Pre-Packaged Insolvency Resolution Process: Informal Route to Resolution

This article on “Pre-Packaged Insolvency Resolution Process: Informal Route to Resolution” authored by Eshanee Bhattacharya explains the Pre-Packaged Insolvency Resolution Procedure in tandem with UNCITRAL and Insolvency and Bankruptcy Code, 2016 with the latest amendments in the law.

Background of the Code

Formal insolvency processes, such as the Code’s Corporate Insolvency Resolution Procedure (“CIRP”), can take a long time and cost a lot of money in direct and indirect costs. Informal workouts, on the other hand, while providing a flexible and cost-effective option for resolving insolvency, the solutions produced through such methods lack statutory underpinning and legal clarity.

Pre-packaged insolvency, often known as pre-pack, is a type of restructuring that allows creditors and debtors to work on an informal plan before submitting it for approval. A pre-pack is an informal agreement between secured creditors and investors to resolve the debt of a distressed firm, which relaxes the entire process of corporate liquidation and insolvency.

Pre-packs are hybrid methods that allow out-of-court remedies to be recognized under insolvency law while also providing sufficient safeguards for all parties involved. This insolvency resolution method has grown in popularity in the United Kingdom and Europe over the last decade, and it has enormous potential in India, given its benefits such as cost-effectiveness and speed.

There is no legal definition for the term “pre-packaged.” It’s presumably because it’s evolved over time in different ways in different jurisdictions, and each jurisdiction has its own variant(s) of pre-pack, allowing stakeholders to tailor it to their specific needs.

The United Nations Commission on International Trade Law (UNCITRAL) refers to pre-packs as “expedited reorganization proceedings” because they combine voluntary restructuring negotiations, in which a plan is negotiated and agreed to by most impacted stakeholders, with reorganization proceedings that begin immediately[1].

Features of the Pre-Packaged Insolvency Resolution Code in India

1. Amendments to the IBC were made through Ordinances to Sections 4, 5, 11, 11A, 33, 34, 54A to 54P (Chapter III-A), 61,65, 67A,77A,208,239, 240 and 240A.
2. In the IBC, a new chapter III-A has been added, covering Sections 54A to 54P.
3. There are introductions to new definitions in the code.
4. A new Section 67A is added, which establishes a penalty for fraudulent CD management during the PPIRP.
5. A new section 77A has been added that specifies the penalties for PPIRP-related offenses.

Shift in Approach: From Creditor to Debtor in Possession

The Act has put emphasis on a “debtor in Possession” approach by introducing this concept. Unlike CIRP, this MSMEs pre-packaged framework will be a debtor in possession and a creditor in the control model. In the case of traditional CIRP, the resolution professional was in possession and the creditor was in command.

The ordinance’s framework is an experiment in some ways, and it differs from the standard CIRP in others.[2] Simply put, in the pre-packaged MSMEs, the debtor retains control and management of the business until it is resolved. In a typical CIRP, the RP arrives and takes over on the day of admission.

Amendments to the Definitions

The amendment ordinance introduced certain new definitions to bring further clarity into the newly enacted pre-packaged regulations.

Section 5 (2A)[3]: “Base Resolution Plan” refers to a resolution plan provided by the Corporate Debtor under Section 54A, subsection 4. This base resolution plan will be made by the Corporate Debtor. The corporate debtor must submit to the RP as a base resolution plan the base resolution plan that was submitted to the financial creditors prior to the initiation of PPIRP within two days of the pre-packaged insolvency commencement date.

Section 5 (23A)[4]: Memorandum of “Preliminary Information” submitted by the Corporate Debtor under clause (b) of sub-section (l) of Section 54G. The Preliminary Information Memorandum contains all the necessary information relevant for the resolution.

Section 5 (23B[5]): “Pre-Packaged Insolvency Date” refers to the date on which the Adjudicating Authority accepts an application to begin the pre-packaged insolvency resolution process.

