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The Insolvency and Bankruptcy Code, 2016 (IBC) was introduced to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnerships and individuals in a time-bound manner. Initially, the IBC only contained provisions relating to the Corporate Insolvency Resolution Process (CIRP) for Corporate Debtors. By way of the IBC (Amendment) Act, 2021, the concept of the Pre-Packaged Insolvency Resolution Process (PPIRP) was introduced. It is an efficient mechanism for alternative insolvency resolution process. The PPIRP applies to the Micro, Small, and Medium Enterprises (MSMEs) falling under the ambit of the MSME Development Act, 2006 along with the rules and regulations framed thereunder. The point of distinction between CIRP and PPIRP is that when an application for initiation of PPIRP is accepted, the management and control of the business remains with the Corporate Debtor and is monitored by a Resolution Professional.
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The CIRP can be time-consuming and expensive. PPIRP is a flexible and economical option for resolving insolvency for MSMEs in financial stress. It is a unique or hybrid mechanism that recognizes out-of-court resolution under insolvency law with appropriate safeguards to the interest of all stakeholders. It is also known as a ‘debtor in possession with the creditor in control’ model and is applicable only to MSMEs.
An application for PPIRP can be made only by those Corporate Debtors who qualify as an MSME under section 7(1) of the MSME Development Act, 2006. For the initiation of Pre-packaged Insolvency Resolution Process, an MSME must approach the Adjudicating Authority. PPIRP can be opted if an MSME has committed a default of at least Rs. 10,00,000/- (Rupees Ten Lakh only). However, if the amount of default exceeds Rs. 1,00,00,000/- (Rupees One Crore Only) then the PPIRP will not apply and the MSME will have to initiate CIRP. In cases where after the initiation of the PPIRP but before the approval of the resolution, the Corporate Debtor meets the threshold of CIRP, then the Pre-packaged Insolvency Resolution Process stands terminated and CIPR has to be initiated. Other criteria that have to be satisfied by an MSME for the initiation of Pre-packaged Insolvency Resolution Process are as follows:
Before applying for initiation of Pre-packaged Insolvency Resolution Process, the majority of directors or partners of the Corporate Debtor have to file a declaration before the Adjudicating Authority (AA) and a resolution has to be passed by at least 3/4th (three-fourths) of the number of directors or partners of the Corporate Debtor approving the filing of the application for initiation of PPIRP. In addition to this, approval from the financial creditors of the Corporate Debtor representing at least 66% of the financial creditors is required before applying for initiation of PPIRP.
After the above criteria are satisfied, an application for initiation of PPIRP should be filed before the AA along with the requisite fee. At the time of applying for initiation of PPIRP, the name of the Insolvency Professional (IP) is required to be proposed by the financial creditors of the Corporate Debtor. The IP is required to prepare a report on whether the Corporate Debtor meets the requirements and whether the base resolution plan complies with the provisions of the IBC. The name of the Resolution Professional (RP) should also be provided in the application for initiation of PPIRP. Within 14 (fourteen) days from the date of making an application for PPIRP, the application has to be accepted or rejected by the AA. If the AA rejects the application, it is required to give a 7-day notice to the Corporate Debtor to rectify any error or defect in the application. However, if the application for initiation of PPIRP is accepted by the AA, then the Committee of Creditors (CoC) has to be constituted within 7 (seven) days of the commencement of PPIRP. The management control in a PPIRP is vested with the Corporate Debtor and it is the CoC that is empowered to resolve to vest the management control with the RP thereafter. In case of such a change in the vesting of management control, the CoC has to make an application before the AA.
The Corporate Debtor is required to submit a base resolution plan to the RP within 2 days from the date of the order passed by the AA. Thereafter, the RP is required to submit the base resolution plan to the CoC. It is the CoC that approves submitting the base resolution plan before the AA for its approval. However, before submitting the base resolution plan to the AA, the CoC is required to ensure that the base resolution plan does not impair the claims of the Corporate Debtor towards its operational creditors. This ensures that the operational creditors are fully paid to the number of their confirmed claims. If the operational creditors are not paid in full, then it is the responsibility of the RP to invite new resolution plans. Before inviting a new resolution plan, the CoC will grant an opportunity to the Corporate Debtor to revise the base resolution plan. This is done to ensure that the operational creditors do not suffer undue financial loss. Unlike operational creditors, financial creditors do not have any safeguard to secure interest and may have to suffer hair cut (losses incurred by creditors on the resolution of stressed assets) in respect of their claims.
The new resolution plans must be submitted to the AA with prior approval by a vote of the CoC comprising not less than 66% of the voting shares. If the AA is satisfied with the resolution plan, then it shall pass an order approving the resolution plan within 30 (thirty) days from the date of receipt of such plan. The same shall be binding on all the stakeholders. However, if the AA rejects the application for approval of the resolution plan submitted to it by the CoC, then the PPIRP will stand terminated. If the CoC is not satisfied with the new resolution plans and does not grant its approval even then the RP is required to apply the AA praying for the termination of the entire PPIRP.
Some real estate developers also fall within the definition of MSMEs if their thresholds match the threshold prescribed for the MSMEs and avail the benefits of PPIRP. However, in the case of PPIRP of real estate development companies, the interest of the home buyers will have to be protected. Further, it is also necessary to ensure that the financial creditors are presenting a plan which aligns with the interest of the home buyers.
Any objections to the application seeking PPIRP before its admission shall be dealt with by the AA. When the application for initiating the PPIRP is accepted, the moratorium period as per section 14 of IBC comes into force. Once the moratorium period has begun, the PPIRP process has to be completed within 120 days and the resolution plan has to be submitted by the RP within 90 days from the date of commencement of the PPIRP.
In conclusion, it can be put succinctly that the Pre-packaged Insolvency Resolution Process mechanism aims to attain the objective promulgated by the IBC. It enables the Corporate Debtor to make a bonafide attempt to revive its business by clearing all the defaults. It also keeps a check that no Corporate Debtor misuses the provision of PPIRP and prejudices the interest of the stakeholders.
Also Read: Pre-pack Insolvency Resolution Process Regulations for MSMEs
Ankita is an Advocate and has joined Enterslice as a Legal Researcher. Her work focuses on General Civil and Commercial laws, Corporate Taxation Laws, Labour and Employment Laws and Dispute Resolution. She is a law graduate from School of Law, University of Petroleum and Energy Studies. Prior to joining Enterslice, Ankita has the experience of practicing law in Delhi and Odisha.
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