Pre-Packaged Insolvency Resolution Process for MSMEs

Background: The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 was promulgated by the President on 4th April, 2021. It has introduced Chapter III-A on ‘Pre-Packaged Insolvency Resolution Process’ (“PPIRP”) under the Insolvency and Bankruptcy Code, 2016 (“IB Code”). The Rules and Regulations for PPIRP were notified on 9th April, 2021.

1. PPIRP is applicable to which entities and what are the pre-requisites for initiating it?

The PPIRP is applicable to the micro, small and medium enterprises (“MSMEs”) which are classified under Section 7(1) of the MSME Development Act, 2006. As per the Form-1 under the Insolvency and Bankruptcy (PPIP) Rules, 2021, only the MSMEs which are incorporated as companies or limited liability partnerships are entitled to initiate PPIRP.

The Corporate Debtor (“CD”) has to take approval from its members by way of a special resolution (more than 75%) as well as approval from over 66% of the financial creditors for the initiation of PPIRP. The other conditions for the initiation of PPIRP are as follows:

First, the CD should not have undergone PPIRP or finished Corporate Insolvency Resolution Process (“CIRP”) within the period of three years prior to the initiation of PPIRP.

Second, CD should not be undergoing the CIRP.

Third, no liquidation order should have been passed against the CD.

Fourth, the CD should be eligible under Section 29A of the IB Code to submit a resolution plan.

Fifth, sixty-six percent of the unrelated financial creditors of the CD should approve the appointment of a Resolution Professional (RP).

Sixth, the partners or directors of the CD in majority, are required to make a declaration in terms of Section 54A(2)(f).

2. What are the differences between PPIRP and CIRP?

i. During the PPIRP, the existing directors or partners of the CD remain in control of the management of CD, whereas, the CIRP is based on the ‘creditor in control’ model.
ii. The maximum time limit for the completion of PPIRP is 120 days, whereas, for CIRP, the same is 330 days.
iii. The minimum threshold for filing an application for PPIP is Rs. 10 Lakhs and for CIRP is Rs. 1 Crore.
iv. Prior to the initiation of PPIRP, the CD has to present a base resolution plan to the financial creditors, however, under CIRP, there is no such requirement.
v. The fee for filing an application for the initiation of PPIRP is Rs. 15,000, whereas, for CIRP, the same is Rs. 25,000.
vi. The RP has to submit the resolution plan approved by the CoC to the Adjudicating Authority (AA) within 90 days of the commencement of PPIRP, however, there is no such time limit for the submission of resolution plan under CIRP.

3. Can a third party submit a resolution plan under PPIRP?

Yes, if the CoC does not approve the base resolution plan proposed by CD or the base resolution plan impairs any claims of the operational creditors, the RP has to invite resolution plan(s) from other parties. These resolution plan(s) will be evaluated by CoC, which will select one of them. Thereafter, CoC may select such resolution plan for approval over the base resolution plan. In case if such resolution plan is not selected for approval, it will compete against the base resolution plan.

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