Policy Analysis

The Insolvency and Bankruptcy Code Amendment Ordinance, 2021


Author: S. Aditya, 2nd Semester LL.M. (Corporate Law) at Hidayatullah National Law University, Raipur.

Introduction

It has been almost a year since the onset of the pandemic in response to which the central government had already suspended the insolvency and bankruptcy regime to safeguard the interests of the enterprises. The instant ordinance is in the same line and is focused upon the resolution process pertaining to the Micro, Small and Medium Scale Enterprises (MSME).

It has been observed that till December, 2020 Corporate Insolvency Resolution Process (CIRP) had been a very time taking process, it has been seen that almost 87% of the 1717 ongoing cases of the insolvency proceeding has already crossed the 270 days barrier within which it must  have been decided upon according to the legislation[1]. One key reason for the prolongation of the CIRP process is the numerous litigation suits filed by the promoters and the bidders during the insolvency procedure.

Objectives of the Amendments

The ordinance provides for speedy redressal of the insolvency proceedings in relation to the Micro, Small and Medium Scale Enterprises (MSME) by further inserting Pre-Packaged Insolvency Resolution Procedure (PPIRP) under the Chapter 3A in the Insolvency and Bankruptcy Code, 2016.

This ordinance also forwards the idea of balancing the interest of the creditors and also the promoters of the company taking into consideration the erstwhile law which was bent towards the interest of the creditors to recover.

Features of the Amendment

  1. The Amendment allows Pre-Packaged Insolvency Resolution Procedure (PPIRP) for the Micro, Small and Medium Scale Enterprises (MSME) and may be triggered within the limit of Rs 10 Lakh to 1 Crore.
  2. Insertion of Section 54A which empowers the use of Pre-Packaged Insolvency Resolution Procedure (PPIRP) which allows the creditors and debtors to work in synergy informally and then submit the same before the National Company Law Tribunal (NCLT).
  3. NCLT must give preference to Pre-Packaged Insolvency Resolution Procedure (PPIRP) over Corporate Insolvency Resolution Process (CIRP) which is the pre-existing process governed by the Insolvency and Bankruptcy Code, 2016.
  4. Promoters of the company may retain control over the affairs of the company under the supervision of the insolvency professional providing stability to the enterprise.

Analysis of Amendment

The statement of purpose of the ordinance describes the simpler corporate structure and the economic contribution of the Micro, Small and Medium Scale Enterprises (MSME) in India. This ordinance introduces various enterprises into the bracket of medium enterprises by including the quantifier of capital invested and also the annual turnover which may go upto 250 Crores when the capital is 50 crore.  This inclusion of these many companies will definitely allow them to take the benefits of the government support granted to the MSME sector. The default value in order for the initiation of the insolvency proceedings has been fixed to be more than ₹1crore. This ordinance has been promulgated tailing the approaching end of the one year suspension of insolvency and bankruptcy proceedings across India.

The proviso to the Section 4 of the amendment enactment empowers the central government to issue notifications for fixing the threshold of default in order to initiate the insolvency proceedings. There is also an insertion of Section 54A which provides for minimum requirement for a Company to initiate a Pre-Packaged Insolvency Resolution Procedure (PPIRP), this provision along with declaring the other qualifiers declares the dis-qualifiers such as any CIRP or PPIRP undergone by such an enterprise in the past 3years or that no liquidation order must have been passed against such enterprise. No big changes in relation to Moratorium procedures have been included into the Ordinance Amendment and the pre-existing model as available under Section 14 of the IBC, 2016 has been retained.

If the enterprise comes into the default category amount then in order to facilitate and speed up the insolvency proceedings the new model of Pre-Packaged Insolvency Resolution Procedure (PPIRP) has been introduced as against the pre-existing Corporate Insolvency Resolution Process (CIRP) which was taking up a lot of time increasing the stress upon the enterprises. The Pre-Packaged Insolvency Resolution Procedure (PPIRP) fundamentally depends upon the model of resolution of debts of the stressed companies by the means of a private agreement between the Secured financial creditors and the potential investors unlike the pre-existing model of public bidding. This Pre-Packaged method has also been popular in Europe and the United Kingdom for a good long decade taking into consideration the swift model of resolution.

