Pre-Packaged Insolvency Process for MSME

The Insolvency and Bankruptcy Board of India (IBBI) on April 04, 2021, has issued the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021. The ordinance will allow a pre-packaged insolvency resolution process for MSMEs. A pre-packaged insolvency process is an informal plan worked out by the creditor and debtor for debt resolution. The Ordinance amends the Insolvency and Bankruptcy Code 2016 to allow the Government to notify such pre-packaged process for defaults up to Rupees One Crore.

Synopsis of Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021

The ordinance introduces a pre-packaged insolvency resolution process (PIRP) for corporate persons classified as MSMEs under the MSME Development Act, 2006.

• Chapter III-A has been introduced to the Insolvency and Bankruptcy Code, 2016 as part of this amendment.
• The ordinance explains the initiation of the resolution, duties of resolution professional and eligibilities to take the benefits of pre-packaged insolvency resolution processes, etc.

The objective of the Ordinance

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 aims to provide an efficient alternative insolvency resolution process for corporate persons classified as MSMEs.

• To urgently address the specific requirements of MSME relating to the resolution of their insolvency, due to the unique nature of the businesses and simpler corporate structures
• To provide an efficient alternative insolvency resolution process for MSME, 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;

Benefit to MSME

The ordinance allows the corporate debtor to submit a “base resolution plan” to the resolution professional. However, the debtor should have the plan ready before approaching the creditors to initiate PIRP. If the committee of creditors did not approve the plan, then the resolution professional shall invite applicants to submit different plans.

Pre-packaged insolvency process for MSME

As mentioned above, a pre-packaged insolvency process is an informal plan worked out by the creditor and debtor for debt resolution. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 allows the approval of such informal plans by the National Company Law Tribunals. A separate chapter, Chapter IIIA, has been inserted in the Insolvency and Bankruptcy Code 2016 to deal with the pre-packaged insolvency resolution process.

Applicability of PIRP

• The pre-pack framework will be applicable for MSMEs with a maximum default value of Rs 1 crore only. It can be filed under a newly inserted Section 54C of the IBC. For defaults of more than Rs 1 crore, IBC or other resolution mechanisms can continue to be used.
• A pre-packaged insolvency resolution process or PIRP cannot run in parallel to another corporate insolvency resolution process (CIRP) and must have a three-year cooling-off period from the closure of any other pre-pack or CIRP, as per the rules notified.
• If a pre-pack application is filed within 14 days of the filing of any application under section 7 or section 9 or section 10 which is pending, then the Adjudicating Authority would have to first dispose of the application under section 54C of IBC. If more than 14 days have passed since an IBC plea was filed under Sections 7, 9, or 10, then the court would have to give the existing plea a preference. Sections 7, 9 and 10 deals with the initiation of the corporate insolvency resolution process by financial creditors, operational creditors and the corporate debtor himself respectively.

Filing of Application for PIRP

An application for initiating a pre-packaged insolvency resolution process may be made in respect of a corporate debtor, subject to the following condition:

Condition for Applying PIRP

• The corporate has not undergone a pre-packaged insolvency resolution process or completed corporate insolvency resolution process during the period of three years preceding the initiation date
• MSME is not undergoing a corporate insolvency resolution process
• No order requiring it to be liquidated is passed under section 33 of the Insolvency and Bankruptcy Code 2016
• The corporate is eligible to submit a resolution plan under section 29A of the Insolvency and Bankruptcy Code 2016

Appointment of Resolution Professional for PIRP

• The financial creditors of the corporate debtor, not being its related parties, representing such number and such manner have proposed the name of the insolvency professional to be appointed as the resolution professional for conducting the pre-packaged insolvency resolution process of the corporate debtor
• The financial creditors of the corporate debtor, not being its related parties, representing not less than sixty-six per cent In case the corporate debtor does not have any financial creditors, not being its related parties, the proposal and approval under this clause shall be provided by such person

Time-limit for completion of the pre-packaged insolvency resolution process

The entire pre-packaged insolvency resolution process would have to be completed within 120 days from the commencement date. The resolution professional is expected to submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority within 90 days of the commencement date. If the plan is not approved by the committee of creditors (CoC) within the time period, the PIRP would be terminated.

