Prepack Insolvency Ordinance

Pursuant to the Report submitted by the Sub-committee of the Insolvency and Law Committee on Pre-packaged Insolvency Resolution Process through the Ministry of Corporate Affairs in January 2021, an Ordinance has been promulgated by the Hon’ble President of India on 04.04.2021, which is slated to come into force at once.

The instant Ordinance has inserted a new Chapter III-A to the Insolvency and Bankruptcy Code, 2016 and is expected to provide an efficient alternative insolvency resolution process for corporate persons classified as micro, small and medium enterprises under the Insolvency and Bankruptcy Code, 2016, ensuring quicker, costeffective and value maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs, especially given the repercussions of the pandemic of Covid-19 from which the country is still reeling.

Key Takeaways:

• The Central Government may, by notification, specify such minimum amount of default of higher value, which shall not be more than Rs. 1 crore, for matters relating to the pre-packaged insolvency resolution process of corporate debtors under Chapter III-A of the Code. (S 4)
• In addition to the bars existing u/s. 11 of the Code – a financial creditor or an operational creditor of a corporate debtor undergoing a prepackaged insolvency resolution process cannot initiate CIRP. Eligibility Criteria for initiating prepackaged insolvency resolution process (“PPIRP”): (S 54A)
  • Corporate Debtor (“CD”) should not have undergone PPIRP or completed a corporate insolvency resolution process (“CIRP”) for 3 years before the date of initiation of PPIRP.
  • CD should not currently be undergoing the CIR Process.
  • No order of liquidation with respect to the CD is ought to have been passed.
  • CD must be eligible under S.29A of the Code.
  • 66% of the Financial Creditors (“FC’s”) who are not related parties of the CD should have proposed and approved an insolvency professional (IP) for the purposes of conducting the PPIRP.
  • Majority of directors or partners of the CD ought to have made a declaration that they would adhere to mandatory timeline of 90 days with regards to PPIRP, ensure that the PPRIP does not defraud any person etc.
  • Members of the CD or 3/4th of the partners of the CD should have passed a special resolution for filing application to initiate PPIRP.
• The CD must produce the base resolution plan to the FCs prior to seeking for their approval. (S 54A).
• Where an Application to initiate PPIRP is filed by the CD u/s. 54C before the Hon’ble NCLT within 14 days of the filing of a S.7, 9 or 10 Application against the corporate debtor (“CD”) then the NCLT shall first dispose of the S. 54C Application. However,
  if the S. 54C Application is filed after 14 days, then the S.7, 9 or 10 Application will be decided first. (S 11A)
• Insolvency Professional (IP/RP): He will have a role of conducting the process and will not run the business and conduct of the CD, RP will provide public announcement, constitute Committee of Creditors (“CoC”) of unrelated FC’s Applications on avoidance application to be filed. (S 54B, 54N)
• Strict timeline of 120 days has been envisaged and provided for the completion of PPIRP. (S 54D)
• A 90 days timeline is provided for submission of resolution plan and 30 days for NCLT to approve the same. (S 54D)
• Moratorium akin to S.14 of the Code will be applicable during PPIRP.(S 54E)
• CD to provide a list of outstanding claims and Information Memorandum with specified data to IP within 2 days and there is severe criminal liability for omission of facts, data and/or provision of wrong information. (S 54G)
• It is a ‘debtor in control’ model. (S 54H)
• The COC at any point of time of the PPIRP can vest the management of the CD with the RP, by vote of 66% and subsequent application to the Hon’ble NCLT by RP. (S
  54J)
• Any person, who sustained any loss or damage as a consequence of omission of material information or inclusion of any misleading information in the list of claims or the preliminary information memorandum shall be entitled to move a court having jurisdiction for seeking compensation for such loss or damage (S 54(G)(4))
• Provisions for initiation of non-cooperation applications against the management of the CD have been made in case of PPIRP also.
• The CoC may provide the CD an opportunity to revise the base resolution plan prior to its approval. (S 54K)
• CoC will have to vote with 66% in order to approve the resolution plan and proceed with the PPIRP.(S 54K). The Hon’ble NCLT is to approve the Resolution plan in 30 days. (S 54L)
• The COC can choose a resolution plan which is better than the base plan and can be chosen for approval.(54K)
• The CoC has the option to approve or terminate the plan. In some cases, subject to conditions, subsequent to termination of the plan, liquidation of the CD could be voted for and proceed with continuation of avoidance application (s 54N)
• During the PPIRP, the CoC may by 66% voting resolve to admit the CD into CIRP, subject to eligibility as per the Code.(S 54O) Such order of initiation of CIRP passed by the NCLT would be equivalent to an Order of admission passed in a S.7 Application.
• The penalty for initiating PPIRP with the intent to defraud or if officer of management of CD manages affairs with intent default ranges from a minimum of Rs. 1 lakh to a maximum of Rs. 1 crore. (S 65, 67A)
• The Pre-packaged Insolvency Resolution Process Cost (“IRPC”) shall include interim finance, fees of the RP and other process related costs approved by CoC and not include cost incurred to run the process.

AMA View (Practical Aspects for Stakeholders):

1. Small and mid-size companies have always faced challenges under the conventional IBC mechanism to find suitable Resolution Applicants/interested acquirers; as a result of which the companies land up in liquidation.
2. Promoters are typically barred under 29A of IBC to present Resolution Plan unless the company is an MSME and the promoter falls under certain exceptions, even as per the instant Ordinance.
3. The initiation or decision to go ahead with pre pack insolvency will have to be really well thought out and planned; a lot of paperwork and ground work done by the corporate debtor not just in terms of its financials, data collection but also to convince its unrelated financial creditors allowing it to get into the pre-pack insolvency resolution mode.
4. The timelines are extremely stringent at least for now which will have to be seen as to how it pans out at the ground level. Promoters should not get complacent due to the “debtor in possession” model as the same can be changed midway and the COC has the power to convert the prepack into a proper normal CIRP process.
5. The CD should be prepared to go ahead with the base plan and also the RP approved by 66% of the COC has to keep all claim details, financials, IM ready, etc ready as most of these are required prior to even filing and some of them within two days of commencement of PPIRP. Hence there is a fair bit of base work to be done by the CD in a short amount of time.
6. Whether this is helpful; effective or not really used by CD’s will only be seen in time. One may think as to what would be the benefit for an MSME to go ahead with this process when it anyways has to convince its unrelated FCs with 66% voting shares to at least in principle be agreeable to the base plan before even filing.
7. However the benefits of moratorium and pressures from statutory authorities and operational creditors may be something that the companies may look at and benefit along with 66% FC’s on-board; there would be some instances where smaller stakes of FC’s could be giving the CD more trouble and this could be a solution therein. It is to be seen whether it really converts to good numbers on filing or like Sec 10’s; the numbers don’t show a good picture.
8. The onset and impact of COVID-19 has been seen in the most drastic manner in the MSME segment and companies in that size.
9. The Government had suspended initiation of CIRP by creditors or the Corporate Debtor with effect from 25.03.2020 till 24.03.2021 to save companies already under financial distress due to COVID with respect to defaults. Whether the present Ordinance allows companies to negotiate with the financial creditors and irrespective of the default being pre or post COVID period is yet to be seen, as the only provision made thus far is that the Central Government shall specify the minimum threshold of default which shall not be more than Rs. 1 crore.
10. The key pointers and takeaways are provided above for the readers (stakeholders from all groups) and especially companies in the financial distress to understand the concept.
11. This will be technically a different regime under the very same IBC and the challenges and aspects of law will evolve with the law. Nevertheless, the present Ordnance seems as at least an option and has come at a time much needed to try and rescue those MSME’s in financial distress. A lot of aspects have been left to be specified/notified leaving a lot of open room for several procedural aspects which are crucial in nature to be decided in time either by way of supporting regulations or notifications to that effect.