Section 5 (23D[6]): “pre-packaged insolvency resolution process period” includes the time between the date of acceptance of the application for the initiation of the PPIRP and the order passed by the Adjudicating Authority accepting or rejecting the plan.

Punishment for offenses related to the PPIRP is provided in Section 77A[7]. Sections 54A through 54P have been added to a new Chapter III-A.

It describes the entire scheme of the Pre-Packaged Insolvency Resolution Process, including how the PPIRP is initiated, the duties and powers of the Resolution Professional before and during the PPIRP, management of affairs, creditors’ committee, consideration, and approval, appeals, and so on.

Legal Framework of Pre-Packaged Insolvency Resolution Process

The economy suffered fallout from Covid-19, and, the Government of India has enacted a number of policy measures to provide a cost-effective, timely, and value-maximizing mechanism for resolving insolvency with minimal disruption to business operations (during the process).

The IBC has been amended to include Chapter IIIA [8], which addresses the pre-packaged insolvency resolution process by an ordinance issued on 4th April 2021[9].

An application for initiating pre-packaged insolvency resolution with the Adjudicating Authority in respect of a Corporate Debtor categorized as MSME can be made by a Corporate Applicant subject to several conditions as mentioned in Section 54A[10].

Application of the Provisions

According to the ordinance, as of now, the PPIRP concept will only be applicable to Micro, Small, and Medium Enterprises (MSME). As stated in the ordinance’s objective, the PPIRP for MSME has been introduced to provide them with an efficient alternative insolvency resolution process so that value maximization, which is the main goal of the Code, can be achieved more quickly and cost-effectively[11].

Where an application under Section 7, 9, or 10 of the IBC has been submitted and is pending as of the date of the abovementioned Ordinance, 2021, the terms of Pre-pack Insolvency for MSME will not apply.

Since the law relating to the pre-packaged insolvency is at it’s a very nascent stage, the corporate debtor and the relevant parties to the pre-packaged insolvency resolution must fulfill certain pre-requisites which are given below:

1. The corporate debtor who has not resorted to a PPIRP or CIRP process within three years of its inception date;
2. A corporate debtor who is not going through the CIRP process pending
3. A corporate debtor against whom no liquidation order has been issued under Section 33 of the IBC.
4. Is qualified to submit a resolution plan under Section 29A of this Code if he or she is subject to Section 240A of the Code;
5. The financial creditor should not be related to or have any close connection to the corporate debtor and represent at least 66 per cent of the financial debt’s value, the proposal (by specified means) of an Insolvency Professional being appointed as Resolution Professional to conduct the PPIRP of such a corporate debtor has been accepted.
6. A majority of the corporate debtor’s directors or partners sign a declaration stating (among other things):
7. The corporate debtor will file for initiating the PPIRP within 90 days.
8. The PPIRP will not be initiated to defraud anyone.
9. The name of the resolution professional who has been approved.
10. A special resolution approving the filing of an application commencing the PPIRP has been passed by at least 3/4th of the total number of partners of the corporate debtor.

Process Before Initiation of Resolution Process[12]

1. The Corporate Debtor shall prepare and submit to the FCs a Base Resolution Plan that confirms all of the Section 54K requirements.
2. Documents to be submitted to Financial Creditors by the Corporate Debtors Base Resolution Plan, Declaration by most Directors, Special Resolution by members, and other documents[13]
3. The Corporate Debtors shall notify all Financial Creditors of its intention to initiate PPIRP and shall request the FCs to do so in the meetings in the future.
4. The Financial Creditors must be given 5 days’ notice of the meeting, which must include the date, time, and location, as well as a list of creditors (Form P2) and their amounts owed.
5. The name of the RP must be proposed by FCs with at least a 10% stake (Reg. 14), and the appointment and terms of the RP must be provided in Form P3.

