This article has been written by Nidhi Mishra.

Introduction

What is indeed a welcoming step, the President of India on 4th April 2021 promulgated an ordinance for Insolvency and Bankruptcy Code (Amendment) Ordinance 2021. The Amendment Act further amends the IBC Code and introduces Chapter III A to the Code. The Amendment targets Micro, Small and Medium Enterprises (MSMEs) due to the unique nature of their businesses and simpler corporate structure and thereby introduces “Pre-packaged Insolvency Resolution Process (PPIRP)” for quicker, cost-effective and value-maximizing outcomes for all the stakeholders in a manner, which is least disruptive to the continuity of their businesses and which preserves jobs.

The amendment was the need of an hour, keeping in mind the suspension of Section 7, 9 and 10 for a prolonged period of one year due to the COVID-19 pandemic situation that has severely affected the businesses nationwide and led to the steep increase in penury and the cases of bad loans and stressed assets. 

The aim of the Central Government to introduce such an amendment at this point of time is to prevent overburdening of the NCLT with all the cases of defaults that might have arisen due to pandemic situation and to simultaneously make sure that the businesses especially the MSME sector, that plays a vital role in India’s economy, keeps running at these crucial times when the GDP of the country desperately requires them to function and grow and this very well explains the timing of the Amendment Act i.e. within two weeks from the date when the suspension of Section 7,9 & 10 has been lifted. 

What is PPIRP?

PPIRP or Pre-packaged Insolvency Resolution Process is a type of restructuring process that can be initiated in respect of the Corporate Debtor classified as MSME, wherein the debtor and the creditor informally work upon for a resolution of the default amount and at the same time the business functioning of the Debtor is not affected or hampered. The resolution plan agreed by both the Debtor and the Creditor is finally approved by the NCLT. 

Who can file an application for PPIRP?

The application for the PPIRP can be filed by the Corporate Debtor wherein the default amount is a minimum of one crore, or such other minimum amount which is less than one crore and is as prescribed by the Central Government, but the same is subject to the approval of financial creditors, not being the related parties, and representing not less than 66% of the financial debt due to them. The majority of the Directors/Partners of the Corporate Debtor are also supposed to make a declaration in this regard and a special resolution passed by at least 3/4th of the total number of partners of the Debtor thereby approving the filing of an application for PPIRP is also required. 

Conditions as to when one can and cannot file an application for PPIRP?

The PPIRP application can only be initiated against a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006. 

The application for the PPIRP cannot be filed if the default amount is less than one crore or less than such other amount as is prescribed by the Central Government. Further, under the following situation, the PPIRP cannot be initiated if:

1. A corporate debtor is already undergoing a CIRP or PPIRP; or 
2. A financial creditor or an operational creditor of a corporate debtor is  undergoing PPIRP; or
3. A corporate debtor having completed CIRP twelve months preceding the date of making of the application; or 
4. A corporate debtor in respect of whom a resolution plan has been approved under Chapter III-A of the IBC, twelve months preceding the date of making of the application; or
5. A corporate debtor or a financial creditor who has violated any of the terms of resolution plan which was approved twelve months before the date of making of an application under this Chapter; or 
6. A corporate debtor in respect of whom a liquidation order has been made; or
7. A corporate debtor has not undergone PPIRP or completed CIRP, as the case may be, during the period of three years preceding the initiation date.

What happens if both CIRP and PPIRP applications are being filed?

Through the introduction of Section 11A to the Code, the Central Government has especially taken care of scenarios wherein both the CIRP and PPIRP applications are filed against the same Corporate Debtor. The NCLT has been authorized to prioritize the PPIRP applications filed before the CIRP application against the same Corporate Debtor and is empowered to either admit or reject the application under PPIRP before considering the application under CIRP. 

But in cases where the CIRP application has been filed first and then the PPIRP application, the 14-day rule is applicable according to which if the PPIRP application is filed within 14 days from the CIRP application the PPIRP shall be given priority and in case it is filed after 14 days, the CIRP application shall be dealt with first.

The entire PPIRP process is to be completed within 120 days. The Resolution Professional has to submit a resolution plan before the NCLT within 90 days from the date of initiation of the process and the NCLT has to pass relevant orders within further 30 days. In case the Debtor and the Creditor fail to finalize a resolution plan the Resolution Professional shall on the 90th-day file an application for the termination of PPIRP. 

How is PPIRP different from CIRP?

It is different from the Corporate Insolvency Resolution Process (CIRP) wherein the Creditor and the Resolution Professional works upon a resolution plan and the organization of the Debtor is put under a moratorium and under the control of the Resolution Professional. In PPRIP a base resolution plan is submitted by the Debtor along with the application for the PPIRP to the NCLT. The Process commences from the date when the application is admitted. 

A Resolution Professional is appointed and the Debtor is put under moratorium but at the same time, the Board of the Debtor continues to control the managing and the functioning of the business of the Debtor during the moratorium period. The job of the Resolution Profession is majorly to keep an eye on the management of the Debtor and to simultaneously work towards procedural technicalities required for the approval of base plan by the Creditors. 

Even though the management of the Debtor vests with its Board of Directors, the Creditors can by a vote of not less than 66% vote to vest it to the Resolution Professional. Moreover, the Creditors have also been empowered that at any time after the pre-packaged insolvency commencement date but before the approval of the resolution plan, by a vote of sixty-six per cent. of the voting shares, they may resolve to initiate a corporate insolvency resolution process in respect of the corporate debtor, if such corporate debtor is eligible for corporate insolvency resolution process under Chapter II of the Code.

Conclusion

All things considered, the amendment is a noteworthy effort towards minimizing the hardships faced by the stakeholders be it creditors or the debtors while going through the extensive process of CIRP. The bare reading of the draft code suggests that all possible procedural irregularities that might arise during the implementation have been dealt with in advance by the amendment ordinance however the real-time procedural glitches can only be ascertained once it is used and misused by the ones benefitting from it.

References

1. http://www.mca.gov.in/Ministry/pdf/IBCAmedOrdinanceBill_06042021.pdf
2. https://www.livelaw.in/columns/insolvency-and-bankruptcy-codeibc-micro-small-or-medium-enterprise-msme-corporate-insolvency-resolution-process-cirp-172354
3. https://www.livelaw.in/news-updates/centre-promulgates-ibc-amendment-ordinance-pre-packaged-insolvency-process-msmes-172102

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