Micro, small and medium enterprises (“MSME”) have been contributing greatly to the growth of the Indian economy including by way of employment generation. As on date, there are approximately 26.42 Lakh registered MSMEs in India. The Covid- 19 pandemic has caused great disruption in most businesses and while the larger conglomerates may have a war chest to tide over these times, the majority of MSMEs do not.
In recognition of the role of MSMEs and to offer them some respite from the economic challenges due to the ongoing pandemic, a pre-packaged insolvency resolution process (“PIRP”) was introduced by the Ministry of Law and Justice, GOI , by way of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 dated April 4, 2021 (“Ordinance”).
An application for PIRP can be made only in relation to a corporate debtor which qualifies as an MSME under Section 7(1) of the Micro, Small and Medium Enterprises Development Act, 2006.
An MSME may trigger the PIRP for defaults of amounts between INR 10,00,000 (Indian Rupees Ten Lakhs only) and INR 1,00,00,000 (Indian Rupees One Crore only). For defaults of higher amounts, the MSME would have to initiate the corporate insolvency resolution process (“CIRP”) under the Insolvency and Bankruptcy Code, 2016 (“the Code”).
D. Prerequisites and Other Requirements:
The MSME (being the corporate debtor) (“Applicant”) can initiate a PIRP by submitting an application in prescribed form , accompanied with affidavit, documents, declarations or records along with a fee of INR 15,000 (Indian Rupees Fifteen Thousand only) within 90 days from the date of default, provided:
(i) where such Applicant is a company, it has the approval of 75% of its shareholders or if it is a partnership firm, it has the approval of 3/4 the of its partners;
(iii) it has obtained the approval of unrelated financial creditors representing 66% in value of the total financial debt due and payable by the Applicant;
(iv) the Applicant is not undergoing and has not undergone CIRP/PIRP during a 3-year period prior to the PIRP initiation;
(v) no order of liquidation should have been passed against the Applicant; and
(vi) the Applicant is eligible to submit a resolution plan under section 29A of the Code.
The adjudicating authority (“AA”) within a period of 14 days from the receipt of application may admit or reject the application. However, before rejecting an application, the AA must give notice to the Applicant to rectify the defect in the application within a period of 7 days from such notice. If admitted, the PIRP shall be said to have commenced from the date of admission (“Pre-Packaged Insolvency Commencement Date”) and the AA shall declare a moratorium in relation to the Applicant. The PIRP is required to be completed within a period of 120 days from the Pre-Packaged Insolvency Commencement Date.
The Applicant shall submit a base resolution plan within 2 days from the Pre-Packaged Insolvency Commencement Date to the resolution professional and the unrelated committee of creditors (“COC”) for their consideration. Once the base resolution plan is presented, the COC may approve the base resolution plan for submission to the AA only if it does not impair any claims owed by the Applicant to the operational creditors.
Where — (a) the COC does not approve the base resolution plan; or (b) the base resolution plan impairs any claims owed by the AA to the operational creditors, the resolution professional may invite prospective resolution applicants to submit a resolution plan to compete with the base resolution plan (i.e., swiss challenge process). However, the COC is also empowered to provide the Applicant the opportunity to revise the base resolution plan, prior to inviting competing bids.
Upon receipt of the resolution plans from potential bidders, the COC shall evaluate the resolution plans and chose one that is compliant with the criteria set out and superior to the base resolution plan. If no competing bids are received, the COC may proceed with the base resolution plan. The resolution plan/base plan must be approved by the COC with at least 66% of the voting share and presented to the AA within a period of 90 from the Pre-Packaged Insolvency Commencement Date for its approval.
If the NCLT is satisfied that, the resolution plan/base resolution plan so approved by the COC meets the requirements under Section 30 of the Code, then the NCLT shall by an order, within 30 days of receipt of such resolution plan, approve the resolution plan.
An important advantage of PIRPs is the debtor-in-possession model which allows the existing management of the MSME to continue to control, manage and focus on the turnaround. This protects against business disruptions and loss of goodwill, to a certain extent. There are of course checks on management powers to ensure that the process is used by MSMEs that are genuinely affected by unavoidable circumstances and not those in self-orchestrated financial trouble. For example, the resolution professional is bound to monitor the management and report any breaches to the COC. The COC is also empowered to replace the management by voting in the resolution professional to manage the corporate debtor during the PIRP process, by a 66% vote.
PIRP is a commendable step in providing a flexible, speedy and collaborative process for resolution of financial stress in the MSME sector. Especially in a scenario where the base resolution plan is accepted, the process is potentially far speedier and more cost effective than a CIRP process.
While the benefits are apparent, the key to the success of the PIRP as a speedy and efficient mechanism, lies in adherence to stipulated timelines and the pro-active approach of stakeholders. There may be challenges to timely completion of the PIRP, due to the reliance on the AA/NCLT to approve the resolution plan even after COC approvals, the requirement of a swiss challenge process where the base resolution plan is rejected and the need to achieve cooperation between various classes of stakeholders.
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The material contained in this alert is for informational purposes only. The views expressed are not those of K Law and do not constitute legal advice. K Law disclaims all liability to any person or entity for any loss or damage caused by errors or omissions in this alert.