The Jigsaw of Pre-Packaged Insolvency for MSMEs–tax guru

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

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated by the President on the Fourth day of April 2021. The Ordinance has been introduced with the intent to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises (MSMEs) thus ensuring a quicker, cost-effective and value maximizing outcomes for all the stakeholders, and in a manner, which is least disruptive to the continuity of the business and which preserves jobs. The initiative is based on a trust model and the amendments honor the honest MSME owners by trying to ensure that the resolution happens and the Company remains with them.

By way of this article, we aim to put together certain pieces of the Jigsaw of Pre-Packaged Insolvency as set forth in the Ordinance and the IBBI (Pre-Packaged Insolvency Resolution Process) Regulations, 2021 as notified by the IBBI on April 9, 2021. However, there are certain pieces to this Jigsaw, that shall be unveiled in due course of time, as and when this Insolvency Regime tests the waters before the Judicial Forums upon the implementation of this regime.

History of Pre-Packaged Insolvency:

Black’s Law Dictionary defines a ‘pre-pack bankruptcy’ as, ‘Bankruptcy where the debtor agrees to terms reducing the time it takes to handle the business at hand.’

However, ‘pre-pack’ has no statutory definition. It is probably because it has evolved over the time, differently in different jurisdictions and every jurisdiction has a unique variant(s) of pre- pack, which allows the stakeholders to modify it further to an extent to suit their needs.

The concept of ‘Pre-Packaged Insolvency’ has not all of a sudden come into vogue. This concept, by whatever term it may be called, has found its place in the Insolvency Laws in the United Kingdom, the United States of America, Singapore, France and Canada.

Need for Pre-Packaged Insolvency in India:

The outbreak of COVID-19 pandemic and the lockdown imposed thereto forced companies, industries and enterprises all over the World to remain shut for a long period of time thus pushing innumerable business units, specifically the Micro, Small and Medium Enterprises (MSMEs), into financial distress and causing a treat to the very existence of such enterprises.

Considering the need of the hour of revival and insolvency resolution of these Micro, Small and Medium Enterprises that contribute significantly to India’s GDP and provide employment to a sizeable population, the Government of India upon several deliberations promulgated the regime of Pre-Packaged Insolvency specifically for such MSMEs vide the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 on April 4, 2021.

Pre-Packaged Insolvency has emerged as an innovative corporate rescue method that incorporates the virtues of both informal (out-of-court) and formal (judicial) insolvency proceedings thus resulting in in a faster, cost-effective and value maximizing regime along with ensuring that the management of MSMEs remains with the honest MSME owners. This regime has been introduced as an alternative to Corporate Insolvency Resolution Process (CIRP) and not as a replacement of the same.

Important Terms and Definitions:

1. Base Resolution Plan means a resolution plan provided by the Corporate Debtor under 54A(4)(c).

2. Preliminary Information Memorandum means a memorandum submitted by the Corporate Debtor under 54G(1)(b).

3. Pre-Packaged Insolvency Commencement Date means the date of admission of an application for initiating the pre-packaged resolution process by the Adjudicating Authority under 54C(4)(a).

4. Pre-Packaged Insolvency Resolution Process Period means the period beginning from the pre-packaged insolvency commencement date and ending on which order under Section 54L (1) [Approval of Base Resolution Plan/Resolution Plan by the Committee of Creditors (CoC)], Section 54N (1) [Termination of Pre-Packaged Insolvency Resolution Process] or Section 54O (2) [Migration form Pre-Packaged Insolvency Resolution Process to Corporate Insolvency Resolution Plan as agreed to by the CoC], as the case may be, is passed by the Adjudicating

Order of Priority for disposal of application under Section 54C vis-à-vis application under Section 7or 9 or 10:

Section 11A has been inserted in the Principal Act to set forth the order of priority for disposal of application filed under Section 54C for initiation of PPIRP vis-à-vis an application filed under Section 7 or Section 9 or Section 10 for initiation of CIRP. The provisions set forth as follows:

1. Where an application filed under Section 54C is pending, the NCLT shall pass an order to admit or reject such application before considering application under Section 7 or 9 or 10 for CIRP, in respect of the same Corporate Debtor;

2. Where an application under Section 54C is filed within 14 days of any application filed under Section 7 or 9 or 10, the NCLT shall first dispose of the application under Section 54C;

3. Where an application under Section 54C is filed after 14 days of any application filed under Section 7 or 9 or 10, the NCLT shall first dispose of the application under Section 7, 9 or

The provisions of this Section shall not apply where an application under Section 7, 9 or 10 is filed and pending as on the date of the commencement of the aforementioned Amendment Ordinance.

Eligibility Criteria for Pre-Packaged Insolvency:

Section 54A enlists the pre-requisites for a Corporate Debtor to be eligible for the Pre-Packaged Insolvency Resolution Process. For the convenience of our readers, the same are enlisted as follows:

1. The Corporate Debtor shall be classified as a micro, small or medium enterprise under sub-section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act,

The Revised Classification of MSME w.e.f. 1st July 2020 under the Micro, Small and Medium Enterprises Development Act, 2006 is as follows:

ClassificationMicro EnterpriseSmall EnterpriseMedium Enterprise
Manufacturing and ServiceInvestment < Rs. 1 Cr. and Turnover < Rs. 5 Cr.Investment < Rs. 10 Cr. and Turnover < Rs. 50 Cr.Investment < Rs. 50 Cr. and Turnover < Rs. 250 Cr.

 2. The Corporate Debtor who commits a default of Ten Lakh Rupees or more, referred to in Section 4 of the Insolvency and Bankruptcy Code,

The Ministry of Corporate Affairs vide notification dated April 9, 2021 issued under the second proviso to Section 4 for Chapter III-A specified Ten Lakh Rupees as the minimum amount of default for filing matters relating to the Pre-Packaged Insolvency Resolution Process.

3. The Corporate Debtor has not undergone PPIRP or completed CIRP, as the case may be, during the period of 3 years preceding the initiation date;

4. The CD is not undergoing a CIRP;

5. No order requiring the CD to be liquidated is passed under Section 33 of the Code;

6. The CD is eligible to submit a resolution plan under Section 29A read with Section 240A (Section 240A being an overriding provision shall be considered while determining the applicability of Section 29A to MSMEs being the Corporate Applicants herein;

7. The unrelated Financial Creditors of the Corporate Debtor, representing such number as may be specified in the relevant Regulations to be notified by the IBBI, shall propose the name of the Insolvency Professional to be appointed as the Resolution Professional for conducting the PPIRP;

8. The unrelated Financial Creditors of the CD representing not less than 66% in value of the financial debt due shall approve such proposal of PPIRP;

9. The Members of the Corporate Debtor shall pass a Special Resolution or consent of at least three-fourth of the total number of partners, in case of an LLP, approving the filing of an application for initiating

10. Majority of the directors or partners of the Corporate Debtor shall make a declaration, stating inter alia that-

(i) The Corporate Debtor shall file an application for initiating PPIRP within a time period as may be set forth in the declaration provided, the same shall not exceed 90 days from the date of the declaration;

(ii) The PPIRP is not being initiated to defraud any person; and

(iii) The name of the IP proposed and approved to be appointed as the

Upon the fulfillment of the aforementioned criteria, the Corporate Debtor shall again be required to obtain an approval from its unrelated Financial Creditors representing not less 66% in value of the financial debt due to such creditors for filing an application for initiating PPIRP.

At the time of obtaining such approval from the unrelated Financial Creditors the Corporate Debtor shall be required to furnish the following documents-

1. Declaration by majority of directors or partners of the Corporate Debtor as aforementioned;

2. A copy of the Special Resolution or resolution of partners passed by the members or partners of the Corporate Debtor;

3. A Base Resolution Plan which confirms with the requirements of Section 54K of the Code, that shall be enlisted in this

Procedure of Pre-Packaged Insolvency

Consideration of Resolution Plans by the CoC:

Important Terms:

1. Impairment of Claim: Claims shall be considered to be impaired where the Resolution Plan does not provide for full payment of the confirmed claims as per the updated list of creditors maintained by the Resolution

2. Basis for Evaluation: It includes the parameters to be applied and the manner of applying such parameters, as approved by the CoC, for evaluating a Resolution Plan to assign a score to the plan, and disclosed in the invitation for resolution

Illustration: The Committee may identify three parameters namely X, Y and Z for evaluation of Resolution Plans. It may apply these parameters in the form of a formula, namely, 1.5X + 2Y + 2.5Z. If, on evaluation, the score of X, Y and Z are 20, 25 and 30 respectively, the score of the Resolution Plan is 1.5 (20) + 2 (25) + 2.5 (30) =155.

3. Significantly Better: In relation to a Resolution Plan, significantly better means, that the score of the Resolution Plan is higher than that of another resolution plan by a certain number or percentage, as approved by the CoC and disclosed in the invitation of resolution

Illustration: The CoC may consider a Resolution Plan to be significantly better than another resolution plan, if the score of the former is higher than the later, say by 10. Where Resolution Plans ‘A’ and ‘B’ have score 100 and 110 respectively, ‘B’ is significantly better than ‘A’.

4. Tick Size: The Tick Size means minimum improvement over another resolution plan in terms of score, as approved by the CoC and disclosed in the invitation of resolution

Illustration: Let us consider that on the basis of evaluation, resolution plans ‘A’ and ‘B’ have scores of 105 and 108, respectively. Resolution Applicant ‘A’ may wish to improve ‘A’ over ‘B’. The Plan ‘A’ shall be improved in such a way that the score of ‘A’ shall exceed that of ‘B’ at least by tick size. If the tick size is 5, the Resolution Applicant of ‘A’ must improve ‘A’ such that the score of ‘A’ is at least 108 +5=113.

Management of Affairs of the Corporate Debtor during PPIRP:

During the PPIRP period the management of affairs of the Corporate Debtor shall continue to vest in the Board of Directors of the Corporate Debtor, subject to conditions as may be specified.

Under Section 54J of the Code, where the Committee of Creditors (CoC), at any time during the PPIRP period, by a vote of not less than 66% of the voting share, resolves to vest the management of the Corporate Debtor with the Resolution Professional, the Resolution Professional shall make an application in Form P14 to the NCLT for this purpose.

If the NCLT, upon consideration of the Application is of the opinion that during the PPIRP:

1. The affairs of the Corporate Debtor have been conducted in a fraudulent manner; or

2. There has been gross mismanagement of the affairs of the Corporate Debtor

Then the Hon’ble NCLT shall pass an order vesting the management of the Corporate Debtor with the Resolution Professional.

Where the Adjudicating Authority has passed an order under this Section and the Resolution Plan approved by the CoC does not result in change in the management or control of the Corporate Debtor to a person who was not a promoter or in management or control of the CD or if the PPIRP is required to be terminated, the Adjudicating Authority shall pass an order rejecting such plan and terminate the PPIRP by passing a Liquidation Order.

Migration from PPIRP to CIRP:

The CoC, at any time after the Pre-Packaged Insolvency Commencement Date but before the approval of the Resolution Plan, by vote of 66% of the voting shares, may resolve to initiate a CIRP in respect of the CD, if such CD is eligible for CIRP under Chapter II of the Code.

The Resolution Professional appointed to conduct the PPIRP shall be appointed as the Interim Resolution Professional in respect of the CIRP. The order passed by the Adjudicating Authority initiating CIRP shall be deemed to be an order for admission passed under Section 7 of the Code.

Determination of Preferential and other Transaction:

In accordance with Section 54C (3) (c) of the Insolvency and Bankruptcy Code, 2016 the Corporate Applicant shall, along with the application for initiating PPIRP, furnish a declaration in Form P7 regarding the existence of any transactions of the Corporate Debtor that may be within the scope of provisions in respect of avoidance of transactions under Chapter III or fraudulent or wrongful trading under Chapter VI.

Forming an Opinion by the Resolution Professional: The Resolution Professional shall, on or before the 30thday of the Pre-Packaged Insolvency Commencement date, form an opinion whether the Corporate Debtor has been subjected to transactions covered under Sections 43, 45, 50 or 66.

Determination: If the Resolution Professional is of the opinion that the Corporate Debtor has been subjected to transaction covered under Sections 43, 45, 50 or 66, he shall make a determination on or before the 45th day of the Pre-Packaged Insolvency Commencement date.

Application to NCLT: Where the resolution professional makes a determination, he shall apply to the NCLT for appropriate relief on or before the 60th day of the pre-packaged insolvency commencement date.

Pre-Packaged Insolvency Resolution Process Vis-à-vis Corporate Insolvency Resolution Process

Basis of DifferencePre-Packaged Insolvency Resolution ProcessCorporate Insolvency Resolution Process
ObjectiveAlternative insolvency resolution process to ensure a quicker, cost- effective, value maximizing outcomes along with ensuring continuity of the businessEnsuring insolvency resolution of stressed corporate debtors in a time bound manner along with ensuring business continuity
Nature of ProcedureAn innovative corporate rescue method that incorporates the virtues of both informal (out-of-court) and formal (judicial) insolvency proceedingsIt is a formal (judicial) insolvency proceeding
ApplicabilityCompanies and LLPs classified as a micro, small or medium enterprise (MSMEs).Companies and LLPs
Minimum Amount of DefaultINR Ten Lakh onlyINR One Crore only
Initiation byCorporate Debtor with prior consent of Shareholders and unrelated Financial CreditorsFinancial Creditor(s), Operational Creditor(s) or Corporate Debtor
Management of the CDDebtor-in-possession with creditor-in- controlIP-in-possession with creditor-in- control
Public AnnouncementPublic Announcement in Form P9 only as intimation and not for invitation of claimsPublic Announcement in Form A as intimation as well as for invitation of claims
Time LimitShall be completed within 120 days from the Pre-packaged insolvency commencement date.No provision for grant of extension.Shall be completed within 180 days from the Insolvency Commencement Date.The RP may file an application for extension of time limit, upon consent of the CoC.
List of ClaimsTo be prepared by the Corporate Debtor itself and verified by the Resolution ProfessionalTo be prepared by the Resolution Process upon collation of claims of the creditors.
Resolution PlanFirst opportunity to the Corporate Applicant itself (Base Resolution Plan) and second opportunity to other Resolution Applicants to challenge the Base Resolution PlanOpportunity directly given to other Resolution Applicants (Public)
Consequence of TerminationOther than in case order is passed under Section 54J, the termination of PPIRP shall not have any significant consequence on operations of the Corporate Debtor and the promotors can continue with the Business operations as it was before initiation of PPIRPShall result in initiating of Liquidation upon the Corporate Debtor under Section 33 of the Code.

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Disclaimer :  This write up is a knowledge resource of Corpvin Curious and is prepared by ensuring the accuracy, completeness and reliability of the information available to us. The author will not be responsible for any action taken on the basis of this document for any reasons whatsoever.

Any form of plagiarism will be considered as an offence and in the case of any excerpt required due reference has to be given.

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