The Covid’19 Pandemic has impacted businesses, financial markets and economies all over the world. In India, the Micro, Small and Medium Enterprises (MSME) Sector is the backbone of the national economic Structure. MSME contributes around 6.11% of the manufacturing GDP and 24.63% of the GDP from service activities as well as 33.4% of India’s manufacturing output. They have been able to provide employment to around 120 million persons and contribute around 45% of the overall exports from India. The sector has consistently maintained a growth rate of over 10%.
Since the MSME enterprises contribute significantly to the Country’s Gross Domestic Product and provide employment to a sizeable population, MSME are critical for India’s economy. Pandemic has impacted the business operations of MSME Enterprises and exposed many of them to financial distress.
To cater the specific requirements of MSME relating to the resolution of their insolvency and to provide an efficient alternative insolvency resolution process for corporate persons classified as MSME Enterprises under the Insolvency and Bankruptcy Code, 2016, a pre-packaged insolvency resolution process for corporate persons classified as MSME Enterprises has been introduced.
On 04.04.2021, In exercise of powers conferred by clause (1) of Article 123 of the Constitution, the President of India promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021.
INTRODUCTION OF THE PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS
Pre-pack is a restructuring plan which is agreed to by the debtor and its creditors prior to the insolvency filing, and then sanctioned by the Court on an expedited basis.
The Insolvency Law Committee (ILC), in its meeting held on 14th May, 2020, decided to constitute a sub-committee to propose a detailed scheme for implementing Pre-packaged Insolvency Resolution Process (PPIRP) under the Code.
A sub-committee of ILC was constituted on 24th June, 2020 to propose a detailed scheme for implementing pre-pack and prearranged insolvency resolution process. The sub-committee was tasked: “To study and recommend the regulatory framework for prepack insolvency resolution process which shall include pre-requisite for initiation of PPRIP in terms of default and threshold, appointment of Insolvency Professional, role and responsibility of committee of creditors, moratorium, expected cost of process and timelines for completion of process.”
Pre-pack is an informal process which is shorter, efficient and which causes minimal disruption to debtors’ business activities. It is a process which is followed prior to the commencement of the formal proceeding. Pre-pack provides the stakeholders flexibility in working out a consensual, but efficient, strategy for effective resolution and value maximisation that may be difficult under the formal insolvency procedure. It takes less time because a substantial part of the proceedings is undertaken before the commencement of the formal proceeding by the Court. The sub-committee took note of benefits of a typical pre-pack process.
The Sub-Committee observed that the options available for resolution till date were either fully formal or fully informal and, therefore, they may not be conducive for all circumstances. The business needs an alternate option for resolution, which is between formal and informal options. Pre-pack is the most popular semi-formal option and is a natural step in the evolution of insolvency regimes.
OBJECTIVE OF THE PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS
The Sub-Committee acknowledged the fact that there was a need for a semi-formal or hybrid option which has an element of informality, but sanctity and advantages of a formal process. The most popular form of such a semi-formal option is pre-pack. Informal (out-of-court) resolutions, pre-packs and CIRPs are all part of a continuum of avenues for resolution of stress. Pre-pack is introduced so that it can be available side by side with CIRP so that CIRP is used as the last resort.
Pre-pack for India should be the most optimal semi-formal option that harnesses the benefits of all three options, avoids the associated concerns and does not dilute the gains made so far from implementation of the Code.
Rehabilitation is the most essential objective of insolvency proceedings all over the world. This is the first order objective of the Code. Liquidation of a Corporate Debtor is a matter of last resort. To encourage resolution, it is proposed to have approval of resolution plan by required majority of creditors, present and voting, and a decision to liquidate a Corporate Debtor will require a higher threshold of approval. If the CoC does not approve any resolution plan, the pre-pack should close without any consequence and an eligible stakeholder may initiate CIRP. However, where liquidation is the only option for resolution of stress, the CoC may proceed for liquidation, but with a higher threshold of voting.
