Pre-packed Insolvency Resolution process for MSME – A boon in disguise during Pandemic? - MMJC

Introduction:

The President of India has promulgated Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 on 4 April 2021 to allow pre-packaged insolvency resolution process (PPIRP) for Corporate Debtors classified as a Micro, Small or Medium Enterprise (MSMEs) under section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.

The Ordinance is promulgated to address the specific requirements of MSME relating to the resolution of their insolvency. Due to the unique nature of their businesses and simpler corporate structures, a need was felt for an efficient alternative insolvency resolution process for MSMEs under the Insolvency and Bankruptcy Code, 2016, (IBC) ensuring quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which would also preserve jobs and ensuring economic recovery which is affected due to pandemic.

The MSMEs may proceed for PPIRP in case if the default amount is 10 Lakh or more.  The Central Government may specify the higher amount of default not exceeding more than Rs. 1 crore for PPIRP.  

Key features of PPIRP:

• Eligibility:

An application for initiating PPIRP can be made in respect by a Corporate Debtor (CD) subject to the following conditions, that-

• The CD has not undergone PPIRP or completed Corporate Insolvency Resolution Process (CIRP) as the case may be during the period of 3 years preceding the initiation date
• No Order of Liquidation is passed against the CD
• CD is not undergoing CIRP
• CD is eligible to submit a resolution plan under section 29A of IBC
• An approval from its Financial Creditors (FCs), not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, for the filing of an application for initiating PPIRP and proposal to appoint insolvency professional to be appointed as resolution professional (RP) for conducting the PPIRP. 

• Constitution of Committee of Creditors (CoC)

The Resolution Professional (RP) within 7 days from the commencement is required to constitute a CoC, based on the list of confirmed claims. The first meeting of the CoC is required to be held within 7 days of the constitution CoC.

• Key Nuggets:

• While making an application the majority of the Directors/ Partners of the CD are required to make a declaration that the PPIRP is not being initiated to defraud any person
• The moratorium u/s 14 of the IBC, mutatis mutandis apply, to the proceedings under PPIRP till the date on which the PPIRP comes to an end
• During the PPIRP period, the management of the affairs of the CD would continue to vest in the Board of Directors or the partners, as the case may be, of the CD, subject to conditions specified.
• However, CoC at any time during the PPIRP period may resolve to vest the management of the CD with the RP with a voting of not less than 66% of the voting and with the approval of National Company Law Tribunal (NCLT)  
• Base Resolution Plan is required to be submitted by CD either individually or jointly to the RP within 2 days from the date of commencement and the RP is required to submit the plan to CoC. The plan submitted is required to meet the requirements of section 30(1) & 30 (2) of the IBC
• The CoC may approve the base resolution plan for submission to the NCLT if it does not impair any claims owed by the CD to the operational creditors (OC)
• If the base resolution plan is not approved by CoC or it impair the claims of the OCs, the RP may invite prospective resolution applicants to compete with the base resolution plan.

• Approval of PPIRP:

• The resolution plan is required to be approved by 66% of the FC value after considering its feasibility and viability.
• The CoC is also required to consider the manner of distribution proposed taking into the order of priority among creditors including the priority and value of the security interest of a secured creditor etc.
• The CoC may require promoters of the CD to dilute their shareholding or voting or control rights         
• NCLT is required to approve the resolution plan within 30 days from the receipt after confirming that the resolution plan has provisions for its effective implementation.

• Fraudulent Management of CD during PPIRP:

• Where an officer of the CD manages its affairs with an intent to defraud creditors of the CD or for any fraudulent purpose, NCLT may, on an application by RP, pass an order imposing upon any such officer, a penalty which shall not be less than Rs. 1 Lakh  but which may extend to Rs. 1 Crore

• Punishment for offences related to PPIRP:

• If CD/director/partner of the CD provides any information which is false in material particulars, knowing it to be false or omits any material fact, knowing it to be a material fact such corporate debtor or person as the case may be shall be punishable with imprisonment for a term which shall not be less than 3 years, but which may extend to 5 years or with fine which shall not be less than Rs. 1 Lakh but which may extend to Rs. 1 Crore or with both.

The key attraction of PPIRP is its short duration of process covering 120 days and it’s for MSMEs. However, the success of this would depend on its effective implementation!!