- It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
Insolvency and Bankruptcy Code
- It is a reform enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms.
- It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.
Key Words
- Insolvency: It is a situation where individuals or companies are unable to repay their outstanding debt.
- Bankruptcy: It is a situation whereby a court of competent jurisdiction has declared a person or other entity insolvent, having passed appropriate orders to resolve it and protect the rights of the creditors. It is a legal declaration of one’s inability to pay off debts.
Key Points
- Major Provisions:
- Distressed Corporate Debtors (CDs) are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.
- A corporate debtor is a corporate person who owes debt to any other person.
- A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.
- A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
- This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
- CIRP is a time taking resolution. At the end of December 2020, over 86% of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold.
- Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.
- One of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.
- Insolvency Practitioner:
- Pre-Pack usually requires services of an insolvency practitioner to assist the stakeholders in the conduct of the process.
- The extent of authority of the practitioner varies across jurisdictions.
- It envisages a consensual process - prior understanding among or approval by stakeholders about the course of action to address stress of a CD, before invoking the formal part of the process.
- It does not always require approval of a court. Wherever it requires approval, the courts often get guided by commercial wisdom of the parties.
- Outcome of the pre-pack process, where approved by the court, is binding on all stakeholders.
- Quick resolution:
- It is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
- Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the NCLT by offering a faster resolution mechanism than ordinary CIRPs.
- Existing management retains control in the case of pre-packs rather than resolution professionals in CIRP, hence avoids the cost of disruption of business and continues to retain employees, suppliers, customers, and investors.
- PIRP will help CD to enter into consensual restructuring with lenders and address the entire liability side of the company.
- Raising additional capital:
- Initially CDs may not raise additional capital or debt from Investors or Banks, because of the risk involved in recovering the money being provided by these Investors and lenders.
- Resolution Plan under PIRP is 90 days with an additional 30 days to AA (Adjudicating Authority) for support of the scheme. It is challenging for CoC (Committee of Creditors) members to decide on the Base resolution Plan within this short period without any broad parameters on which the Resolution Plan be approved.
Way Forward
- While the PIRP is a timely effort to protect viable MSMEs, it is likely that operationalising it only for MSMEs now may just be the first step towards a sound Pre-pack and will lead to a much wider coverage in the future which, like the IBC, is expected to evolve with time and jurisprudence.
- The government should consider setting up specific benches of the NCLT to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.
- Distressed Corporate Debtors (CDs) are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.