The value of assets of the Corporate Debtor shall be maximised/optimized to the greatest levels as they are subject to the claims of the creditors. The individual claim enforcement against the common pool of assets which results in value destruction for both the creditors and the debtor. The insolvency laws around the world follow the principle of maximising value of assets. The pre-pack should harness value through cost savings, least disruption to business, avoidance of liquidation, and adequate marketing and disclosures.
Also, the main focus of the Law-makers was the Rehabilitation of MSMEs. The Government of India has been actively promoting the business of MSMEs, due to their significant contributions towards the GDP and employment opportunities. Considering their simpler corporate structure, the conventional CIRP would not yield the desired outcome. Therefore, to insulate MSMEs from liquidation, an alternative resolution mechanism was proposed to be added to the Code by the Sub-Committee.
The Pre-packaged insolvency resolution process offers the promoters of MSMEs to negotiate with the relevant parties and agree upon a mutually beneficial resolution plan, before beginning the formal process. Upon arriving at a consensus, the PPIRP can be conducted smoothly with limited costs and disputes, while maximizing the value of the corporate debtor.
WHO SHOULD INITIATE THE PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS?
The process of PPIRP can be initiated by any corporate debtor classified as micro, small or medium enterprise under Section 7(1) of the MSME Development Act, 2006 and by a Corporate Debtor who commits a default referred to in Section 4 of the Code, subject to the conditions laid out:
a. Such corporate debtor who has not undergone a PPIRP or CIRP process within three years of the initiation date;
b. Such corporate debtor who is not undergoing a CIRP process;
c. Such corporate debtor against whom there is no order of liquidation under Section 33 of IBC;
d. Such Corporate Debtor is eligible to submit a resolution plan under Section 29A of this Code;
e. On the condition that the financial creditors are not its related parties, and represent not less than 66% in value of the financial debt have proposed the name of the Insolvency Professional to be appointed as Resolution Professional for conducting the PPIRP of such a corporate debtor.
f. The majority of the directors or partners of the corporate debtor, as the case may be, have made a declaration, stating (as specified) inter alia:
i. The corporate debtor within a period of 90 days will file for initiating the PPIRP;
ii. The PPIRP will not be initiated to defraud any person;
iii. The name of the Insolvency Professional proposed and approved to be appointed as resolution professional under clause (e);
g. The members of the Corporate Debtor have passed a Special Resolution or at least 3/4th of the total number of partners of the corporate debtor, as the case may be, of the Corporate Debtor have passed a resolution, approving the filing of an application initiating the PPIRP;
The corporate debtor shall furnish the financial creditors with a:
a. declaration as specified in Section 54A(2)(f);
b. special resolution as specified in Section 54A(2)(g);
c. a base resolution plan as specified under Section 54K;
d. any other documents as specified,
in order to obtain approval from its financial creditors for filing an application for initiating PPIRP.
APPLICATION FOR INITIATION OF PPIRP
The Corporate applicant can file an application for initiating the PPIRP only if it has met the requirements under Section 54A of the Code. It is pertinent for the corporate applicant to furnish the following:
a. the declaration, special resolution and the approval for filing an application to initiate the PPIRP;
b. the report as per section 54B(1) of the code, details and written consent of the insolvency professional to be appointed as the resolution professional as under Section 54A(2)(e) of the code;
c. declaration regarding any transaction that falls within the scope of any provisions under Chapter III or fraudulent transaction under Chapter IV
d. information relating to books of account of the corporate debtor;
The Adjudicating Authority within a period of 14 days, shall either accept or reject the application by passing an order. The PPIRP shall commence from the date of acceptance of the application.
The PPIRP should be completed within a period of 120 days, and the resolution professional should submit the approved resolution plan, as approved by the CoC to the Adjudicating Authority. If such time period elapses the resolution professional shall file an application for the termination of PPIRP.
