The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (“Ordinance”) was promulgated by the President of India on April 4, 2021. Considering the hardships faced, especially by Micro Small and Medium Enterprises (“MSMEs”), during the ongoing pandemic, the Pre-Packaged Insolvency Resolution Process (“PIRP”) have been introduced vide the Ordinance for the MSMEs.
The Ordinance alters the Insolvency and Bankruptcy Code, 2016 (”IBC”) to enable the Central Government to notify a pre-packaged procedure for defaults of up to INR 1 crore (approx. USD 130,000) by the MSMEs. As a stimulus to the pandemic, the Centre had briefly stopped the start of new insolvency proceedings on March 24, 2020 which after numerous extensions came to an end on March 24, 2021. Thereafter, the process of insolvency has been restarted and a separate chapter, Chapter 3A, has been inserted in the Code to deal with the pre-packaged insolvency resolution process vide the ordinance dated April 4, 2021.
The concept of PIRP has be brought about to ensure an efficient, timely and cost-effective resolution process for the MSMEs. All the 34 amendments brought about by this ordinance revolve around the concept of pre-packaged resolution. A gist of the amendments that have been made and the procedure involved in a pre-packaged resolution process has been mentioned herein.
Section 54A of the IBC provides for the option of PIRP available only for MSMEs. As per the aforesaid section, it is the manager of the corporate debtor who is required to issue a declaration for initiating the PIRP. Thereafter, the unrelated financial creditors by vote of not less than sixty-six per cent in value of the financial debt due to them, shall approve initiation of this process and the corporate debtor shall share a base resolution plan with such creditors at this stage.
Section 54B thereafter, provides the insolvency professional to perform the required duties, which would commence from the date on which his name is proposed in the declaration and approved by the unrelated financial creditors.
Further, the adjudicating authority may accept or reject the application for initiation of an insolvency resolution process within 14 days of filling of the application. Vide insertion of Section 54D of the code, the prescribed time limit has been provided for completing the pre-packaged insolvency process which is 120 days.
Section 54E further lays down the responsibility upon the adjudicating authority to appoint a resolution professional and cause a public announcement to be made by him.
Moreover, the moratorium has been decided to be in place from the pre-packaged start date until the process is completed, whether by resolution plan approval or otherwise.
Also, throughout the pre-packaged insolvency process the corporate debtor will be in the custody and control of the promoters or management. Thereafter, adhering to the procedure and call of actions for pre-packaged insolvency process provided under the code the stage of a having an approved resolution plan may be reached.
More so, section 61(3) of the code provides for certain grounds by virtue of which the order of the Adjudicating Authority approving a resolution plan may be appealed.
In light of the Ordinance, the common questions that have been asked are what happens to the applications filed under Corporate Insolvency Resolution Process (“CIRP”) prior to April 4, 2021. If the CIRP application with respect to a MSME is filed prior to April 4, 2021, then PIRP cannot be filed. Further, in case both application under PIRP and CIRP has been filed :
- If application under CIRP has already been filed, a MSME gets 14 days time to file PIRP, and under such circumstances, for the NCLT, first the PIRP application needs to be disposed off;
- In a situation wherein, PIRP is already filed and thereafter the application for CIRP is filed, thereto rst the PIRP application needs to be disposed off.
The Ordinance provides an alternative and efficient resolution mechanism to the MSMEs, subject to the prescribed de-minimis provided . The PIRP model envisages to avoid the deterioration in the value of assets and goodwill of the corporate debtor by ensuring safeguards in the management of the corporate debtor, as unlike under the CIRP process, this model envisages that the corporate debtor is in possession and the creditor is in control.