Prerequisite for PIRP

• The declaration, special resolution or resolution and the approval of financial creditors for initiating pre-packaged insolvency resolution process in terms of section 54A
• The name and written consent of the insolvency professional proposed to be appointed as resolution professional
• A declaration regarding the existence of any transactions of the corporate debtor that may be within the scope of provisions in respect of avoidance of transactions
• Information relating to books of account of the corporate debtor and such other documents relating to such period

Declaration by Directors or Partners of MSME

The majority of the directors or partners of the corporate debtor have made a declaration, in such form as may be specified

• The corporate debtor shall apply for initiating a pre-packaged insolvency process within a definite time period not exceeding ninety days
• The pre-packaged insolvency resolution process is not being initiated to defraud any person
• The name of the insolvency professional proposed and approved to be appointed as resolution professional under clause

Approval from Members for Filing PIRP

The members of the corporate debtor have passed a special resolution, or at least three-fourths of the total number of partners of the corporate debtor has passed a resolution, approving the filing of an application for initiating the pre-packaged insolvency resolution process.

Approval from financial creditors  for Filing PIRP

The corporate debtor shall obtain approval from its financial creditors, not being its related parties, representing not less than sixty-six per cent in value of the financial debt due to such creditors, for the filing of an application for initiating pre-packaged insolvency resolution process, in such form as may be specified

Declaration of the moratorium and a public announcement during PIRP

The Adjudicating Authority shall, on the pre-packaged insolvency commencement date, along with the order of admission under section 54C declare a moratorium and appoint a resolution professional. A public announcement of the initiation of the pre-packaged insolvency resolution process to be made by the resolution professional immediately after his appointment. The order of moratorium shall affect the date of such order till the date on which the prepackaged insolvency resolution process period comes to an end.

Completion of PIRP

• The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date.
• The moratorium shall be available from the pre-pack commencement date till the closure of the process, whether by approval of the resolution plan or otherwise

Control of company during PIRP

Unlike the IBC, under the pre-pack framework, the management of the affairs of the corporate debtor will continue to vest in the Board of Directors or the partners of the corporate debtor. If the Committee of Creditors at any time during the process feels the company’s affairs are not being run in a transparent, or there is a fraud, it can vote by 66 per cent majority to transfer the management powers to the resolution professional instead.

Pre-pack insolvency resolution framework vs normal IBC process

Criteria	Pre-Packaged Insolvency Resolution Process (PIRP)	Corporate Insolvency Resolution Process (CIRP)
Eligibility	Only MSMEs	All corporate debtors
Default threshold	Upto Rs 1 crore	Over Rs 1 crore
Initiation by	Only Corporate Debtor (CD), post-approval by shareholders & unrelated Fin Creditors	Financial Creditor/Operational Creditor/Corporate Debtor
Timeline	90 days to submit a resolution plan to adjudicating authority, 120 days for the entire process. No extension	180 days extendable upto max 330 days
Management Control	Corporate Debtor-in-Possession with Creditor-in-Control	Creditor in control
Resolution plan	CD to submit Base Resolution Plan. If CoC rejects, or if Operational Creditors not paid in full, competing bids can be invited.	EOIs invited from all prospective resolution applicants.
Section 29A applicability	Section 29A applicable	Section 29A applicable
Consequence of failure	Termination of PIRP, or liquidation or initiation of CIPR	Liquidation
Moratorium	Moratorium protection from the date of commencement	Moratorium protection from the date of filing of the plea
Termination	Can terminate the process with min 66% Committee of Creditors  votes	Section 12A to withdraw from CIRP with 90% vote of Committee of Creditors

The official notification about the Pre-packaged insolvency process for MSME is as follows: