Recently, the government of India put forth the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha. This bill is intended to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021, which was promulgated earlier this year in April. The primary feature introduced by this new Bill is an alternate insolvency resolution process specifically designed for Micro, Small and Medium Enterprises (MSMEs) who have defaults up to Rs 1 crore. It is coined as the Pre-packaged Insolvency Resolution Process (PIRP).
The PIRP came into consideration after the recommendation made by a sub-committee of the Insolvency Law Committee (ILC) in March 2021 – suggesting a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.
Understanding Insolvency, Bankruptcy, and the IBC
Insolvency is a financial state where individuals or companies are incapable of repaying their outstanding debt. When a court declares a person or entity insolvent and passes orders for it’s resolution while safeguarding the rights of the creditors, it is known as bankruptcy. Insolvency and bankruptcy situations underline the importance of laws such as the IBC.
Enacted in 2016, the IBC amalgamates various laws related to the insolvency resolution of business firms. It outlines clear and expedient insolvency proceedings to aid creditors like banks in recovering dues and warding off bad loans that hinder economic growth.
Major Provisions of the New Bill: Distressed Corporate Debtors and PIRP
The new amendment allows distressed Corporate Debtors (CDs) to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt. The PIRP also introduces a Swiss challenge to the resolution plan submitted by a CD if operational creditors are not paid 100% of their outstanding dues.
About PIRP: A New Insolvency Resolution
A pre-pack is an agreement between secured creditors and investors for debt resolution of a distressed company, bypassing the public bidding process. Pre-packs offer MSMEs a chance to restructure their liabilities and start afresh while ensuring adequate protections to prevent misuse of the system by firms trying to evade payments to creditors.
Need for Pre-Packs: An Efficient Resolution Mechanism
The regular Corporate Insolvency Resolution Process (CIRP) takes considerable time. As of December 2020, over 86% of 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold. Hence, there was a dire need for a more efficient process – something like the PIRP.
Key Features of Pre-Packs and their Benefits
Pre-Packs come with several key features and benefits including quick resolution within 120 days, minimal business disruptions, and broad coverage of the entire liability side of the company.
Challenges in Implementing PIRP: Raising Capital and Limited Timeline
While the PIRP provides a much-needed solution for MSMEs struggling with insolvency, it poses certain challenges. Risk factors might discourage CDs from raising additional capital or debt from investors or banks. Plus, the short timeline for resolution may pose a hurdle for Committee of Creditors (CoC) members.
Future of Pre-Pack Resolution: Expectations and Suggestions
Even with potential challenges, the PIRP is viewed as a timely effort to support viable MSMEs and is likely to have wider coverage in the future. Specific benches of the National Company Law Tribunal (NCLT) could be set up to deal with pre-pack resolution plans, ensuring their timely implementation.