Handbook on the pre-packaged Insolvency Resolution Process
Publication: Handbook on the Pre-packaged Insolvency Resolution Process under The Insolvency and Bankruptcy Code, 2016 by CIBC of ICAI
Introduction
The Insolvency and Bankruptcy Code, 2016 (“IBC”) was introduced to provide a framework for time-bound process for insolvency resolution and wherever not possible ensuring ease of exit by liquidation process. The IBC is an all-encompassing law that deals with the insolvency of not only Corporate Persons, but partnership firms and individuals as well. The emergence of the Insolvency and Bankruptcy Code, 2016 has led to a turnaround in the corporate distress resolution framework of India. Under the IBC the standard procedure is the Corporate Insolvency Resolution Process (CIRP).
The Regulators are continuing their drive to improve ‘insolvency resolution process’ and ‘ease of doing business’ further by enriching the insolvency regime with innovative options and features, with primary focus on time bound rescue of businesses as going concerns. During this time of pandemic several important measures were rolled out such as moratorium on loan repayments, infusion of liquidity into the banking system to provide credit to financially distressed entities, relief in banking norms for asset classification, suspension of filing of insolvency proceedings by the creditors.
The financial slowdown during the COVID-19 pandemic saw a scarcity of resolution applicants for the revival of the Corporate Debtor, stretching the stress period and also affecting the creditor’s expectations. It was observed that the completion of insolvency proceedings generally exceeded the stipulated timelines as given under the IBC and during this adversity which has been causing hardships to several businesses in India, the number of insolvency proceedings are likely to rise.
In the Indian context, most of the organizations are largely promoter driven. In many cases the MSME borrowers were suffering due to the elongated Corporate Insolvency Resolution Process and closure of their existing units. The Government of India amended and widened the definition of MSMEs to refine the business scenario for Indian enterprises and to change the criteria to classify MSMEs to “Investment in Plant and Machinery and Annual Turnover” to bring more and more enterprises in the ambit of the definition of MSMEs.
It was considered necessary to urgently address the specific requirements of the MSMEs relating to the resolution of their insolvency, due to the unique nature of their businesses and simpler corporate structures.
The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated on 4th April, 2021 in the backdrop of the Covid-19 pandemic, basically to rescue the MSMEs, given that the pandemic exposed many of such businesses to severe financial distress.
Therefore, introduction of Pre-packaged Insolvency Resolution Process under the Insolvency and Bankruptcy Code, 2016 by this Ordinance has emerged as an innovative corporate rescue method that incorporates the virtues of both informal (out-of-Court) and formal (judicial) insolvency proceedings. Although it involves an informal mechanism, it still comes within the purview of the Courts and Tribunals for their ultimate sanctioning which would in turn be binding on the parties. This scheme allows the Corporate Debtor and its Creditors to negotiate the terms of an insolvency resolution plan prior to the commencement of the formal insolvency process and which allows formal process to be implemented at great speed.
The objective of this Pre-packaged Insolvency Resolution Process is to provide an “efficient alternative insolvency resolution process” for corporate debtor classified as micro, small and medium enterprises (“MSMEs”) which are covered under the definition of “MSME” as defined in Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006. It aims to provide a cost-effective and value-maximizing mechanism for resolving insolvency with minimum disruption to business operations and thus preserving jobs.
Earlier, recognizing the need for protecting smaller businesses, the Government of India, by way of a notification dated 24th March 2020, had also raised the minimum threshold for initiating corporate insolvency resolution process (CIRP) to Rs.1.00 crore from earlier Rs.1.00 lakh. This was followed by a 1-year suspension on initiation of any new insolvency proceedings for defaults occurring on or after 25th March 2020, irrespective of the size of default.
