This Article aims to provide a brief outline of the provisions relating to the Pre-Packaged Insolvency Resolution Process, highlighting the timelines, and a background of the interpretation of the provisions by the National Company Law Appellate Tribunal, so far.

The Insolvency and Bankruptcy Code, 2016 (“IBC”) was promulgated with an objective to consolidate and amend the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner. IBC has undergone many amendments since its promulgation and various questions have been answered by the Hon’ble Supreme Court thereby bringing clarity on the provisions of IBC. It has been time and again clarified that IBC is aimed at maximization of value of assets of the corporate persons and to balance the interests of all the stakeholders and that it is not a process of recovery. Also, the jurisprudence on various aspects of the IBC is still evolving as we write this and keep writing more and more on IBC.

The provisions of IBC which were initially brought into effect pertained only to the Corporate Insolvency Resolution Process (“CIRP”) of the Corporate Debtors. Thereafter, provisions relating to the Personal Guarantors to the Corporate Debtors were brought into force by way of a notification. The validity of the notification as well as the rules and regulations framed thereunder was challenged and the same has been upheld by the Hon’ble Supreme Court.

By way of a further amendment to IBC viz., IBC (Amendment) Act, 2021, the Pre-Packaged Insolvency Resolution Process (“PIRP”) has been introduced. This was certainly a landmark amendment to IBC.

The PIRP is applicable ONLY in respect of Micro, Small and Medium Enterprises (“MSMEs”). The thresholds of who all fall within the ambit of MSMEs are provided under the Micro, Small and Medium Enterprises Development Act, 2006 and rules and regulations framed thereunder.

Similar to all businesses, big and small, even MSMEs have been widely impacted by the Covid-19 Pandemic. It is with this perspective that the MSMEs have been brought under the scope of IBC by way of a separate chapter dedicated to PIRP. The main point of distinction between CIRP and PIRP mechanism can be said to be that PIRP amalgamates judicial and non-judicial processes towards insolvency resolution. To illustrate the said fact, it can be noted that unlike CIRP, when an application for initiation of PIRP is admitted, the management and control remains with the Corporate Debtor and is monitored by a Resolution Professional.

It is imperative to point out in brief the criterion on the basis of which MSME can approach the Adjudicating Authority (“AA”) for initiation of PIRP. It is firstly important to understand the monetary threshold. A Corporate Debtor which has committed a default of at least Rs.10,00,000/- (Rupees Ten Lakh Only) is eligible to make an application before the AA for initiation of PIRP. In a case where there is a default of an amount above Rs.1,00,00,000/- (Rupees One Crore Only), PIRP will not apply.

Further, there are various other criteria that have been specified for initiation of PIRP. Following are key conditions for a MSME to apply for initiation of PIRP:

• the MSME which is applying for initiation of PIRP should not have undergone PIRP or should not have completed CIRP, during the 3 (three) years preceding the initiation date of PIRP;
• CIRP and PIRP cannot run simultaneously. Therefore, the MSME should not be undergoing any CIRP;
• the MSME should be eligible under Section 29A of IBC, meaning thereby that the MSME should not be ineligible to be the resolution applicant; and
• the MSME is not ordered to be liquidated as per Section 33 of the IBC.

The application for initiation of PIRP is to be filed before the AA along with the requisite fee. The timelines specified in the IBC for adjudication i.e., either admission or rejection of the application for initiating PIRP is 14 (fourteen) days from the date of filing of such application. In PIRP, before an application for initiation of PIRP is filed by the Corporate Debtor, majority of directors or partners of the Corporate Debtor have to file a declaration before the AA. Further, a resolution has to be passed by at least three-fourth of the number of directors or partners of the Corporate Debtor approving the filing of the application for initiation of PIRP. Further, the approval of the financial creditors of the Corporate Debtor, not being related parties, representing not less than 66% (sixty six percent) of the financial creditors is also required before filing the application for initiation of PIRP.

At the stage where the application seeking initiation of PIRP is yet to be admitted, name of an Insolvency Professional (“IP”) is to be proposed by the financial creditors of the Corporate Debtor. Such IP is required to prepare a report confirming if the Corporate Debtor meets the requirements and also to confirm if the base resolution plan complies with the provisions of IBC. The obligations and duties of the IP come to an end if the application seeking initiation of PIRP is not filed within the stipulated timeline, or if the same is admitted / rejected, as the case maybe.

The next step is the filing of the application for initiation of PIRP. The said application is required to entail the name of the proposed Resolution Professional (“RP”) along with a report on behalf of the RP. The AA is required to deal with the application and pass an order within a period of 14 (fourteen) days. In case the AA is rejecting the application due to some defect, it is required to give a notice of 7 (seven) days to the Corporate Debtor to rectify such defect.

In the event that the application for initiation of PIRP is admitted by the AA, CoC has to be constituted within 7 (seven) days of the pre-packaged insolvency commencement date and the first meeting of CoC has to be held within 7 (seven) days of the constitution of CoC. Further, the provisions of Section 21 of IBC are to apply mutatis mutandis to the CoC in PIRP. It is also to be noted that though PIRP vests the management control with the Corporate Debtor; however, CoC (by a vote of not less than sixty-six percent) is empowered to resolve to vest the management with the RP. The CoC is required to make an application before the AA for such change in management and such provisions which apply in case of CIRP shall be applicable in this case.

