The Chartered Accountant • Journal of ICAI November 2021 • Vol. 70 • No. 5 • pp. 31–36 (Journal pp. 543–548)
INSOLVENCY & BANKRUPTCY • MSME RESOLUTION

MSME: Prepack Insolvency a New Avenue

CA. Nipun Singhvi (Member of the Institute of Chartered Accountants of India)

The author is a member of the Institute. He can be reached at canipunsinghvi@gmail.com and eboard@icai.in.

1. CIRP v. PIRP: Comparative Interplay & Filing Safeguards

CIRP cannot be filed in a case where the company is going through the PIRP process. The financial creditors or the operational creditors can’t file PIRP. The ordinance has provided that no PIRP can be initiated within a period of 3 years of undergoing one PIRP. Even in the case where a CIRP has been completed, PIRP cannot be initiated within 3 years. Therefore, the corporate Debtor is to cautiously use the opportunity to file PIRP, only in cases where relief in financial stress of the Company is required. This protection was provided to avoid repeated attempts of initiating PIRP by the corporate Debtor/ promoter.

“CIRP cannot be filed in a case where the company is going through the PIRP process. The financial creditors or the operational creditors can’t file PIRP.”

Fourteen-Day Priority Rule:

If any PIRP application is pending, no application for initiating CIRP can be accepted by the adjudicating authority.

If a CIRP application is pending, within 14 days PIRP application can be filed and will get preference. And if the CIRP application is pending and PIRP application is filed after 14 days, then application for initiating CIRP will be attended and disposed of prior to the other application being taken up.

2. Application and PIRP Process

1. Eligibility Criteria for Application of PIRP (Section 54A)

In order to make an application for PIRP, the Corporate Debtor (CD) ought to fulfil the requirements laid down in Section 54A of the Code. These criteria inter alia include:

  • No prior CIRP or liquidation should be admitted against the CD;
  • Financial Creditors (not being related party of the CD) not having less than 66% of the financial debt of the CD have accepted the proposal of an Insolvency Professional to be appointed as the Resolution Professional for PIRP;
  • A specific declaration from the directors/partners of the CD declaring the CD’s intention to initiate PIRP.

The Resolution Professional has to file a report confirming that the CD has fulfilled the requirements under Section 54A of the Code. Declaration, special resolution, and base resolution plan must be provided to financial creditors before taking their approval. In addition, the minimum amount of default is ₹ 10 lakh, which can be raised up to ₹ 1 crore by the Central Government.

2. Requirement to File an Application Before Adjudicating Authority

  • The Corporate Debtor must meet the requirement under Section 54A thereafter it becomes a Corporate Applicant and approaches the Adjudicating Authority for initiation of PIRP.
  • The Corporate Applicant shall along with application furnish: declaration, special resolution or resolution and the approval of financial creditors; name and written consent of the IP proposed to be appointed as RP as approved under Section 54A(2)(e) and his report under Section 54B(1)(a); Declaration regarding existence of any avoidance transactions falling under Chapter III (Preferential, undervalued and extortionate transactions) or fraudulent or wrongful trading under Chapter VI; information relating to books of account of the corporate debtor and such other documents relating to such period.

The Adjudicating Authority must decide the application of PIRP within 14 days of receipt of application.

3. Strict Timelines for Completion of PIRP Process

  • 120-Day Overall Horizon: The pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty (120) days from the pre-packaged insolvency commencement date.
  • 90-Day Plan Submission Window: The resolution professional shall submit the resolution plan, as approved by the committee of creditors, to the Adjudicating Authority under sub-section (4) or sub-section (12), as the case may be, of Section 54K, within a period of ninety (90) days from the pre-packaged insolvency commencement date.
  • Termination on Non-Approval: Where no resolution plan is approved by the CoC within the prescribed period, the resolution professional shall, on the day after the expiry of such time period, file an application with the Adjudicating Authority for termination of the pre-packaged insolvency resolution process in such form and manner as may be specified.

4. PIRP Procedural Execution & Debtor-in-Possession Model

  • Moratorium: The moratorium shall be applicable mutatis mutandis as per Section 14(3) of the IB Code, 2016 till the end of PIRP. The Adjudicating Authority shall appoint RP as named in the application or recommend the name from IBBI panel.
  • Public Announcement: The Adjudicating Authority shall cause public announcement of the PIRP of the Corporate Debtor and the RP shall make public announcement within 2 days of initiation of PIRP.
  • Essential Goods and Services: Essential goods and services shall mean electricity, water, telecommunication services and information technology services to the extent these are not a direct input to the output produced or supplied by the corporate debtor.
  • Debtor-in-Possession & Claims Submission (Section 54H): The corporate debtor shall, within two days of the pre-packaged insolvency commencement date, submit to the resolution professional a list of claims along with details of the respective creditors, their security interests and guarantees and a preliminary information memorandum containing information relevant for formulating a resolution plan. The management of affairs of the Corporate Debtor shall vest with the Board of Directors or partners, and such persons shall keep the operations of Corporate Debtor as going concern along with discharging their statutory or contractual rights and obligations in relation to Corporate Debtor.
  • Constitution of CoC: The Resolution Professional shall, within seven (7) days of the pre-packaged insolvency commencement date, constitute a committee of creditors, based on the list of claims confirmed under clause (a) of sub-section (2) of Section 54F, and the provisions of Section 21 except sub-section (1) shall mutatis mutandis apply.