Admission and Approval of Resolution

1. Within 14 days of submission, the NCLT will review the application and decide whether it is complete or rejects. The PPIRP shall be considered to have begun on the date of application acceptance[14].
2. The Adjudicating Authority will appoint the Resolution Professional whose name was suggested in the application. There will be no disciplinary action taken against him.
3. If the said Insolvency Professional is the subject of a disciplinary proceeding, the appointment will be made on the recommendation of IBBL.[15]
4. Adjudicating Authority shall direct the RP to issue a Public Announcement (Form P9) within two days of the start of the PPIRP.[16]
5. The entire PPIRP process must be completed within 120 days of the PPIRP’s inception, and the RP must submit the Resolution Plan, duly approved by COC, within 90 days of the PPIRP’s inception.
6. If the application is not submitted within 90 days, the Resolution Professional will file an application to terminate the PPIRP.[17]
7. Moratorium begins with the start of PPIRP, and the Adjudicating Authority shall declare the moratorium by order.
8. Moratorium shall be limited for the purposes referred to in Section 14/1) read with Section 143) of the Insolvency and Bankruptcy Code, limiting the institution or continuation of any action against the Corporate Debtor and any transfer, alteration, disposal, or other disposition of any assets by the Corporate Debtor[18]
9. One of the most important responsibilities of the Resolution Professional in PPIRP is the formation of a Committee of Creditors.
10. The Resolution Professional is also responsible for confirming the list of claims and keeping an updated list of claims, monitoring the CD’s management of affairs, and preparing Information Memorandum on the basis of the Preliminary Information Memorandum.[19]
11. The Resolution Professional must submit an application to AA for approval of a resolution plan accepted by the CoC within 90 days of the start of the PPIRP Form P12.
12. If the Adjudicating Authority approves the Resolution Plan, the Resolution Professional must notify each claimant of the principle or formula for debt payment under the Resolution Plan.
13. If the Adjudicating Authority does not approve the plan, the RP will file a process dismissal application. If the PPIRP is terminated, the next PPIRP cannot be initiated within three years.

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References

[1] Legislative Guide on Insolvency Law UNCITRAL UNITED NATIONS COMMISSION ON INTERNATIONAL TRADE LAW. (n.d.). [online] Available At

[2] K.R.Srivats, Now, a pre-packaged insolvency process for MSMEs, The Business Line, 5th April 2021, New Delhi Available At

[3] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 5(2A) (1), No 3 of 2021, Act of Parliament (India)

[4] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 5(23A) (1), No 3 of 2021, Act of Parliament (India)

[5] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 5(23 B) (1), No 3 of 2021, Act of Parliament (India)

[6] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 5(23 D) (1), No 3 of 2021, Act of Parliament (India)

[7] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 5(77A) (1), No 3 of 2021, Act of Parliament (India)

[8] Insolvency & Bankruptcy Code,2016, No. 37, Act of Parliament (India)

[9]Ministry of Law and Justice (Legislative Department) The Insolvency and Bankruptcy Code, Amendment Ordinance, 2021 Available At

[10] Insolvency & Bankruptcy Code,2016, § 54, No 37, Act of Parliament (India)

[11] Ajay Kumar, Pre Packaged Insolvency Resolution Process: Section 29 (A) and 29 (H) a Resolution for Expemption, Mondaq (2021),).

[12] Amita Desai, PPIRP- Pre-Packaged Insolvency Resolution Process under IBC 2016. TaxGuru. May 2021. Available At

[13] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 54 C (4), No 3 of 2021, Act of Parliament (India)

[14] Supra

[15] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 54 E (1), No 3 of 2021, Act of Parliament (India)

[16] Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021, Regulation 10

[17] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 54 D, No 3 of 2021, Act of Parliament (India)

[18] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 § 54(1) , No 3 of 2021, Act of Parliament (India)

[19] The Insolvency and Bankruptcy Code (Amendment) Ordinance,2021 §Section 54 F (2) , No 3 of 2021, Act of Parliament (India)

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