News: Recently, the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha.
- The Bill is set to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021 promulgated in April 2021. 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). In March 2021 a sub-committee of the Insolvency Law Committee (ILC) recommended a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.
- 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.
- The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues. 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.
What is PRIP?
- 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.
- Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors. Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP.
- Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
What are Pre-Packs?
- 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.
- 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.
- 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.