3. Duties and Powers of the Resolution Professional (RP)

Duties of RP During PIRP:

  • It is the duty of RP to confirm the list of claims submitted by the corporate debtor under Section 54G and inform creditors regarding their claims as confirmed along with maintaining an updated list of claims.
  • RP is required to monitor management of the affairs of the corporate debtor and constitute the committee of creditors and convene and attend all its meetings.
  • RP has obligation to prepare the information memorandum on the basis of the preliminary information memorandum submitted under Section 54G and any other relevant information and file applications for avoidance of transactions (if any) under Chapter III or fraudulent or wrongful trading under Chapter VI.
  • The resolution professional shall ascertain class(es) of creditors, if any for representation of creditors in a class ascertained under sub-regulation (1) of Regulation 15 in the committee, identify three insolvency professionals who are not relatives or related parties of the applicant or the resolution professional having their addresses, as registered with the Board, in the State or Union territory, as the case may be, which has the highest number of creditors in the class as per their addresses in the records of the corporate debtor.

Powers of RP During PIRP:

  • RP has access to all books of account, records and information available with the corporate debtor along with electronic records of the corporate debtor from an information utility having financial information of the corporate debtor.
  • RP has access to the books of account, records and other relevant documents of the corporate debtor available with Government authorities, statutory auditors, and accountants.
  • RP has power to attend meetings of members, Board of Directors and committee of directors, or partners and appoint accountants, legal or other professionals. RP is empowered to collect all information relating to the assets, finances and operations of the corporate debtor for determining the financial position of the corporate debtor and the existence of any transactions that may be within the scope of provisions relating to avoidance of transactions under Chapter III or fraudulent or wrongful trading under Chapter VI.
  • Financial institutions are obligated to supply relevant documents to RP and seek cooperation from its promoters and any other person associated with the management of the corporate debtor and for such purpose sub-sections (2) and (3) of Section 19 shall, mutatis mutandis apply, in relation to the proceedings.
  • Vesting of Management with RP (Section 54J): Management can be vested with RP in cases where the Adjudicating Authority is of the view that the affairs of the Corporate Debtor have been conducted in a fraudulent manner or/and there is gross mismanagement of the affairs of the Corporate Debtor. The CoC must approve the same with voting of 66%.

4. Role and Composition of the Committee of Creditors (CoC)

  • The RP shall convene meetings of the financial creditors, who are not related parties of the corporate debtor, and financial creditors who are not related parties of the corporate debtor and have not less than ten percent (10%) of the value of the total financial debt of such creditors may propose names of insolvency professionals for the purposes of clause (e) of sub-section (2) of Section 54A.
  • Where the corporate debtor has only creditors in a class and no other financial creditor who are not related parties of the corporate debtor, the committee shall consist of only the authorised representative(s).
  • Where the corporate debtor has no financial debt or all financial creditors are related parties, the committee shall consist of operational creditors, being not related to the corporate debtor, as ten largest operational creditors by value. It should also consist of one representative elected by all workmen and one representative elected by all employees.
  • Quorum: Meeting of the committee shall quorate if members of the committee representing at least thirty-three percent (33%) of the voting share are present either in person or by video conferencing or other audio and visual means. The meeting can be conducted through video conferencing as well.

5. Statutory Valuation Standards

Valuation of Corporate Debtor is based on Fair Value and Liquidation Value which must be in accordance with internationally accepted valuation standards after physical verification of the inventory and fixed assets of the Corporate Debtor. The average of the value determined by the two registered valuers shall be considered the fair value or the liquidation value.

Confidentiality Undertaking: The resolution professional shall provide the fair value and the liquidation value to every member of the committee in electronic form, on receiving an undertaking from the member to the effect that such member shall maintain confidentiality of the fair value and the liquidation value and shall not use such values to cause an undue gain or undue loss to itself or any other person.

6. Approval of Plan, Termination & Migration to CIRP

Base Resolution Plan & Promoter Equity Dilution

Corporate Debtor shall submit base resolution plan within two days of PIRP commencement date and RP must present the same to the CoC. CoC may consider base resolution plan or invite prospective resolution applicants. Corporate Debtor may file plan individually or jointly with any other person.

While considering the feasibility and viability of a resolution plan, where the resolution plan submitted by the corporate debtor provides for impairment of claim of operational creditors owed by the corporate debtor, the committee of creditors may require the promoters of the corporate debtor to dilute their shareholding or voting or control rights in the corporate debtor.

While the above stated dilution is preferable, the same is not mandatory. If plan does not provide for such dilution the CoC must record reasons for the same. Claims shall be considered to be impaired where the resolution plan does not provide for the full payment of the confirmed claims as per the updated list of claims maintained by the resolution professional.

