As the micro, small and medium enterprises are important for India’s economy, as they contribute significantly to its gross domestic product and provide employment to a sizeable population, the Government of India has introduced the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was promulgated on 4 April 2021, bringing into the system a prepackaged insolvency resolution process (PPIRP) for corporate persons classified as micro, small and medium enterprises (MSME). The IBC amendment focussed on ease of doing business for entrepreneurs and stakeholders in the MSME sector. It aims to provide an efficient alternative insolvency resolution process for micro, small and medium companies ensuring quicker, cost-effective and value-maximising outcome for all stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs.
The PPIRP has been brought in, keeping in mind the pandemic situation. MSME may not be doing well under the coronavirus circumstances. Many such companies are workable but for these situations are unable to function normally. These companies can start earning profits when normalcy returns. Closure of such workable businesses is not in the interest of the stakeholders, creditors, suppliers, employees, customers, shareholders and overall for the economy.
The options available for companies and how the present prepackaged insolvency resolution process (PPIRP) would work in aid in the MSME sector must be understood. During a time of financial strain, a company would normally try to come out from their financial difficulties by facing the competition in the market, improving their competitiveness at the marketplace. However, they may not succeed every time. The entrepreneurs and promoters of the company may sit across the table, collectively or individually with their stakeholders, for working out a plan for resolving the stress, which may culminate into a formal outline that will provide a path for resolution for all the stakeholders for resolution for the stressed company.
There were two statutory options under the supervision of the court. Those are (i) Corporate Insolvency Resolution Process (CIRP) under the IBC, and (ii) the scheme of compromise or arrangement (SoA) under the Companies Act, 2013. In addition to that, there were two out-of-court options for settlement: (i) the Reserve Bank of India’s (RBI) framework for stressed assets resolution and (ii) mutual understanding between debtors and creditors, which is informal, which may be with or without the intervention of mediation through a mediator. These were the options available to creditors for resolving the stress of a company in which they have stakes. Needless to say, these options are in addition to several other options for the recovery of loans. Now, the present prepackaged insolvency resolution process (PPIRP) will come in aid.
Under the new pre-packaged insolvency resolution process (PPIRP), corporate debtors are eligible for the resolution process. An application for initiating a pre-packaged insolvency resolution process, thanks to the amended IBC, may be made in respect of a corporate debtor classified as a micro, small or medium enterprise under sub-section (1) of Section 7 of the MSME Development Act, 2006.
By notification dated 9 April, the union government has specified that Rs 10 lakh will be the minimum amount of default for the matters relating to the pre-packaged insolvency resolution process of the corporate debtors under Chapter III-A of the IBC.
Outer time-limit for completion of pre-packaged insolvency resolution process
The pre-packaged insolvency resolution process shall be completed within a period of 120 days from the pre-packaged insolvency commencement date.
Initiation of pre-packaged insolvency resolution process
When a corporate debtor meets the requirements of Section 54A of the IBC, a corporate applicant thereof may file an application with the Adjudicating Authority for initiating a pre-packaged insolvency resolution process.
The creditors interests are safeguarded
The financial creditors of the corporate debtor, not being its related parties, representing such number and such manner as may be specified, have proposed the name of the insolvency professional to be appointed as resolution professional for conducting the pre-packaged insolvency resolution process of the corporate debtor, and the financial creditors of the corporate debtor, not being its related parties, representing not less than sixty-six per cent. in value of the financial debt due to such creditors, have approved such proposal in such form as may be specified.
IBC (PPIRP) Rules, 2021
The new rules provide that a corporate debtor makes an application to the National Company Law Tribunal (NCLT). The rules give the manner in which the particulars of financial creditors (not being related parties of the corporate debtor) are to be given along with annexures wherein the approval of creditors for appointment of the proposed resolution professional, approval of creditors for filing an application for initiating pre-packaged insolvency resolution process and so on are to be given. This means, in case a debtor wants to avail the benefit of the prepackaged insolvency resolution process (PPIRP) under the amended IBC, he has to take the creditors permissions for availing the same.