Insolvency and Bankruptcy Amendment Bill,2021

Topic

Insolvency and Bankruptcy Amendment Bill,2021

 

 

CONTEXT
Recently, the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha.
• The Bill is set to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021 promulgated in April 2021.
        o It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
• In March 2021 a sub-committee of the Insolvency Law Committee (ILC)recommended a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.

Insolvency and Bankruptcy Code Ordinance 2021
1. The Amendment allows the use of Pre-Packaged insolvency resolution as an alternative resolution mechanism for MSMEs. The threshold limit to trigger the Pre-Packaged insolvency resolution is between Rs 10 lakh to 1 Crore.
2. Section 54A: It allows the use of Pre-Packaged insolvency resolution(PPIR).
      1. PPIR is a form of restructuring that allows creditors and debtors to work on an informal plan and then submit it for approval.Under this system, financial creditors will agree to the terms of a
potential investor.
     2. Further, they will seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
     3. However, the submission of the resolution plan cannot happen directly to NCLT. It requires approval of a minimum of 66% of financial creditors that are unrelated to the corporate debtor before submission of a resolution plan.
3. The threshold limit to trigger the PPIR is between Rs 10 lakh to 1 Crore.
4. The NCLTs must consider a pre-pack insolvency proceeding before allowing a Corporate

 

 

Insolvency Resolution Process(CIRP).

     1. CIRP is the process of resolving corporate insolvency according to the provisions of the Insolvency and Bankruptcy Code, 2016.

 

source-taxguru https://taxguru.in/corporate-law/jigsaw-pre-packaged-insolvency-msmes.html

 

Insolvency and Bankruptcy Code, 2016

• The code replaced all the existing laws and created a uniform procedure to resolve insolvency and bankruptcy disputes.
• It allows creditors to assess the viability of a debtor as a business decision. Further, the creditors can agree with the plan for its revival or suggest for a speedy liquidation.
• The Code creates a new institutional framework. This framework facilitated a formal and time-bound insolvency resolution process and liquidation. The framework includes:
     1. Insolvency Professionals: They will administer the resolution process. They also manage the assets of the debtor and provide information for creditors to assist them in decision-making.
     2. Insolvency Professional Agencies: The insolvency professionals will be registered with insolvency professional agencies. The agencies would conduct examinations to certify the insolvency
professionals and enforce a code of conduct for their performance.
     3. Information utilities: They will keep a record of debts given by creditors along with details of repayments/ dishonor of debt.
    4. Adjudicating authorities: They will give the approval to initiate the resolution process, appoint the insolvency professional, and approve the final decision of creditors.
         1. National Company Law Tribunal(NCLT): It is the adjudicating authority for companies and limited liability entities
         2. Debt Recovery Tribunal: It is the adjudicating authority for individuals and partnership firms.
5. Insolvency and Bankruptcy Board: The Board will regulate insolvency professionals, insolvency professional agencies and information utilities set up under the Code.
• The code aims to resolve insolvencies in a strict time-bound manner – the evaluation and viability determination must be completed within 180 days.
• Moratorium period of 180 days (extendable up to 270 days) for the Company. For startups and small companies, the resolution time period is 90 days which can be extended by 45 days.

 

Insolvency and Bankruptcy Code (Amendment Bill), 2021
• Major Provisions:

        o Distressed Corporate Debtors (CDs) are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.
▪ A corporate debtor is a corporate person who owes debt to any other person.
        o The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues.
▪ A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.

• About PIRP:
        o A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
▪ This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
       o Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system
is not misused by firms to avoid making payments to creditors.
       o Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP.
       o Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

• Need of Pre-Packs:
      o CIRP is a time taking resolution. At the end of December 2020, over 86% of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold.
▪ Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.
▪ One of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.

• Key Features of Pre-Packs:
     o Insolvency Practitioner:

▪ Pre-Pack usually requires services of an insolvency practitioner to assist the stakeholders in the conduct of the process.
▪ The extent of authority of the practitioner varies across jurisdictions.
    o Consensual Process:
▪ It envisages a consensual process – prior understanding among or approval by stakeholders about the course of action to address stress of a CD, before invoking the formal part of the process.
   o No requirement of Court Approval:
▪ It does not always require approval of a court. Wherever it requires approval, the courts often get guided by commercial wisdom of the parties.
▪ Outcome of the pre-pack process, where approved by the court, is binding on all stakeholders.

 

• Benefits of pre-packs:
   o Quick resolution:
▪ It is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
▪ Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the NCLT by offering a faster resolution mechanism than ordinary CIRPs.
   o Minimizes Disruptions to the Business:
▪ Existing management retains control in the case of prepacks rather than resolution professionals in CIRP, hence avoids the cost of disruption of business and continues to retain employees, suppliers, customers, and investors.
   o Addresses the entire liability side:
▪ PIRP will help CD to enter into consensual restructuring with lenders and address the entire
liability side of the company.
• Challenges of PIRP:
   o Raising additional capital:
▪ Initially CDs may not raise additional capital or debt from Investors or Banks, because of the risk involved in recovering the money being provided by these Investors and lenders.
   o Small timeline:

▪ Resolution Plan under PIRP is 90 days with an additional 30 days to AA (Adjudicating Authority) for support of the scheme. It is challenging for CoC (Committee of Creditors) members to decide on the Base resolution Plan within this short period without any broad parameters on which the Resolution Plan be approved.

Way Forward
• While the PIRP is a timely effort to protect viable MSMEs, it is likely that operationally it only for MSMEs now may just be the first step towards a sound Pre-pack and will lead to a much wider coverage in the future which, like the IBC, is expected to evolve with time and jurisprudence.
• The government should consider setting up specific benches of the NCLT to deal with pre-pack resolution plans to ensure that they are implemented in a time-bound manner.