The Central Government has recently promulgated an Ordinance wherein it has introduced a new Chapter-IIIA in the Insolvency and Bankruptcy Code, 2016 (IBC) providing for an application for initiating pre-packaged insolvency resolution process. This update seeks to broadly set out the important changes brought about by the Ordinance, to the IBC.

• Pre-Packaged Insolvency Resolution Process (PIRP): PIRP is a form of restructuring that allows the corporate debtor and creditors to work on an informal resolution plan i.e. base resolution plan and submit it for approval to the committee of creditors. As per the newly introduced Section 54A of the IBC, an application for initiating PIRP may be made in respect of Mirco, Small and Medium enterprises (MSME) or in respect of a corporate debtor who commits a default of the amount specified by the Central Government, which cannot exceed Rupees One Crore. Subject to certain restrictions, a corporate applicant (which includes the corporate debtor itself) may file an application with the adjudicating authority for initiating PIRP.

• Approval from Financial Creditors: Before initiating PIRP, a corporate debtor must seek an approval from its financial creditors representing not less than 66% of its financial debt in value. Further, the financial creditors must propose and approve the resolution professional (RP) who shall conduct the PIRP.

• Base Resolution Plan: Under PIRP, the corporate debtor shall submit the base resolution plan to the RP and the RP shall present the same to the committee of creditors (CoC). The CoC may approve the base resolution plan in case if it does not impair any claims owed by the corporate debtor to its operations creditors. In case the CoC does not approve the base resolution plan, RP shall invite resolution plans from eligible applicants.

• Moratorium: On the commencement of PIRP, the adjudicating authority shall declare a moratorium as provided under Section 14 of the IBC qua the corporate debtor and cause a public announcement to be made with respect to the same.

• Timeline: PIRP shall be completed within a period of 120 days from the date of admission of the PIRP application.

• Management of the Corporate Debtor: In case of PRIP, the management of the affairs of the corporate debtor continue to vest in the Board of Directors or the partners, as the case may be, of the corporate debtor, unless the committee of creditors, during PIRP resolve, by a vote of not less than 66% of the voting shares, to vest the management of the corporate debtor with the RP.

• CoC may initiate Corporate Insolvency Resolution Process: At any time after PIRP has commenced, but before the approval of the resolution plan, the CoC may by a vote of 66% of the voting shares, may resolve to initiate a corporate insolvency resolution process (CIRP) in respect of the corporate debtor, if such corporate debtor is eligible for CIRP under Chapter II of IBC. In this case, the adjudicating authority shall pass an order terminating PIRP.

 

• Termination of PIRP and Liquidation: In cases where no resolution plan is approved by the CoC within the specified time frame, or in case where the affairs of the corporate debtor have been conducted in a fraudulent manner / gross mismanagement of the affairs of the corporate debtor, the adjudicating authority shall within 30 days terminate the PPIRP and pass an order of liquidation in respect of the corporate debtor.

MHCO COMMENT: : This Ordinance is a welcome step towards the resolution of distressed MSMEs in light of the impact that COVID-19 pandemic has had on the businesses and the economy. The corporate debtor under PIRP will get to trigger the bankruptcy process, and thus, it is expected to yield much faster resolution than CIRP and cut cost of litigation.

This update was released on 14 Apr 2021.

The views expressed in this update are personal and should not be construed as any legal advice. Please contact us directly on +91 22 40565252 or legalupdates@mhcolaw.com for any assistance.

Legal Update Team
MANSUKHLAL HIRALAL & COMPANY
Advocates, Solicitors and Notaries
T: +91 22 40565252
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