The company must prepare and propose a Base Resolution Plan (BRP) taking into consideration the debts pending upon the company, and coming out with a plan to resolve the pending credit upon the financial creditors and the same must be acceptable to the Committee of Creditors (COC) as it may include proposed haircuts on the payment pending to them, in order to bring the company out of the state of insolvency. This Base Resolution Plan must however still pay the operational creditors in full and cannot grant leeway on the payments bound to be made by the enterprise by law. This BRP would be submitted by the company to the Insolvency Professionals who shall present the same to the Committee of Creditors (COC) where if the plan is accepted 66% majority votes then it shall be presented before the National Company Law Tribunal by the Insolvency Professionals and if is it is not accepted by the COC then competing resolution plans may be demanded from the eligible parties or the BRP may be renegotiated to better cater the needs of the COC. In such a case the better plan, amongst the BRP and competing resolution plan, after a thorough evaluation carried out under the provisions of the statute shall be selected and presented before the National Company Law Tribunal for approval.

In a Pre-Packaged Insolvency Resolution Procedure (PPIRP) the pre-existing management of the enterprise retains control as opposed to CIRP where the earlier board is stripped of its powers and the company is managed by a resolution professional. This model also promisingly offers lesser disruptions to the operations of the company in comparison to the CIRP. The role of the resolution professional also increases in manifolds taking into consideration the continuance of the pre-existing management. The resolution professional hence has the power to access all the documents of the enterprise and may also request an audit for the transactions that do not seem necessary or in the interest of the company. But in case any gross mismanagement is carried out by the previous management the insolvency professional may take the control of the management and the National Company Law Tribunal may also direct the removal of the pre-existing management on similar grounds. The decisions of the NCLT during the PPIRP may be appealed against under Section 61 of the Insolvency and Bankruptcy Code,  2016.

In this model the financial creditors are given a chance to agree to the proposed terms of a potential investor and on acceptance of this plan it is presented before the National Company Law Tribunal for the approval. The submission of the Resolution plan as a prerequisite before the submission before the NCLT requires agreement of the 66% Financial Creditors. In other cases the process of public bidding is followed which leads to various issues of disagreements and dissatisfaction amongst the bidders which further delays the process, due to litigation. The applicant of the PPIRP must not be barred under Section 29A of the Insolvency and Bankruptcy Code, 2016. Also the 66% financial creditors must favour the application and declaration of the Company to undergo PPIRP.

This Pre-Packaged Insolvency Resolution Procedure (PPIRP) model thus allows the Micro, Small and Medium Scale Enterprises (MSME) to restructure the liabilities and also aims at pre-empting misuse of the resolution plan by opportunistic debtor enterprises. The pre-pack model of resolution could only used as a parallel solution of Insolvency Resolution by such MSMEs which are registered with the government and has been included under Section 7 of the Micro, Small and Medium Scale Enterprises (MSME)  Development Act, 2006 however only 4% of the 6crore+ MSMEs is registered in the UDYAM portal for MSME in India. Also, this legislation only takes into its ambit the Companies and LLP,  while the sole proprietorship, HUF enterprises, etc. Have not been covered in the pre-pack model.

Key Takeaways

  1. The Pre-Packaged resolution proceeding is limited to 120 days and a further limit of 90 days has been imposed upon the creditors to come up with the resolution plan before the National Company Law Tribunal (NCLT).
  2. In a pre-pack resolution the earlier management of the enterprise retains control as opposed to CIRP where the earlier board is stripped of its powers and Company is handled by a resolution professional. This model also promisingly offers lesser disruptions in comparison to the CIRP.
  3. The committee of the creditors must take into consideration the Base resolution plan (BRP) drafted by the enterprise seeking to initiate pre-pack resolution. The insertion of the opportunity to draw a base resolution plan is a welcoming amendment which increases the chances of resolution of the Companies undergoing insolvency, as against the earlier knee jerk response of liquidation.

Conclusion

  • This Pre-Packaged Insolvency Resolution Procedure (PPIRP) must also be made available to more corporates in financial stress.
  • The Section 29A provides a very strong leash upon the criteria of a person eligible to be a resolution applicant and the same must be widened in order to increase the resolution probability.
  • There is a crucial need to increase the number of NCLT benches for increasing the resolution of greater number of enterprises.
  • The Alternative Dispute Resolution (ADR) methods must be popularised in order to save the crucial time, resource and energy of the disputing enterprises.

Reference

[1] The Quarterly Newsletter of the Insolvency and Bankruptcy Board of India October – December, 2020 | Vol. 17, Table 5 Pg 17, available at: https://ibbi.gov.in/uploads/whatsnew/9c804e45a2741e109a6cab56f48a140b.pdf.

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