News and developments
Primer on Pre-Packaged Insolvency Resolution Process under the Insolvency & Bankruptcy Code, 2016
The basic intent behind introduction of PPIRP is to save the time taken in the whole resolution process and consensual restructuring. Pertinently, the PPIRP is only for the Micro, Small and Medium Enterprises (“MSMEs”) whose default is not more than INR 1 crore. Law(s) regulating the MSMEs states that the capital investment in the Micro Enterprises shall not be more than 1 crore and the turnover shall not be more than 5 crores, for Small Enterprises, the capital investment shall not be more than 10 crores and turnover shall not be more than 50 crores and for Medium Enterprises, the capital investment shall not be more than 50 crores and the turnover shall be less than or equal to 250 crores.
On a bare perusal of the Ordinance, it can be deduced that the PPIRP is a sequel to Section 10A of the IBC which suspended the operation of Section 7, 9 and 10 of the IBC for the debts accrued between the period of March 25, 2020, to March 25, 2021.
Meaning of Pre-Packaged Insolvency Resolution Process
The concept of PPIRP has been introduced to insulate the MSMEs as well as the creditors from prolonged legal battles at a time when financial liquidity in the market is essential to bring back the crippled economy on its feet. Although prevalent in various countries, introduction of this unique method in India allows the creditors as well as the debtors to work out a robust plan and iron the differences without going through the rigours of litigation proceedings. PPIRP promotes mutual negotiations as regards the terms and conditions of restructuring with minimum involvement of the Adjudicating Authority (“AA”). Contrary to the formal insolvency proceedings such as the corporate insolvency resolution process (“CIRP”) which is time-consuming, PPIRP entails informal resolution(s) passed outside the court which is capable of obtaining legal sanctity if found appropriate by the AA. In short, PPIRP is a pre-out of court-settlement which can be recognised by the court with apposite safeguards for all the interested parties.
Promoters are allowed to participate, board of directors exercise power and the corporate debtor presents the base resolution package, which is subsequently put to bidding process using the Swiss challenge. This way, PPIRP aids the corporate debtor in reaching an agreement with the creditors.
The pre-pack mechanism allows for a Swiss challenge for any resolution plans which proved less than full recovery of dues for operational creditors. Under the Swiss challenge mechanism, any third party would be permitted to submit a resolution plan for the distressed company and the original applicant would have to either match the improved resolution plan or they can lose their company.
Pre-requisites of PPIRP in India
Subject to the following conditions, any corporate debtor can initiate the PPIRP:
Gurmukh Choudhri Advocate Gurmukh is a counsel at TMT Law Practice, New Delhi. A dispute resolution lawyer, Gurmukh's core areas of practice includes intellectual property laws, arbitration laws, insolvency laws, civil and criminal laws. Gurmukh regularly advises clients on media and broadcasting rights and telecommunications laws. MO: 9711246256 Email: [email protected]
[1] 04af067c22275dd1538ab2b1383b0050.pdf (ibbi.gov.in) [2] https://ibbi.gov.in/uploads/legalframwork/e9b1c4b3489e51213db701b27222b474.pdf [3] f75906d8657a51f214785c697d9bb296.pdf (ibbi.gov.in) [4] https://ibbi.gov.in/uploads/legalframwork/0dd40b82af7a770d5e89c0d9e37bdb45.pdf
- The PPIRP must be approved by at least 3/4th of the total number of partners of the corporate debtor.
- Corporate debtor must have not undergone a PPIRP or a CIRP in the preceding three years;
- Corporate debtor must not be undergoing a CIRP process;
- No order of liquidation under Section 33 of IBC must have been passed against the corporate debtor;
- Subject to the conditions laid down under section 240A of the IBC, a corporate debtor must be eligible to submit a resolution plan under Section 29A of IBC;
- The details of the respective creditors along with the resolution plan must be submitted with the resolution professional by the corporate debtor strictly two days before the start of PPIRP;
- Financial creditors must not be the related parties of corporate debtor and, the proposal of the Insolvency Professional must be approved by at least 66% of the financial creditors;
- The PPIRP approved by the CoC is allowed by the AA;
- The PPIRP is terminated by AA, either at the request of CoC or on its own due to contravention of any applicable provision;
- The AA orders commencement of CIRP at the request of the CoC;
- The AA passes an order of liquidation, if subsequent to an order vesting the management of the corporate debtor with the IRP, the CoC approves a resolution plan that does not envisage a change in control or management to a third-party or the PPIRP is required to be terminated.
- Where an application filed under Section 54C of the IBC for PPIRP is pending, the AA shall pass an order to admit or reject such application before considering application under Section 7 or 9 or 10 of the IBC for CIRP, in respect of the same Corporate Debtor;
- Where an application under Section 54C of the IBC for PPIRP is filed within 14 days of any application filed under Section 7 or 9 or 10 of the IBC for CIRP, the AA shall first dispose of the application under Section 54C;
- Where an application under Section 54C of the IBC for PPIRP is filed after 14 days of any application filed under Section 7 or 9 or 10 of the IBC for CIRP, the AA shall first dispose of the application under Section 7, 9 or 10.
- PPIRP favours secured creditors over operational creditors as the operational creditors does not have much say in the negotiation nor they are given a fair share.
- Another hurdle is the lack of transparency in the whole PPIRP. It is noteworthy that the existing management would be in-charge of the assets to keep the company afloat and hence, the legitimacy of the entire process will be questionable.
- There will always be chances of collusion/mismanagement as the PPIRP is initiated by the corporate debtor itself and therefore, the aspect of mismanagement cannot be ignored.
Gurmukh Choudhri Advocate Gurmukh is a counsel at TMT Law Practice, New Delhi. A dispute resolution lawyer, Gurmukh's core areas of practice includes intellectual property laws, arbitration laws, insolvency laws, civil and criminal laws. Gurmukh regularly advises clients on media and broadcasting rights and telecommunications laws. MO: 9711246256 Email: [email protected]
[1] 04af067c22275dd1538ab2b1383b0050.pdf (ibbi.gov.in) [2] https://ibbi.gov.in/uploads/legalframwork/e9b1c4b3489e51213db701b27222b474.pdf [3] f75906d8657a51f214785c697d9bb296.pdf (ibbi.gov.in) [4] https://ibbi.gov.in/uploads/legalframwork/0dd40b82af7a770d5e89c0d9e37bdb45.pdf