The Government has promulgated an Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (“Ordinance 2021”) to introduce a pre-packaged insolvency resolution process (“PIRP”) for corporate persons classified as micro, small and medium enterprises (“MSMEs”) with a maximum default value of INR 1 crore.
A separate chapter i.e. Chapter IIIA has been inserted in the Insolvency and Bankruptcy Code, 2016 (“Code”) to deal with the PIRP. The PIRP can be initiated by financial creditors if a minimum of 66% of creditors vote in favour. If the corporate debtor does not have the financial creditor then it may approve the application for initiation of PIRP through a special resolution and file an application before the Adjudicating Authority. However, the corporate debtor is required to have a base resolution plan in place before approaching creditors to initiate a PIRP. Moreover, the PIRP cannot run simultaneously with another corporate insolvency resolution process (“CIRP”) and must have 3 years cooling-off period from the closure of any other pre-pack or CIRP.
The moratorium shall be available from the pre-pack commencement date till the closure of the process. Under the PIRP, the corporate debtor shall remain under the control and possession of the current promoters and management during the PIRP. However, the committee of creditors (“CoC”) by a vote of 66% may vest the management of the corporate debtor with the Resolution Professional in case it feels the affairs of the corporate debtor are being conducted in a fraudulent manner and file an application for approval of the same before the Adjudicating Authority through Resolution Professional. The PIRP can be terminated with a minimum of 66% vote of the CoC.
The Resolution Professional is required to submit the resolution plan, as approved by the CoC, to the Adjudicating Authority within 90 days of the pre-packaged insolvency commencement date. Further, the Resolution Professional is required to invite resolution applicants for the resolution plan in the event the base resolution plan is not approved by the CoC or impairs claims owed by the operational creditor. The PIRP shall be completed within a period of 120 days from the pre-packaged insolvency commencement date.
The PIRP will allow creditors and debtors to work on an informal plan and then submit it for approval. A pre-pack or pre-packaged deal is a kind of restructuring plan which is agreed to by the debtor and its creditors prior to the insolvency filing and then sanctioned by the Adjudicating Authority on an expedited basis. The existing management retains control until the final agreement is agreed upon. The informality of the pre-pack plan is aimed at a faster resolution of distressed firms. In comparison with CIRP, PIRP has the advantage of being a more informal process and the possibility of closure in a shorter period of time. This helps to cut down the time and costs in the overall process. Hence, value-maximizing outcomes for all the stakeholders.