September 20 2021

Insolvency And Bankruptcy Code Reforms – With a focus on Pre-packaged insolvency resolution process

Source: Invest India by Govind Puri

Since the Insolvency and Bankruptcy Code was enacted in 2016, it has aided higher realizations of debt and quicker recovery of businesses. The Code has had a positive impact of freeing up capital which was stuck in failed businesses and has allowed companies, on the brink of collapse, to rise and become successful again, thereby also saving jobs.

The government has proactively monitored the implementation of the code and made prompt amendments as and when required to keep it relevant and sensitive to the constantly changing needs of the market. Underscoring this, the government took prompt action to alleviate the impact of Covid-19 on Indian businesses by suspending insolvency proceedings arising for any default occurring during the period from 25th March 2020 to 24th March 2021.

Micro, Small & Medium Enterprises (MSMEs) are a major driver of the Indian economy as significant contributors to the GDP and employment generation. To alleviate the impact faced by the MSME sector due to the pandemic, the government promulgated an Ordinance in April 2021 to introduce pre-packaged insolvency resolution process for MSMEs. This is to augment the existing Corporate Insolvency Resolution Process (CIRP) and provide an efficient alternative insolvency resolution process for MSMEs under the IBC to ensure quicker, cost-effective and value maximising outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses, and which preserves jobs. The Ordinance was ratified as a law on Parliament on the July 28, 2021.

The pre-packaged insolvency resolution process (PIRP) can be initiated by a corporate debtor, classified as an MSME, who has a default amount of at least one lakh rupees. Once the proceedings under the PIRP begin, the debtor is required to submit the base resolution within two days of commencement of the PIRP. To increase the speed and efficiency of insolvency proceedings against MSMEs, a resolution plan must be approved by the creditors with at least 66% of the voting shares within 90 days from the commencement of PIRP. The approved resolution plan will finally be examined and approved by the National Company Law Tribunal. As a safeguard to ensure timely resolution, the committee of creditors may decide with at least 66% voting share to terminate the PIRP and initiate the CIRP at any time after the PIRP commencement date but before the approval of the resolution plan.

The PIRP amendments have been brought in to provide relief to honest MSME owners who have been severely impacted by the pandemic, by trying to ensure quicker, cost-effective and value maximising outcomes for all stakeholders. Furthermore, to ensure continuity of businesses for MSMEs the resolution process will be carried out while the company remains with the proprietor unless there has been fraudulent conduct or gross mismanagement.

The amendments are expected to reduce process costs, ensure continuity of business operations which benefit the corporate debtor and most importantly maximise the asset realisation for financial creditors. These reforms are expected to further improve the Ease of Doing Business and ensure quick resolutions for honest MSMEs – the backbone of the Indian economy.

Source: Invest India