DECLARATION OF MORATORIUM AND PUBLIC ANNOUNCEMENT
The Adjudicating Authority shall, on the pre-packaged insolvency commencement date, in conjunction with the order of admission under section 54C-
a) declare a moratorium for the purposes referred to in sub-section (1) read with sub-section (3) of section 14, which shall apply mutatis mutandis to the proceedings under this Chapter;
b) appoint a resolution Professional as named in the application, if no disciplinary action is pending against him or based on the recommendation made by the Board
c) cause a public announcement of the initiation of the PPIRP to be made by the resolution professional, in such form and manner as may be specified, immediately after his appointment.
The order of moratorium shall have effect from the date of such order till the date on which the pre-packaged insolvency resolution process period comes to an end.
DUTIES OF THE RESOLUTION PROFESSIONAL BEFORE AND DURING THE PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS
The amended Code provides for the duties of the RP before and during the PPIRP.
Section 54B provides for the following duties that the Resolution Professional shall carry out from the date of the approval of the financial creditors and before the initiation of the PPIRP:
a) Preparing a report confirming whether the corporate debtor meets the requirements of Section 54A and the base Resolution Plan conforms to the requirements of Section 54 (4)(c);
b) File such reports and other documents with the board;
c) Perform such other duties as may be specified.
The duties of the Resolution Professional shall cease if,-
a) the corporate debtor fails to file an application for initiating PPIRP within the time period as stated in the declaration under 54A(2)(f); or
b) the application for initiating the PPIRP is admitted or rejected by the Adjudicating Authority.
The fees payable to the insolvency professional for the duties performed under Section 54B (1) of the Code, should be determined and borne in such manner as specified and if the application is accepted by the Adjudicating Authority then this fee shall be a part of PPIRP costs.
During the PPIRP, the Resolution Professional shall perform the duties prescribed under Section 54F which include; confirming and maintaining an update list of claims, constituting the CoC, convening and attending meetings, preparing the information memorandum, etc. Further, the provision also enlists the powers enjoyed by the Resolution Professional to ensure smooth facilitation of the pre-pack process.
As per the Sub-Committee, the RP shall act in an advisory capacity before the commencement of the formal procedure. He shall aid the corporate debtor in negotiation of the base resolution plan and in completion of pre-admission formalities. Therefore, the formal role of the RP begins with the admission of the PPIRP.
MANAGEMENT OF AFFAIRS OF THE CORPORATE DEBTOR
During the PPIRP period, the management of the affairs of the corporate debtor shall continue to vest in the Board of Directors or the partners. The Board of Directors or the partners, shall make every endeavour to protect and preserve the value of the property of the corporate debtor, and manage its operations as a going concern. The promoters, members, personnel and partners shall exercise and discharge their contractual or statutory rights and obligations in relation to the corporate debtor, subject to such other conditions and restrictions as may be prescribed.
According to Section 54J of the Code, The CoC during the insolvency process shall by a vote of not less than 66% of the voting shares place the management of the corporate debtor with the resolution professional. An application for the same shall be made to the Adjudicating authority by the RP. Further, if during the pre-packaged insolvency process, the Adjudicating Authority feels that the affairs of the corporate debtor have been conducted in a fraudulent manner or there has been gross mismanagement of the affairs of the corporate debtor, it shall accordingly pass an order vesting management of the debtor with the resolution professional. The principle of mutatis mutandis would be applicable to the said provision.
CONSIDERATION AND APPROVAL OF RESOLUTION PLAN
The base resolution plan as submitted to the financial creditors before the initiation of PPIRP shall be submitted to the RP by the corporate debtor as a base resolution plan within 2 days of the pre-packaged insolvency commencement date. The corporate debtor is given an opportunity to revise the base resolution plan by the committee of creditors.
The base resolution plan is approved by the CoC if it does not impair any claims owed by corporate debtor to the operational creditors. When the CoC does not approve a base resolution plan, the Resolution Professional shall invite prospective resolution applicants to submit a resolution plan to compete with the base resolution plan.
The basis of evaluation as laid down by the RP as approved by the CoC shall be provided and other relevant information is referred to in Section 29 of the Code. The CoC confirms the requirement of Section 30(2) of the code as presented by the RP. After evaluation, the CoC selects a resolution plan. If the prospective resolution plan is better than the base resolution plan, then such resolution plan would be selected for approval.