It may further be pointed out that  the Corporate Debtor  is required to submit a base resolution plan with the RP within a time frame of 2 (two) days from the order of admission passed by the AA. Thereafter, the RP is required to submit the base resolution plan with the committee of creditors (“CoC”).

The CoC will thereafter, grant its approval for submitting the base resolution plan before the AA for its approval. However, before the base resolution plan is submitted with the AA, the CoC is required to ensure that the said base resolution plan does not impair the claims owed by the Corporate Debtor to its operational creditors. This aspect of ensuring that the base resolution plan does not impair the claims owed by the Corporate Debtor to its operational creditors, in effect means that the operational creditors of the Corporate Debtor are to be provided the full payment of their confirmed claims. In the event, the operational creditors are not being paid in full of their confirmed claims, the RP is required to invite new resolution plans, which are to compete with the base resolution plan. However, before calling for the prospective resolution plan, the CoC will grant an opportunity to the Corporate Debtor to revise the base resolution plan. This is in the nature of a ‘swiss challenge method’ to ensure that the operational creditors are not made to suffer undue financial losses. On the other hand, there is no such safeguard to secure the interests of the financial creditors of the Corporate Debtor, who may have to suffer a hair cut, in so far as their claims are concerned.

The proposed resolution plan must be approved for submission to the AA by a vote of the COC comprising not less than 66% (sixty six percent) of the voting shares. Thereafter, if the AA is satisfied that the resolution plan approved by COC fulfils the requirements under IBC, it shall by an order, within 30 (thirty) days from the date of receipt of such plan, approve the resolution plan. In case, even after inviting competing resolution plans, the CoC does not accord its approval to the same, the RP is required to file an application with the AA praying for termination of the entire PIRP.

Interestingly, some of the real estate developer companies do fall within the definition of MSMEs (owing to the thresholds of prescribed for MSMEs); and therefore, they may too avail the benefits of PIRP. Infact, one of the PIRPs approved by AA recently was of a real estate developer company in the matter of In Re: GCCL Infrastructure & Projects Ltd [1]. Now, obviously the interest of home buyers will have to be protected in any eventuality of a residential developer company seeking PIRP and financial creditors (non home buyers) are presenting a plan which is not in sync with the interest of the home buyers.

The question that arises in such a situation is that if both the debtor and the creditor approve of filing of an application for initiation of PIRP; can no other stake holder object to initiation of PIRP and if the order initiating PIRP is an empty formality. It is imperative to highlight at this stage that the PIRP is a relatively recent regime. In fact, the first order approving initiation of PIRP was passed on September 14, 2021 in the above mentioned matter of GCCL Infrastructure and thereafter, in a few more matters [2] PIRP has been initiated. However, the National Company Law Appellate Tribunal, New Delhi (“NCLAT“) has had the occasion to deal with the issue regarding objections being filed in applications seeking PIRP before the same are admitted. The NCLAT has held that the AA has the jurisdiction to deal with objections before the application seeking initiation of PIRP is admitted.

It is to be noted that on admission of the application initiating PIRP, moratorium as per Section 14 of IBC will come into force. Further, the entire process of PIRP has to be completed within 120 (one hundred and twenty) days and the resolution plan has to be submitted by the RP within 90 (ninety) days from the pre-packaged insolvency commencement date.

It is also to be mentioned that the AA can reject the application for approval of the resolution plan as submitted on behalf of the CoC in case the resolution plan does not comply with the provisions of IBC. In such a case, the PIRP shall stand terminated. In case of approval of the resolution plan by AA, the same shall be binding on all stakeholders and provisions of Section 31 of IBC will apply mutatis mutandis. The chapter on PIRP also provides that in case the Corporate Debtor meets the threshold of CIRP, anytime after pre-packaged insolvency commencement date and before the approval of resolution plan, the CoC may approach the AA for termination of PIRP and initiation of CIRP.

The above is a brief overview of the PIRP mechanism. To put it succinctly, the PIRP mechanism is aimed to further the object with which IBC was promulgated. It allows, though with a rider, the Corporate Debtor to control the management of business and to also submit a base resolution plan; meaning thereby that the Corporate Debtor can make bonafide attempts to resuscitate its business and to also clear its defaults. However, it will also be imperative to see that no Corporate Debtor is allowed to misuse the provisions of PIRP and to prejudice the interests of the stakeholders. Considering the PIRP is a recent addition to IBC, it will be worthwhile to await the different and distinct interpretations that the Courts and Tribunals may offer to the provisions of PIRP, therefore watch this space for more.

Footnotes:

[1] Before the  National Company Law Tribunal, Bench – 2, Ahmedabad, CP(IB)/116(AHM)/2021

[2] In Re: Loon Land Developers Ltd, National Company Law Tribunal, Principal Bench, New Delhi, IB-PP-03(PB)-2021.