The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 was recently passed by Lok Sabha, replacing an ordinance on the same.
It has proposed ‘pre-packs’ as an insolvency resolution mechanism for Micro, Small and Medium Enterprises (MSMEs).
A Pre-packaged Insolvency Resolution Process (PIRP) relates to the resolution of the debt of a distressed company.
Pre-packs work through a direct agreement between secured creditors and the existing owners or outside investors. The agreement is an option instead of a public bidding process.
Under it, financial creditors will agree to terms with the promoters or a potential investor. They then seek approval of the resolution plan from the National Company Law Tribunal (NCLT).
The approval of at least 66% of financial creditors that are unrelated to the corporate debtor is required before a resolution plan is submitted to the NCLT.
The NCLTs will be required to either accept or reject an application for a pre-pack insolvency proceeding before considering a petition for a CIRP.
Corporate Insolvency Resolution Process (CIRP) is the existing mechanism.
Difference between pre-packs and CIRP
- One of the key criticisms of the CIRP has been the time it takes for resolution. At the end of March 2021, 79% of the ongoing insolvency resolution proceedings had crossed the 270-day threshold.
- A major reason for the delays is the prolonged litigation by erstwhile promoters and potential bidders.
- The pre-pack, in contrast, is limited to a maximum of 120 days. It has only 90 days available to stakeholders to bring a resolution plan for approval before the NCLT.
- In the case of CIRP, a resolution professional takes control of the debtor as a representative of financial creditors. In the case of pre-packs, the existing management retains control. This would ensure minimal disruption of operations relative to a CIRP.
Insolvency and bankruptcy code (IBC)
Insolvency and bankruptcy code 2016 was introduced to resolve the bankruptcy crisis in corporate sector. Under IBC, either the creditor (banks) or the loaner (defaulter) can initiate insolvency proceedings.
It is done by submitting a plea to the adjudicating authority, the National Companies Law Tribunal (NCLT).
According to IBC, a financial creditor holds an important role in the corporate insolvency process. The Committee of Creditors (CoC) under IBC includes all financial creditors of a corporate debtor. The CoC will appoint and supervise the Insolvency Professional.
It has the power to either approve or reject the resolution plan to revive the debtor, or to proceed to liquidate the debtor.
National Company Law Tribunal
The National Company Law Tribunal is a quasi-judicial body in India that adjudicates issues relating to Indian companies. The tribunal was established under the Companies Act 2013 and was constituted on 1 June 2016 by the government of India and is based on the recommendation of the V. Balakrishna Eradi committee on law relating to the insolvency and the winding up of companies.
All proceedings under the Companies Act, including proceedings relating to arbitration, compromise, arrangements, reconstructions and the winding up of companies shall be disposed off by the National Company Law Tribunal. The NCLT bench is chaired by a Judicial member who is supposed to be a retired or a serving High Court Judge and a Technical member who must be from the Indian Corporate Law Service, ICLS Cadre.