Insolvency and Bankruptcy Code has not only seen tremendous growth since its implementation over the past six years but it has also managed to positively and efficiently change the entire resolution framework in India. To put in better words as the Apex court of the country has stated, “a paradigm shift in the corporate insolvency regime”[2] has been witnessed by establishing a time-bound, creditor-in-control framework that aims at maximizing the value of assets at the same time balancing the interest of all the stakeholders involved.
Since, 2019 COVID-19 has been brutal worldwide degrading the financial health of many corporate entities. The pandemic had unfurled its wrath on businesses forcing them into insolvency and liquidation. Pandemic has caused an immense incline in unemployment and lowered the demand in multiple sectors.[3] This distress was manifold for the MSMEs hence there was an essential requirement of bringing them out of this economic crisis without letting them slip into insolvency. As someone has rightly said that, necessity is the mother of all invention hence, the pandemic also led for the Ministry of Corporate Affairs into coming up with a hybrid model for handling the efficient and effective insolvency resolution of such businesses. Hence, came into existence the concept of pre-packaged insolvency resolution framework.
MCA on 24th June,2020 constituted a sub-committee with an objective of implementation of a hybrid insolvency mechanism i.e. pre packed insolvency resolution process as suggested by MCA committee. This sub-committee submitted its report on 31st October, 2020.[4] Finally, via an ordinance[5] the government established the Pre-Packaged Insolvency Resolution Process (PRIRP).
what is the concept of pre-packaged insolvency?
Pre Pack insolvency basically is a process of pre-planning amidst the creditor and the purchaser prior to the insolvency proceedings wherein both the parties negotiate on the terms of sales and other requirements before approaching the tribunal/court for insolvency proceeding.
Vanessa Finch has defined pre-packaged insolvency as follows: “a troubled company and its creditors conclude an agreement in advance of statutory administration procedures” which “allows statutory procedures to be implemented at maximum speed.“[6]
The main aim of a pre pack insolvency is to be able to achieve a balance between safeguarding the interests of the creditors and assets of the debtor by facilitating a swift transition of such assets and business.[7] Therefore, in layman language we can understand it to be as a method of restructuring wherein the creditor and debtor enter into an informal agreement before approaching the court to submit their approval. The distinguishing factor of a pre pack from CIRP or any other process of traditional bankruptcy is that in a pre- pack the restructuring takes place before filing for insolvency.
in india: Before the 2021 ordinance a company had various other resolution options available like; CIRP under the Code, Section 230 under the Companies Act 2013, RBI’s prudential framework etc.[8] However, owing to the financial stress created on the companies and suspension of CIRP because of the pandemic, a need for hybrid model was felt for. The preamble of the IBC (Amendment) ordinance, 2021 lays down emphasis on MSMEs being an integral part of the Indian economy, contributing a significant share towards the GPD while generating employment for a sizeable population of the country.[9] Henceforth, making it vital to address the problem of resolution of insolvency of the MSMEs in accordance to their specific requirements owing to their different business and corporate structures. Chapter IIIA of the Code defines pre-packaged insolvency as follows: “pre-packaged insolvency resolution process for corporate persons classified as micro, small and medium enterprises (“MSMEs“).“
prerequisites for initiation of PRIRP: Section 14[10] provides for the initiation of a PRIRP and lays down the following essentials/conditions that need to be adhered to:
- msme- Any corporate debtor who has been categorised as a micro, small or medium enterprise under Section 7(1) of the MSME Development Act, 2006;
- default- To trigger a pre pack the default has to be of a minimum amount of Rs. 10 Lacs;
- corporate insolvency resolution process- The Corporate debtor shall not have undergone through a CIRP or PRIRP for 3 years preceding the initiation date or isn’t going through CIRP at present;
- section 33- No liquidation order should have been passed against such a Corporate debtor;
- section 29a- Such a corporate debtor should be eligible to file a resolution plan subject to section 240A;
- resolution professional- The RP is appointed by the financial creditors on the condition that they aren’t related parties and the FCs with 66% voting shares approve to the same;
- special resolution- A minimum of 3/4th of the total number of partners of the corporate debtor are required to pass a special resolution, approving the filing of an application initiating the pre pack;
- declaration- Majority of the directors of the corporate debtor have to declare the following:
-Within a period of 90 days the corporate debtor would be filing for initiation of the PRIRP;
-The pre pack process is not being initiated with an intention to defraud any individual;
-Name of the approved resolution professional.
application for initiation of prirp: The corporate debtor can file an application for initiating the PRIRP only under the circumstances when corporate debtor has met the requirements under Section 54A of the Code. Corporate debtor needs to file the application along with the prescribed fees furnishing the following details:
- Declaration, special resolution along with the approval for filing of application to initiate the PRIRP;
- Report as prescribed under section 54B (1) of the Code and written consent along with details of the IP to be appointed as the RP under section 54A(2)(e) of the Code;
- Declaration regarding any transaction falling under the ambit of fraudulent transaction as per chapter III and chapter IV;
- All information relating to books of account of the corporate debtor.
