Most businesses in India are promoter-led and are susceptible to failure in comparison to larger conglomerates due to cashflow and debt burden. To help and relieve the business owners from the comprehensive insolvency proceedings established under the Insolvency and Bankruptcy Code (Amendment) Act, 2021 (“the Code”), the Government introduced the Pre-packaged Insolvency Resolution Process (“PPIRP”) under the Code, via the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 promulgated on April 4, 2021.
PPIRP is an efficient alternative insolvency resolution process for the MSME Corporate Debtor under the Micro, Small and Medium Enterprises Development Act, 2006 (“MSME Act”), without replacing the Corporate Insolvency Resolution Process (“CIRP”). PPIRP is proposed to be the least disruptive, cost-effective and value-maximizing resolution process introduced whereby the business owners continue to manage the affairs.
CIRP V/s PPRIP
Section 4 of the Code has defined INR 10 lakhs as the minimum default amount to initiate PPIRP against the Corporate Debtor.
Section 11A of the Code, allows PPIRP Applications filed under Section 54(C) to be prioritized and disposed off in the following instances –
- where a CIRP application is filed during pendency of PPIRP Application; or
- where a PPIRP Application is filed within 14 days of filing a CIRP Application which is pending for adjudication.
However, if the period of 14 days has lapsed, CIRP Application shall be disposed before considering PPIRP Application.
Section 54A sets out the grounds for Corporate Debtor to file an application for PPIRP –
- It includes a Corporate Debtor –
- not undergone PPIRP or completed CIRP during the period of 3 years preceding the initiation date;
- not undergoing CIRP;
- against whom order for liquidation under section 33 has not been passed;
- Is eligible to submit a Resolution Plan under section 29A of IBC
- Financial Creditors have proposed an Insolvency Professional and approved (with 66% voting by value of financial debt) the person to act as Resolution Professional for conducting PPIRP while approving the Base Resolution Plan (“BRP”)
- Majority Directors of the Company / Partners of the LLP declare that they will file PPIRP application within 90 days and they are not filing with the intention to defraud.
- Members of the Corporate Debtor has passed the Special Resolution or at least 3/4th of the total number of partners have passed the resolution approving the filing of an application for initiation of PPIRP
- Approval of Financial Creditors (with 66% voting by value of financial debt) is required for filing an application to initiate PPIRP
Section 54B provides for duties of the Resolution Professional (“RP”) from the date of approval of Financial Creditors which includes preparation of the report confirming compliance with Section 54A and Section 54K of the Code.
Although, the RP is not required to perform the duties of Section 54 B, if the Corporate Debtor fails to file an application within 90 days or if NCLT admits / rejects the application.
According to Section 54C, Corporate Applicant has to file the PPIRP Application along with some documents on behalf of Corporate Debtor, including –
- Resolution as required under Section 54A, the Declaration and an approval of Financial Creditors initiating PPIRP application
- Name and written consent of RP proposed to be appointed along with the report prepared under Section 54B
- Declaration by Corporate Applicant stating that there are no avoidable transaction undertaken by the Corporate Debtor
- Information relating to Books of Accounts and such other documents as specified
NCLT adjudges the application within 14 days by either accepting or rejecting the PPIRP application. A 7 day rectification is allowed for discrepancies.
As per Section 54D, a PPIRP Application needs to be disposed off within a period of 120 days from Insolvency Commencement Date (“ICD”).
Under Section 54E, NCLT can declare a moratorium to remain in place till final conclusion of PPIRP (Section 14 shall mutatis mutandis apply), appoint RP as named in the PPIRP application and make a public announcement of the PPIRP application initiation to be made by RP.
Under Section 54F the RP has to confirm the list of claims submitted by Corporate Debtor, constituting Committee of Creditors (CoC) and convening its meetings, monitoring management of the affairs and keeping CoC informed. RP is also required to prepare Information Memorandum as specified in Section 29 basis the Preliminary Information Memorandum (“PIM”) submitted under Section 54G.
PIM is prepared by the Corporate Debtor whereby all relevant information is shared with RP to assist in preparing the Information Memorandum in accordance with Section 29. This Information Memorandum is used for competing resolution applicants under Section 54K.
Corporate Debtor, has to include a list of claims within two days from ICD as per Section 54G. Any loss or damage caused due to omission of any material information or inclusion of any misleading information in the PIM or the IM, entitles the person to claim compensation from the promoter/director/partner of Corporate Debtor or from persons who authorized the submission of list of claims.
One beneficial part of PPIRP is that it allows the management of the affairs to continue to vest in the Board/Partners, whereby the management can run the affairs as a going-concern and ensure to protect and preserve the value of the property owned by Corporate Debtor.
The constitution of the CoC has to be completed in 7 days from ICD.
Once CoC resolves by 66% voting that the management of Corporate Debtor should vest with RP, then the RP has to make an application to NCLT. If NCLT opines that affairs are conducted in a fraudulent manner or there is gross negligence, then it can cause the management to be vested with RP in accordance with Section 54J.
Section 54K allows invitation of other competing prospective resolution, if CoC does not approve BRP. In case of any impairment of any claims owed, CoC may require promoters to dilute their stake.
Resolution Plan can be approved by NCLT within 30 days of receipt if satisfied. NCLT may reject Resolution Plan, terminate PPIRP or pass a liquidation order where the plan approved by CoC under section 54K does not result in change of management/control to a person who was not a promoter or involved in the management previously.
Section 54N provides for occasions when PPIRP shall be terminated by an order by NCLT within 30 days i.e., if the application is not filed within the due date or when CoC rejects Resolution Plan (including by vote of 66%).
Section 54O allows for initiation of CIRP when CoC by 66% vote resolves to do so before approval of Resolution Plan.
It must be noted that the CIRP concludes with liquidation of Corporate Debtor but PPIRP allows an option to proceed with CIRP or liquidate, thereby allowing additional time and expertise to recover through CIRP.
This is only for informational purposes. Nothing contained herein is, purports to be, or is intended as legal advice and you should seek legal advice before you act on any information or view expressed herein. Endeavored to accurately reflect the subject matter of this alert, without any representation or warranty, express or implied, in any manner whatsoever in connection with the contents of this. This isn’t an attempt to solicit business in any manner.