Insolvency and Bankruptcy
PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS (PPIRP) SECTION 54A – PRE PACKAGED IRP FOR MSME
An optimum law would enable the restructuring and survival of struggling but sustainable enterprises, along with the efficient liquidation of struggling and non-sustainable enterprises. The legislation must further assure candour, integrity, effectiveness, and, especially punctuality, as they have substantial repercussions on the distribution of credit risk as well as risk mitigation in the banking industry, and hence significantly affect the availability of finance and its affordability.
The Insolvency and Bankruptcy Code governs insolvency procedures in India. The legislation, which went into effect in 2016, attempts to govern, standardize and expedite the insolvency processes that will be initiated within the nation. This is a result of the legislature’s attempts to assure debt recovery and is focused on addressing gaps left by the earlier statutes such as RDBFI 1935 and SARFESI 2002.
With a remarkable rate of closure, the IBC has culminated in a tremendous change in settlement and retrieval procedures. As per the Economic Survey 2020-21, the IBC has resulted in the liquidation or acquisition of over 1500 businesses, with roughly 1800 more in the pipeline. While Indian courts are notorious for taking a garrulous time in proceedings, the IBC compels a conclusion of proceedings in a particular timeframe with a statutory threshold of 330 days, tied to specific exceptions. As per the Economic Survey 2020-21, the average time it takes to settle an entity is 441 days, comparable to 328 days for liquidation.
Upon assessing the exposure of the IBC 2016, the Insolvency Law Committee (ILC) resolved to form a subedit to research the pre-packaged Insolvency Resolution Process (PPIRP) towards enabling accelerated settlement of insolvency and present their proposals at its conference on May 16, 2020. As a result, the Ministry of Corporate Affairs (MCA) established an ILC sub-committee by notification issued dated April 24, 2020, presided by Dr. M S Sahoo, Chairman of IBBI.
The panel presented its findings to the state on the date of October 31, 2020. It was determined to modify the IBC 2016 on the grounds of the panel’s findings and conclusion. On April 4, 2021, an Ordinance amending the IBC was released. The revisions take force on April 4, 2021. The Ordinance has been replaced by the IBC (Amendment) Act, 2021, commencing April 4, 2021.
On the date of April 4, 2021, the PPIRP for corporate individuals designated as MSMEs was established. With effect from the date of April 4, 2021, Chapter III-A [sections 54A to 54P] has now been inserted into Part II of the IBC, 2016. The objective of the Amendment is just to assist MSME in overcoming the challenges posed by the COVID-19 crisis. Nevertheless, this really isn’t the primary goal of the Amendment. PPIRP has a significantly broader purview. Several participants were concerned regarding whether it will be a commercial success or only a novelty.
1. ONE-OF-A-KIND FRAMEWORK FOR MSMES:
- The primary attribute of this revamped system, renowned as PPIRP, is that once an MSME unit fails to repay debts amounting to INR 10.00 Lakhs or even further, then the present management of said MSME facility is authorized to suggest a Base Resolution Plan to the lenders and the NCLT to alleviate their fiscal stress.
- The incumbent board is often permitted to persist in operating the facility throughout the IRP. This is in contradiction to the current CIRP procedure, in which Control is passed to IRP promptly after the procedure is commenced. For insolvency resolution, the revised PPIRP shifts from the “Lender approach” to a “borrower approach”.
2. ADVANTAGE OF PPIRP OVER CIRP
- PPIRP is designed to be concluded in a time span of 120 days, inclusive of 30 days period provided for the A.A. to approve the resolution plan.
- This Amendment integrates “the finest of all systems” such that bankruptcy procedures hinder borrowers’ commercial operations as little as possible through balancing the effectiveness, timeliness, affordability, and adaptability of exercises with the enforceable nature and framework of official insolvency procedures.
- This Amendment has numerous upsides over the traditional settlement approach. The majority of these are due to 2 factors:
- The unofficial approach and
- A smaller timeframe for settlement. Because the approach preceding the initiation of the official action is casual, which enables stakeholders to figure out a consensus, yet practical, plan for successful settlement and asset utilization, which may be challenging underneath the official insolvency proceedings.
