the base resolution plan irrespective of the additional deliberations by the COC.[26]

Finally, any of the resolution plans above ought to be approved by the COC by a minimum vote of 66% of the voting shares and submitted to the Adjudicating Authority for its approval.[27] The Adjudicating Authority has been mandated to pass an order for liquidation of the corporate debtor if the PIRP needs to be terminated on any ground.[28]

Nonetheless, the COC, by a vote of 66% of the voting share, can opt to initiate CIRP at any time during PIRP but before approval of the resolution plan.[29]

Analysis

From the understanding of the provisions introduced vide the IBC Amendment Ordinance 2021, it is evident that the PIRP is far more complicated than the CIRP. The statutory comparison of base resolution plan with prospective resolution plans (if invited) in PIRP corresponds to comparison of several prospective resolution plans in the CIRP. Above this, the mandate upon the COC to compare these prospective resolution plans against themselves as well as against other specified criteria adds to the complexity of the process, thereby making it less attractive.

Another aspect is the proposed two-fold approval of the base resolution plan. At one instance, the financial creditors of the corporate debtor approve the filing of application for initiation of PIRP basis the documents and base resolution plan made available to them by the corporate debtor.[30] The COC, which primarily constitutes the same financial creditors,[31] are again required to examine the base resolution to either approve, reject, or seek revision thereof. This process involving scrutiny and approval of the same base resolution plan by the same financial creditors at two different stages would be time consuming and contrary to the basic objectives sought to be achieved by this Amendment. In that sense, the pre-pack insolvency resolution process does not appear to ‘pre-pack’. On the contrary, approval of the base resolution plan by the financial creditors before initiation of PIRP, with the option of rejection in limited circumstances, can help in quick resolution for MSMEs.

The default amount of Rs. 10 Lacs[32] is also considerably low for MSMEs considering that the same for other corporate debtors was increased to Rs. 1 crore by the government during Covid-19 pandemic. This will bring several MSMEs within the purview of PIRP creating additional burden on these entities during these tough times.

Nevertheless, the Amendment Ordinance allows a corporate debtor to “submit the base resolution plan either individually or jointly with any other person”.[33] This entails that a corporate debtor has an option to submit an appealing base resolution plan to its creditors in collaboration with a potential investor thereby aiding the promoters / partners in conserving the maximum value of the assets of the corporate debtor.

Another aspect of concern is that whether a corporate debtor or its promoter / partner can re-submit a resolution plan after the base resolution plan submitted by the corporate debtor has been rejected by the COC under Section 54K of the IBC. While there is no such bar on the promoter / partner under Section 29A or Section 54K of IBC, Section 54L, in the cases of gross mismanagement or fraudulent conduct of the affairs of the corporate debtor, makes it compulsory for the COC to choose a resolution plan submitted by someone who is not the promoter or in management or control of the corporate debtor. Thus, the opportunity to re-submit a resolution plan post rejection of the base resolution plan seems available to the promoters / partners of the corporate debtor.

Finally, even though the COC has been given an option to initiate CIRP anytime during the PIRP, initiation of CIRP afresh[34] without including the time already spent in PIRP may result in additional delays in the resolution and can also be misused by certain stakeholders to their benefit. At the same time, Section 65 has also been amended by this Ordinance to impose penalty on the persons who seek to initiate PIRP with a fraudulent or malicious intent. While this might act as a deterrent for the stakeholders who wish to misuse PIRP as a delay or pressure tactic, the efficacy and effectiveness of the provisions of this Amendment Ordinance remains to be tested before the Adjudicating Authority.

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[1] Preamble to the IBC Amendment Ordinance 2021.

[2] Preamble to the IBC Amendment Ordinance 2021.

[3] Section 54E (1)(a), Section 54F (5), Section 54-I (3), Section 54J (3), and Section 54K (3) of the Insolvency and Bankruptcy Code, 2016.

[4] Section 11A (4) of the Insolvency and Bankruptcy Code, 2016.

[5] Section 2 of the Amendment Ordinance 2021 read with Notification No. S.O. 1543(E) of the Ministry of Corporate Affairs dated  9^th April 2021.

[6] Section 54D and Section 54L of the Insolvency and Bankruptcy Code, 2016.

[7] Section 54D(3) of the Insolvency and Bankruptcy Code, 2016.

[8] Note that the application under Section 54C has to be made under Form 1 of Insolvency and Bankruptcy (pre-packaged insolvency resolution process) Rules, 2021.

[9] Section 54A of the Insolvency and Bankruptcy Code, 2016.

[10] Note that under Section 240A of Insolvency and Bankruptcy Code, 2016, clauses (c) and (h) of Section 29A are inapplicable on the resolution applicant.

[11] Declaration has to be given in Form P6 of the Insolvency Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.

[12] Approval by Financial Creditors shall be given in Form P3 of the Insolvency Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.

[13] Approval by Financial Creditors shall be given in Form P4 of the Insolvency Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.

[14] Regulation 14 of the Insolvency Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021.

[15] Section 54C (4) of the Insolvency and Bankruptcy Code, 2016.

[16] Section 54E of the Insolvency and Bankruptcy Code, 2016.

[17] Section 54H of the Insolvency and Bankruptcy Code, 2016.

[18] Section 54F of the Insolvency and Bankruptcy Code, 2016.

[19] Section 54J of the Insolvency and Bankruptcy Code, 2016.

[20] Section 54K (1) of the Insolvency and Bankruptcy Code, 2016.

[21] COC is constituted by the resolution professional under Section 54-I of the Insolvency and Bankruptcy Code, 2016.

[22] Section 54K (2), and (4) of the Insolvency and Bankruptcy Code, 2016.

[23] Section 54K (5) of the Insolvency and Bankruptcy Code, 2016.

[24] Section 54K (9) of the Insolvency and Bankruptcy Code, 2016.

[25] Section 54K (10) of the Insolvency and Bankruptcy Code, 2016.

[26] Section 54K (11) of the Insolvency and Bankruptcy Code, 2016.

[27] Section 54K (12), (13) and (15) of the Insolvency and Bankruptcy Code, 2016.

[28] Section 54N of the Insolvency and Bankruptcy Code, 2016.

[29] Section 54-0 of the Insolvency and Bankruptcy Code, 2016.

[30] Section 54A and 54C of the Insolvency and Bankruptcy Code, 2016.

[31] Section 21 of the Insolvency and Bankruptcy Code, 2016.

[32] Section 4 of the Insolvency and Bankruptcy Code, 2016.

[33] Explanation I appended to Section 54K of the Insolvency and Bankruptcy Code, 2016.

[34] Section 54-O (4)(b) of the Insolvency and Bankruptcy Code, 2016 states that CIRP shall commence from the date of the order passed by the Adjudicating Authority thereby indicating that the entire 330 days’ period will be available for the process.