The situation of Insolvency occurs when companies or individuals are not able to repay or return their outstanding debt. A Bill tabled in Lok Sabha (LS) by the finance and corporate affairs minister of India Nirmala Sitharaman to amend the Insolvency and Bankruptcy Code (IBC), 2016. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated on April 4, and a scheme called pre-packaged resolution process (PIRP) for stressed micro, small and medium enterprises (MSMEs) was introduced under the Code. This Bill introduced amid Opposition ruckus over various issues.
IBC Amendment Bill, 2021
The lower house of the Parliament i.e. Lok Sabha passed the Insolvency and Bankruptcy Code (Amendment) Bill 2021 on 28 July. The Rajya Sabha passed the amendment to the Insolvency and Bankruptcy Code (IBC), 2016 on August 3, 2021, to simplify the insolvency procedure for micro, small and medium enterprises (MSMEs).
Here are some key features of the Bill which are necessary to read to know about the bill properly:
- What is the purpose of this Bill?
There was a demand for a very long time seeking a simplified version of Insolvency and Bankruptcy Code. The demand was of a version that can save time and money of small sector business in bankruptcy proceedings. By taking a view of that situation an ordinance was promulgated this year in April month. The ordinance offered a ‘Pre-Package Insolvency Resolution Process’ scheme to help in avoiding the lengthy and expensive proceedings of the court. This ordinance get replaced by The Insolvency and Bankruptcy Code (Amendment) Bill, 2021.
- The Pre-Package Insolvency Resolution Process (PIRP)
First there was the Corporate Insolvency Resolution Process (CIRP) but instead of CIRP Pre-Package Insolvency Resolution Process (PIRP) is introduces in the new bill. For this purpose, the bill inserts a full new chapter (III A) into IBC. The pre-packed insolvency resolution mechanism is a process wherein a resolution arrangement is agreed upon between the debtor (debtor is a person who owes money to a creditor) and lender before approaching the NCLT (National Company Law Tribunal) for approval. In the pre-pack policy, a debtor initiates and takes part in the resolution proceedings with the lender via an informal process that would help in avoiding the lengthy and expensive court procedures. Importantly, the borrower (who borrows money) retain management control till a resolution is arrived at.
When a debtor of corporate sector comes up with a base resolution plan which can be approved by the particular authority for the approval of the board of creditors, it is called Pre-Package Insolvency Resolution Process. The difference between PIRP and CIRP can be seen in the point that Pre-Package Insolvency Resolution Process can be initiated only by the corporate debtor himself but in case of Corporate Insolvency Resolution Process either the corporate debtor or the creditor can initiate it. Because of the enforcement of Pre-pack insolvency scheme the major shareholders and the proprietors of a small business do not lose the operational control of the enterprise to lenders. To run small businesses by getting outsiders can be hard to achieve and the best person to run the firm would be its promoters who get orders on the basis of personal relationships and are experts in the business in small businesses. To prevent the business from suffering with any disruption, the feature ‘of debtor-in-control’ is added in the scheme.
To any resolution plan which provides less than the full dues to the operational creditors, a Swiss challenge mechanism is also provided by the pre-pack scheme. Any 3rd party under this mechanism is permitted to submit a resolution process for the distressed company and the one who is the real applicant, would have to either forego the investment or match the improved mechanism.
- Who can take the benefit of this scheme?
Among 13 lakh companies which are presently active in the country, 60 percent are eligible to get the benefit of Pre-Package Insolvency Resolution Process system. The reason behind the eligibility of that much companies to get the benefit of the scheme is that a large number of function companies falls under the definition of micro, small and medium enterprises (MSMEs).
- Threshold of one crore- According to the amendments, the government has notified that to start a pre-package resolution process, the threshold should not exceed Rs one crore. Now it can be said that for the amounting between Rs. 1 lakh to Rs. 1 crore, PIRP would be a viable option.
Here the number of companies which can take the benefit of the PIRP scheme is seems very large but many companies in the country are not registered under MSMEs that is why resultantly very few companies in comparison to total companies in India would be able to take the benefit of the scheme.
- Resolution process must be completed within 120 days
National Company Law Tribunal must approve the application if the it is complete or should reject the application for the Pre-Package Insolvency Resolution Process within the 14 days of receiving the it if it is found either incomplete or having some mistakes in it. If the application requires any corrections, NCLT should provide a notice to the applicant to do the corrections of the mistakes in the application and this must be informed within the seven days of receiving the application.
If the application has been accepted by National Company Law Tribunal, then the Resolution Plan should be submitted within 90 days by the Resolution Professional to NCLT, this is to be noted that the resolution plan can be filed with the National Company Law Tribunal only after getting the assent of a minimum of sixty six percent (66%) the board of creditors. If no plan has been agreed within the 90 days period, then the person who is resolution professional must file an application with NCLT to terminate the Pre-Package Insolvency Resolution Process.
If within 90 days, the resolution plan has been filed, then within 30 days, NCLT has to approve the plan. Hence, in 120 days, the entire process should be finished. However, it would be a challenge to follow the timeline because there was also a timeline in the previous bill but it was crossed that time, so the well implementation of the scheme it very necessary here.
This IBC (Amendment) helps for the small businesses in proceedings of bankruptcy by not wasting much time and money. Now small business’ major shareholders will not lose the operation control of the enterprise to lenders because of the benefit of the pre-pack insolvency scheme, but in old IBC provisions there was no such rule of Pre-Package Insolvency Resolution Process, which are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate. As it is discussed above that to prevent the business from suffering with any disruption, the feature ‘of debtor-in-control’ is added in the scheme, this scheme also can be benefited in the small businesses. It will be advantageous in many ways for the corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, to provide an ‘efficient and alternative insolvency resolution process. Here the purpose was to ‘to consolidate/amend the laws which relates with the reorganization and insolvency in a time bound manner, cost-effective and value-maximizing results for all the stakeholders, and these outcomes are based on the well implementation of all the schemes.
Author(s) Name: Siddhi Parmar (Manikchand Pahade law college, Aurangabad)