Process for Prospective Resolution Applicants & Swiss Challenge

The resolution applicants submitting resolution plans pursuant to invitation, shall fulfil such criteria as may be laid down by the resolution professional with the approval of the committee of creditors, having regard to the complexity and scale of operations of the business of the corporate debtor.

The resolution plans and the base resolution plan, submitted under this section shall conform to the requirements referred to in sub-sections (1) and (2) of Section 30, and the provisions of sub-sections (1), (2) and (5) of Section 30 along with Section 29 shall, mutatis mutandis apply, to the proceedings under this Chapter.

Where CoC decides that the resolution plan is better than the base resolution plan, the same shall be subject to approval of CoC and Adjudicating Authority. The plan must be approved by requisite 66% voting. It is a mandate upon CoC to look into feasibility and viability, the manner of distribution proposed, taking into account the order of priority amongst creditors as laid down in sub-section (1) of Section 53, including the priority and value of the security interest of a secured creditor.

Performance Security & Compliance: The resolution professional shall require the resolution applicant, in case its resolution plan is approved under subsection (13) of Section 54K, to provide a performance security within the time specified therein and such performance security shall stand forfeited if the resolution applicant of such plan, after its approval by the Adjudicating Authority, fails to implement or contributes to the failure of implementation of that plan in accordance with the terms of the plan and its implementation schedule. The resolution plan must comply with Regulation 44 and Regulation 45 of PIRP Regulations.

Role of Adjudicating Authority (AA) While Approving Resolution Plan

  • The AA shall decide upon the resolution plan application within 30 days of receipt of resolution plan.
  • The AA must satisfy itself that the plan has effective provision for its effective implementation.
  • The order of approval under sub-section (1) shall have such effect as provided under sub-sections (1), (3) and (4) of Section 31, which shall, mutatis mutandis apply, to the proceedings under this Chapter.
  • Where the Adjudicating Authority is satisfied that the resolution plan does not conform to the requirements referred to in sub-section (1) of Section 54L, it may, within thirty days of the receipt of such resolution plan, by an order, reject the resolution plan and pass an order under Section 54N.
  • Where plan of Corporate Debtor is approved but affairs of the Corporate Debtor has been handed over to RP vide order of AA under Section 54J, AA is required to ensure that the management has been changed by way of plan to a person who was not promoter of the Corporate Debtor.

Termination of PIRP

Where the resolution plan selected for approval under sub-section (11) of Section 54K is not approved by the committee of creditors, the resolution professional shall file an application for termination of the pre-packaged insolvency resolution process.

The Adjudicating Authority shall, within thirty days of the date of such application, by an order: (i) terminate the pre-packaged insolvency resolution process; and (ii) provide for the manner of continuation of proceedings initiated for avoidance of transactions under Chapter III or proceedings initiated under Section 66 and Section 67A, if any.

Initiation of CIRP (Migration)

CoC may after the initiation of PIRP but before approval of resolution plan by a vote of not less than sixty-six per cent (66%) of the voting shares, resolve to initiate a corporate insolvency resolution process in respect of the corporate debtor, if eligible under Chapter II.

RP must intimate AA of the decision of CoC and AA must within 30 days pass an order to terminate PIRP, initiate CIRP against Corporate Debtor, and appoint IRP as under Section 54E(1)(b). The PIRP cost shall be made part of the CIRP cost. Initiation of CIRP shall be deemed to be an order of admission under Section 7/9/10 of the IB Code, 2016.

7. Statutory Schedule of Regulatory Forms under PIRP

Nature & Purpose of Filing Prescribed Form Number / Fee
Filing of Application before Adjudicating Authority Form-1 along with a fee of ₹ 15,000
Written consent of RP Form P1
List of Creditors Form P2
Approval of terms of appointment of RP Form P3
Approval for initiating PIRP Form P4
Authorised representative representing class of creditors Form P5
Declaration under Section 54A(2)(f) Form P6
Declaration under Section 54C(3)(c) Form P7
Report prepared by RP Form P8
Public Announcement Form P9
Corporate Debtor to submit list of claims Form P10
Brief particulars of resolution plan Form P11
Compliance Certificate Form P12
Application for termination of PIRP Form P13
Application for vesting management with Corporate Debtor Form P14

8. Conclusion: Pre-Packs as a Hybrid Reform for MSMEs

Pre-packs offer a middle way alternative, as a unique mechanism which seeks to combine benefits of informal workouts and legal recognition. Essentially, pre-packs are hybrid mechanisms allowing out-of-court resolutions to be recognised under insolvency law with appropriate safeguards for all stakeholders.

PIRP is more beneficial for eligible MSME vis-a-vis CIRP as the objective of maximisation of assets or revival of the Corporate Debtor was getting marred due to limited takers. The hurdle of disqualification under Section 29A of the IB Code, 2016 is relaxed by way of PIRP and therefore giving opportunity to the existing management to revive the Corporate Debtor.