This issue of LexCognito, which in Latin means 'awareness about law', seeks to provide you an insight into significant legal and regulatory developments that have taken place very recently in India.
Date: 20 April 2021
India's Pre-packed Insolvency Resolution Process for MSMEs
Amidst global pandemic which is relentlessly disrupting businesses and economy, the second wave of coronavirus in India has resurrected existential crises for small and medium sized businesses. The Micro, Small and Medium Enterprises (“MSMEs”) are critical for India’s economy as they contribute significantly to its gross domestic product and provide employment to a sizeable population. In order to help MSMEs to resolve their insolvency situation while ensuring continuity of business operations in the hands of the promoters, the Government of India has brought into force a pre-packaged insolvency resolution process ("PIRP") for MSMEs.
On 4 April 2021, the Central Government has promulgated the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021 to allow PIRP for MSMEs as an efficient alternative to the corporate insolvency resolution process ("CIRP"). It is aimed at ensuring quicker, cost-effective and value maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and preserves jobs of thousands of people.
The IBC (Amendment) Ordinance 2021 has amended the Insolvency and Bankruptcy Code 2016 (“IBC”) and a new Chapter III-A Pre-Packaged Insolvency Resolution Process has been inserted after Chapter III. The Insolvency and Bankruptcy Board of India has notified the Insolvency and Bankruptcy Board of India (Pre-packaged Insolvency Resolution Process) Regulations, 2021 on 9 April 2021 to enable operationalization of PIRP. The Central Government has notified Rs. 10 Lakhs and above as the minimum default threshold for initiating the PIRP.
Pre-Packaged Insolvency Resolution Process (“PIRP”):
PIRP is a quasi-formal procedure which integrates the essence of an out of court private restructuring and that of a formal bankruptcy. It is a pre-planned insolvency procedure where a resolution plan is formulated and finalized prior to the initiation of formal proceedings.
Key highlights of PIRP:
Initiation of PIRP
An application for initiating PIRP may be made by a corporate applicant with the Adjudicating Authority ("AA") in respect of a Corporate Debtor classified as MSME under sub-section (1) of Section 7 of the Micro, Small and Medium Enterprises Development Act, 2006.
Pre-conditions
Corporate Debtor has not undergone PIRP or completed CIRP immediately 3 years preceding the initiation date.
Corporate Debtor is not undergoing CIRP.
No order requiring Corporate Debtor to be liquidated has been passed under Section 33 of the IBC.
It is eligible to submit a Resolution Plan under section 29A of the IBC.
Pre-approvals and requirements
Corporate Debtor has obtained an approval from its financial creditors, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors, for filing of an application initiating PIRP.
Members of the Corporate Debtor have passed a special resolution, or at least 3/4 of the total number of partners of the Corporate Debtor have passed a resolution, approving filing of an application for initiating PIRP.
Declaration from majority of directors/partners stating that the Corporate Debtor shall file an application for initiating PIRP within 90 days and PIRP is not being initiated to defraud any person along with the name of insolvency professional proposed and approved to be appointed as Resolution Professional.
Admission or Rejection of application
AA shall, within 14 days of receipt of application, by an order, admit the application, if it is complete; or reject the application, if it is incomplete.
Commencement Date
The PIRP shall commence from the date of admission of the application.
Moratorium
Moratorium under Section 14 shall, mutatis mutandis apply, to the proceedings under PIRP. The order of moratorium shall have effect from the date of such order till the date on which the PIRP comes to an end.
Appointment of Resolution Professional (RP)
The financial creditors of the Corporate Debtor, not being its related parties, representing not less than 66% in value of the financial debt due to such creditors shall approve appointment of proposed insolvency professional as RP.
Committee of Creditors (CoC)
The RP is required to constitute CoC within 7 days of the commencement date based on the confirmed claims.
Resolution Plan
The RP to submit Resolution Plan, approved by CoC to AA within a period of 90 days from commencement date. AA shall approve/reject the Resolution Plan if it confirms to the requirements under Section 30(2) of the IBC.
Completion of PIRP
The PRIP is required to be completed within 120 days from the commencement date.
Termination of PIRP
If no Resolution Plan is approved by the CoC within 90 days, the RP is required to file an application with AA for termination of PIRP.
Initiation of CIRP
CoC may, by 66% votes, resolve to initiate a CIRP in respect of the Corporate Debtor (if eligible) at any time after the commencement date but before approval of Resolution Plan.
CHRI Comment:
The promoters are generally instrumental in establishment, growth and sustainability of small and medium size businesses. In order to effectively revive such businesses from ongoing crises endangering their very existence, it is imperative to not disrupt the business operations by completely changing the management and control and offer an opportunity to resolve insolvency situation in a supervised manner as per law. The PIRP aims at offering the desired opportunity to the distressed MSMEs for resolving their insolvency while continuing its business. The time period for completion has been reduced to 2/3rds of the time required for CIRP to make the process more efficient and time-bound, resulting in lesser entities being forced into liquidation.
Chambers of Rajan & Indraneel
T: +91 11 41000224, 41030225| Fax:+91 11 29239074
E-mail:rajan.gupta@chrilegal.com
Mobile: +91 9810404086
N 103 Greater Kailash - I, New Delhi - 110048, India.
About us
Chambers of Rajan & Indraneel is a premier full service law firm headquartered at New Delhi, India. The Firm represents amalgamation of vast experiences and practices of two eminent lawyers. Indranil Ghosh is highly reputed as a disputes lawyer. He was a senior partner and head of litigation practice in one of the oldest Indian law firm Fox Mandal for several decades before setting up his own practice. Rajan D Gupta is a rank holder Chartered Accountant turned Corporate Lawyer. He is also a licensed Insolvency Resolution Professional. He has been associated with internationally renowned big law firms in past and has held senior level positions in firms like PwC, Fox Mandal, Khaitan & Co. and SRGR Law, etc. before starting the Firm.
We have a team of experienced Lawyers, Chartered Accountants, Company Secretaries and Insolvency Resolution Professionals with access to network of high quality experienced lawyers in all major commercial cities of India.
The Firm offers a wide range of expert legal services in the areas of corporate and commercial laws and specializes in representing major foreign and domestic corporations with diverse business interests in India. The Firm is professionally equipped to handle large sized and complex corporate transactions like Mergers & Acquisitions, Corporate Restructuring, Joint Ventures, Inbound & Outbound Investments, Private Equity and Venture Capital Investment Transactions, Real Estate Transactions, Infrastructure Projects, Project Finance, Power Projects, Non-Conventional Energy Projects, Highways & Road Projects and Corporate Taxation as well as GST, etc. The Firm also offers proven capabilities in litigation and dispute resolution practice areas, especially in handling international and domestic arbitrations as well as litigation in Supreme Court, various High Courts of India and various judicial and quasi-judicial tribunals/forums including at National Client Law Tribunal, Appellate Tribunals, Tax Tribunals, Competition Commission, Electricity Tribunal, Telecom Disputes Tribunal, Designated Authorities and other adjudicatory bodies.
We have set up a Japan Business Desk (JBD) in order to serve our Japanese clients in a better way. The endeavour of JBD is to act as a bridge between our professionals and clients from Japan so as to ensure that there are no barriers as to linguistic and cultural differences. This will indeed facilitate Japanese corporates doing business in India.
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