Within a period of 14 days the Adjudicating Authority would either accept or reject the application of PRIRP and the date of application of PRIRP shall commence from the date of acceptance of application by the Adjudicating Authority. Duration for completion of proceedings is 120 days where after the resolution professional should submit the resolution plan as approved by the committee of creditors to the Adjudicating Authority. In case a period of 120 days elapses then the resolution professional shall file an application for termination of PRIRP.[11] Moratorium[12] shall be declared by the Adjudicating authority since the date of commencement of pre-packaged insolvency date.
advantages of prirp over cirp: Pre pack is offering best of both the worlds (formal and informal proceedings) as a resolution mechanism.[13] Pre pack is in comparison to CIRP more informal, cost effective and provides for the companies to have a smoother insolvency proceedings. Pre pack is a much more flexible procedure as it begins on an informal note providing the stakeholders with an opportunity of working out a consensual and efficient strategy to achieve maximisation of the value of assets that is a bit difficult to achieve under the formal mechanism provided by CIRP. Since, CIRP begins on a formal note i.e. before Adjudicating Authority hence it increases the duration of the proceedings whereas, pre pack is less cumbersome as the substantial part of the proceedings are completed before approaching the Adjudicating Authority. Pre packs provide for a win-win situation as the financial creditors and the corporate debtors collectively submit the joint application bringing down the chances of any opposition to a bare minimum. Another vital aspect is that while the pre pack is in process the control is retained by the management causing no disturbance in continuing the operations on a day to day basis but in CIRP the control in is vested in the hands of the resolution professional. Mostly at a time when the Code has been suspended the proceedings on lifting of this suspension as a natural consequence will only increase, this is when pre packs can play an important role.
conclusion: In my opinion pre-packaged insolvency is an appropriate hybrid model needed to cover the shortcomings of CIRP and to provide the corporate debtors a time efficient and summary proceeding. The implementation phase of pre pack would be a little challenging phase however, the pros outweigh the cons in this case. Confidentiality and debtor in possession model under pre pack are the most lucrative features that can benefit corporate restructuring in our country a lot. The MSMEs can benefit a great deal out of this process as the complex, lengthy and rigid procedures of contemporary insolvency of MSMEs can be done away with and an effective debtor, creditor facilitation can be worked out.
[1] Adv. Shruti Mandhotra.
[2] Innoventive Industries v. ICICI Bank, (2018) 1 SCC 407.
[3] Krishnarajapet V. Ramaswamy, “Impact of COVID-19: Micro, Small and Medium Enterprises in India, Pandemic Shock of COVID-19 and Policy Response: A Bird’s Eye View”, Korea Institute for international Economic Policy, 2020, https://www.kiep.go.kr/galleryExtraDownload.es?bid=0026&list_no=9312&seq=2
[4] Report of the ILC on Pre-Packaged Insolvency Resolution Process, MCA, July 2021, https://ibbi.gov.in/uploads/resources/65b114e356eacaaa2dbd25b210f845da.pdf
[5] The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (No. 3 of 2021).
[6] Vanessa Finch, “Corporate Insolvency Law Perspectives and Principles”, 2, Cambridge University Press (2009).
[7] Himani Singh, “Pre-packaged Insolvency in India: Lessons from USA and UK”, (2020). https://ssrn.com/abstract=3518287 or http://dx.doi.org/10.2139/ssrn.3518287
[8] Report of sub-committee of the Insolvency Law Commission on Pre-Packaged Insolvency Resolution process, MCA, October 2020,
https://ibbi.gov.in/uploads/resources/24c7fc03cdffff69960ce374416fa646.pdf
[9] Krishnarajapet, supra note at 2.
[10] The Insolvency and Bankruptcy Code (Amended), 2021, S. 54A.
[11] The Insolvency and Bankruptcy Code (Amended), 2021, S. 54(d).
[12] The Insolvency and Bankruptcy Code (Amended), 2021, S. 54(e).
[13] Pre-packaged Insolvency Resolution Process (PPIRP), Taxmann Blog, (2021),
https://www.taxmann.com/post/blog/pre-packaged-insolvency-resolution-process-ppirp/?amp
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