- Neither any court cases are also anticipated from the side of a CD because he controls the organization and the procedure is carried out with his and FC’s explicit approval alone. A CD should establish a Base Resolution Plan (BRP) based on the enterprise sustainability and inherent assurance and stability to FC, and its application shall be carried out with the explicit approval of FC. The Resolution Professional is not obliged to manage the entity and must instead focus on the Settlement Strategy, which is the foundation of IBC procedures.
- Because a tentative agreement has apparently been achieved among the FCs and CDs, clearance will be swift considering there might barely be any disagreement on the settlement strategy. A thorough evaluation of concerns will not be necessary during the admissions phase. As an outcome, the pressure on NCLT is lessened.
- The sustainability and accomplishment of the PPIRP are dependent on the CD, its executives, and directors’ assertive involvement in the procedure.
- As previously stated, PPIRP offers several intrinsic benefits over traditional CIRP. There is no need, in our opinion, to limit the plan to the MSME exclusively. It should be expanded to other institutions as well, possibly with stronger regulations.
3. CORPORATE DEBTOR - THE IDEAL INDIVIDUAL REGARDING MITIGATION OF FINANCIAL DISTRESS
“One who wears the shoes knows where shoe pinches”
The CD has a deeper understanding of the firm, its financial distress, and the potential of its settlement. In certain circumstances, the CD may be the only individual concerned and capable of resolving the enterprise’s financial distress. In acknowledgment of the fact, that in each state’s legal framework pre-pack system permits just the CD to commence the procedure independently, and proactively and acquire the assent of important parties prior to petitioning the Tribunal. When CD does so freely and with the approval of key players, the prospect of surrendering the firm or the potential of liquidation is significantly reduced. As expressly stated that the CDs may propose the BRP (Base Resolution Plan) either alone or in collaboration with another individual or entity.
4. SWISS CHALLENGE
To obtain the highest feasible resolution scheme, the “Swiss Challenge” approach is optimized. The ‘Swiss challenge’ is a practice in which a proposal is made public and other entities are encouraged to equal or beat it. PPIRP guidelines expressly bring forth provisions for this arrangement. The “Swiss challenge” is a competing technique whereby an intrigued participant commences a contractual offer or project offer. The project’s specifics have been publicly disclosed, and those intrigued in carrying it out are invited to submit applications. When these proposals and quotations are received, the initial bidder has the opportunity to meet the highest feasible proposal. The ‘Swiss Challenge’ enables a seller to combine the benefits of a public bidding as well as a private contest to get the maximum value for their assets.
5. COMPARISON AMONG CIRP AND PPIRP REGULATIONS
This pertains to any CD.
This pertains to only MSME-CD
INR 1 crore is the minimum default amount.
INR 10 Lakh is the minimum default amount.
There is no prior effort required before submitting a petition to the NCLT by an FC or OC. Only a specific settlement must be passed by the CD.
Initial process before applying to NCLT –
a) Special Resolution
b) Consent of at minimum 66 percent FCs
c) Name of RP
d) Base Resolution Plan by CD
e) Any Additional stipulated data
f) Assessment by Resolution Professional- sections 54A and 54B
The CIRP has a 180-day deadline for closure (maximum 330 days) u/s 12
The PPIRP has a 120-days deadline for closure, u/s 54D
CIRP can be initiated by the following parties: (a) FC U/S 7 (b) OC U/S 8 (c) CD U/S 10
PPIRP can be initiated by only CD or its directors.
No Basic Resolution Plan is needed by CD
Corporate debtors may enhance the BRP, and the CoC may accept it, U/S 54(K) (4).
IBBI has made a significant step forward by including a novel Chapter III-A in the IBC code 2016 as of April 4, 2021, coupled with notice of related Regulations and Rules as of April 9, 2021, designating it the PPIRP. Ideally, various participants will contribute to its accomplishment by making the above-mentioned efforts and assisting India to enhance its worldwide reputation, as occurred with the implementation of IBC and GST in 2017.