If the resolution plan does not meet the required criteria as laid down by the COC and is not considered for approval, the prospective resolution shall compete with the base resolution plan as may be specified and one of them shall be selected. If the plan is approved then it is submitted to the Adjudicating Authority, if not the RP shall file an application for termination of PPIRP.
The approval of the base resolution plan shall not be less than 66% vote. While voting the CoC shall consider its feasibility and viability, the manner of distribution proposed taking into account the order of priority under Section 53(1) of the Code including priority and value of the security interest of a secured creditor. The COCs may require the promoters and the corporate debtors to dilute their shareholdings or voting or control rights in the corporate debtors if the resolution plan submitted by the corporate debtor provides for impairment of any claims owed by the corporate debtor. If the plan does not provide for dilution then the COC shall reason for approval. RP shall submit the resolution plan as approved by the COC to the Adjudicating Authority
Approval of Resolution Plan: When the Adjudicating Authority is satisfied that the resolution proposal has been approved by the COCs and that it meets the requirements of Section 30(2) of the Code, it must approve the plan within 30 days of receiving it. The Adjudicating Authority must be certain that the resolution plan includes arrangements for its effective execution.
TERMINATION OF PPIRP
When an application is filed by the resolution professional with the Adjudicating Authority under the proviso of 54K (12) or under 54D (3), the Adjudicating Authority shall within 30 days from the date of such Application, by an order, terminate the PPRIP as well as provide for the manner of continuation of proceedings initiated for the avoidance of transactions or proceedings initiated under Section 66 and 67A respectively.
The Adjudicating Authority shall be entitled to terminate the PPIRP if the decision of the COCs is approved by a vote of 66% of the voting shares in support of such termination. When an order is passed under subsection (1) by the Adjudicating Authority, the PPIRP costs if any shall be borne by the Corporate Debtor.
The adjudicating authority shall pass an order of liquidation with respect to the corporate debtor as referred to in Section 33 (1) and can declare the costs of PPIRP shall be included as liquidation costs for purposes of liquidation of the corporate debtor.
INITIATION OF CORPORATE INSOLVENCY RESOLUTION OF PROCESS
Under Chapter II of this code if any corporate debtor is eligible for CIRP then the committee of creditors at any time after the pre-packaged insolvency commencement date but before approval of resolution plan may resolve to initiate a CIRP by a vote of 66%. The Adjudicating Authority shall terminate and the PPIRP and initiate the CIRP on the application made by the Resolution Professional within 30 days. The Adjudicating Authority shall also appoint the Resolution Professional as interim resolution professional as well as declare the PPIRP costs for the purpose of CIRP of the corporate debtor.
Under Section 7 of the Code, once the order is passed by the Adjudicating Authority shall be deemed to be an order of admission. The CIRP shall commence from the date of such order the proceedings also initiated for either avoidance of transactions or under Section 66 and 67A of this Code will continue during the CIRP.
The IBC Ordinance, 2021 acts as an “additional layer” over the basic structure of the Code, providing for an alternative, semi-formal mechanism for the effective resolution of distressed MSMEs with minimal costs, delays and disputes. All aspects considered, the pre-packaged process promises a more mature, and robust insolvency regime. With the introduction of pre-packaged insolvency resolution, the Government seeks to explore alternatives to the conventional CIRP. In PPIRP, only the debtor will be able to initiate the insolvency proceedings, which is intended to result in a significantly quicker settlement and cost savings than the current CIRP. It will also aid many MSMEs to deal with the chaos wreaked by the pandemic by reducing litigation, which is frequently caused by defaulting promoters seeking to retain ownership of their businesses. It lays special emphasis upon the rehabilitation of MSMEs, considering the unique nature of their business and their contribution to India’s economic growth. The Ordinance is passed keeping in mind the creditor’s needs on the one side with the need to protect MSME Enterprises on the other.