Pre-packaged Insolvency Resolution Process by Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

Parliament is not in session and the President is satisfied that circumstances exist which render it necessary for him to take immediate action, now, therefore, in exercise of the powers conferred by clause (1) of article 123 of the Constitution, the President has promulgated on 4th April, 2021 an Ordinance i.e. Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 which has been come into effective at once i.e. 4th April, 2021.

The objectives behind said ordinance are that micro, small and medium enterprises are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population.  It is considered necessary to urgently address the specific requirements of micro, small and medium enterprises relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures.

Further, 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 maximising 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.

It may be noted that the Government has taken several measures to mitigate the distress caused by the pandemic, including increasing the minimum amount of default for initiation of corporate insolvency resolution process to one crore rupees, and suspending filing of applications for initiation of corporate insolvency resolution process in respect of the defaults arising during the period of one year beginning from 25th March 2020. This suspension, which was extended from time to time, has been ended on March 24, 2021.

The Ordinance amends the Insolvency and Bankruptcy Code 2016 to allow the Central Government to notify such pre-packaged process for defaults up to Rupees One Crores. As per said amendment, in the Insolvency and Bankruptcy Code, 2016, in section 4, after the proviso, the following proviso shall be inserted

“Provided further that the Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than one crore rupees, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Chapter III-A.”.

Further, a new Chapter III-A PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS is inserted, after Chapter III by the aforesaid amendment.

It is noted that a sub-committee of the Insolvency Law Committee (ILC) was constituted by the government in order to structure the pre-pack framework. The ILC has designed a pre-pack framework within the basic structure of the IBC for the Indian market. The same has been detailed in their report of October, 2020. The Ministry of Corporate Affairs (MCA) vide a notice dated January 8, 2021, also invited public comments and views on its proposed Pre-packaged Insolvency Resolution Process (PIRP).

Now, the Government has used the Ordinance route to introduce PIRP for companies classified as micro, small and medium enterprises under sub-section (1) of section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.

PIRP is a quasi-formal procedure which integrates the essence of an out of court private restructuring and that of a formal bankruptcy. It is a pre-planned insolvency procedure where a resolution plan is formulated and finalised prior to the initiation of formal proceedings.

It appears that ‘pre-pack’ has no statutory definition. It is probably because it has evolved over the time, differently in different jurisdictions and every jurisdiction has a unique variant(s) of pre-pack, which allows the stakeholders to modify it further to an extent to suit their needs. It has different nomenclature such as pre-packaged insolvency resolution, pre-arranged insolvency resolution and pre-plan sale in the USA, pre-pack sale in the UK, scheme of arrangement in Singapore, etc. As nomenclature suggests, 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. In the UK context, it generally refers to a pre-agreed business sale by an insolvency practitioner which does not require prior court and/or creditor sanction.

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Disclaimer: Nothing contained in this document is to be construed as a legal opinion or view of either of the authors whatsoever and the content is to be used strictly for educative purposes only.

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