Introduction of pre-packaged insolvency under IBC
The Central Government has amended India’s primary insolvency legislation, the Insolvency and Bankruptcy Code, 2016 (‘IBC’) to enable the use of ‘pre-packaged insolvency’ in the country. This amendment replaces the previously passed President’s ordinance in April 2021, which was enacted to prevent insolvency proceedings against micro, small and medium enterprises (MSME).
Pre-packaged insolvency, or as it is informally known, ‘pre-pack’ is a method of insolvency resolution wherein the promoters of the insolvent company can offer an insolvency plan to the creditors before going into formal bankruptcy proceedings. The owners of the company can enter into agreement with the creditors to sell the concerned business and then submit this agreement to the court for approval. The pre-pack insolvency process (PIRP) has been introduced as an alternative to the existing corporate insolvency resolution process (CIRP) for MSMEs. This amendment has primarily been seen in response to the pandemic’s impact on MSMEs with regard to insolvency as CIRP can be time-consuming, costly and more detrimental to MSMEs.
The amendment proposes the addition of Chapter III-A to the IBC and lays down the PIRP in great detail. It is built with the ‘debtor-in-possession with creditor-in-control’ model to ensure cost-effectiveness and speedy resolution. The corporate debtor has to be eligible as an MSME that has defaulted on its loans (the minimum amount prescribed is INR 10 lakhs) under the IBC to avail the PIRP. Once the eligibility requirement and other pre-commencement requirements are satisfied, it must file an application with the Adjudicating Authority. The actual process involves two stages: 90 days for approval of resolution plan by the committee of creditors (‘CoC’) and 30 days for adjudication by the AA. The corporate debtor is responsible for the formulation of a base resolution plan and must share it with creditors for their approval. Once the approval is obtained, the plan is then submitted to the resolution professional and thereafter, may be approved by the CoC for final submission to the Adjudicating Authority. The base resolution plan is in competition with other plans proposed by prospective resolution applicants, and the final decision to choose the plan to be submitted rests with the CoC. If the Adjudicating Authority can approve or choose to pass an order of termination with respect to the plan. The order of termination can only be passed if:
The CoC has passed a resolution seeking termination;
The resolution plan has not been submitted to the Adjudicating Authority within 90 days;
the resolution plan is not approved by the CoC;
the resolution plan although approved by the CoC is rejected by the AA.
The Adjudicating Authority can also pass an order to initiate CIRP or an order of liquidation.
During the PIRP, the management of the corporate debtor vests in the board of directors or partners. However, the amendment also allows for the COC to vest the management of the CD with the Resolution Professional subject to confirmation by the Adjudicating Authority. Such a confirmation is given by the Adjudicating Authority only if it is found that the affairs of the corporate debtor are being conducted in a fraudulent manner or there has been gross mismanagement of the affairs of the corporate debtor. The amendment has also introduced Section 67A which provides for penalties in case of fraud by any officers of the corporate debtor.
The introduction of PIRP in India’s insolvency law comes as a much-needed relief to the MSME sector, and has made the country in alignment with the laws of the United States of America, Canada and Singapore which allow for similar reliefs within the legal framework. It allows for creditors and debtors to opt for a less formal process, cutting down costs and allowing for effective negotiations on how to resolve the insolvency. The amendment has allowed for a regulatory framework to govern this informal process, taking into account the rights and obligations of both debtors and creditors in order to streamline the entire process. The Insolvency and Bankruptcy Code of India has already announced rules and regulations to better guide parties through the process. It is also expected that the amendment will decrease the burden on courts and tribunals in dealing with insolvency proceedings.