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Decoding Pre-packaged Insolvency Resolution Process (PIRP) : CS Pooja Ojha
About The Author
CS. POOJA OJHA
PRACTICING COMPANY SECRETARY
LLB, PGDBA, DSL
THE INSOLVENCY AND BANKRUPTCY CODE (AMENDMENT) ORDINANCE, 2021
PRE-PACKAGED INSOLVENCY RESOLUTION PROCESS
Decoding the Pre-Packaged Insolvency Resolution Process through
With a glimpse of SWISS CHALLENGE under Pre-Packaged Insolvency Resolution Process
- What is a Pre Packaged Insolvency Resolution Process (PIRP)?
A Pre-Packaged Insolvency Resolution Process (PRIP) is a resolution process for corporate persons classified as micro, small and medium enterprise sand has committed a default of Rs. 10 Lakh or more.
- Is Pre Packaged Insolvency Resolution Process (PIRP) similar to Corporate Insolvency Resolution Process (CIRP)?
PIRP comparative to CIRP is a quicker, cost-effective Insolvency regime than the CIRP which also ensures value maximizing outcomes for all the stakeholders in a manner which is less disruptive to the continuity of their businesses and which preserves jobs also.
- Who is eligible for PIRP?
ACorporate Debtor (CD) classified as a micro, small ormedium enterprise (MSME) under Section 7 (1) ofthe Micro, Small and Medium Enterprises DevelopmentAct, 2006 is eligible for PIRP.
- From which date is PIRP made applicable?
Provisions of PIRP are made applicable form the date of promulgating the Ordinance by the President, i.e.from 04/04/2021.
- Why there is a need of PIRP?
The suspension for filing of applications for initiation of CIRP for minimum amount of default of Rs. 1 Crores and above has ended on 24th March 2021 and thereafter, the Insolvency Process of Corporate Persons for default of Rs. 1 Lakh and above shall be in place.
As such, in order to provide an efficient alternative insolvency resolution process to MSME which are considered critical for India’s economy for their contribution to gross domestic product and provide employment to a sizable population, a PIRP for corporate persons classified as micro, small and medium enterprises has been introduced.
- What is the minimum amount of default for invoking PIRP
The minimum amount of default for invoking PIRP is Rs. 10 Lakhs.
- Who is required to make application to Hon’ble Adjudicating Authority, National Company Law Tribunal (NCLT)for invoking PIRP?
A CD classified as an MSME under the Micro, Small and Medium Enterprises Development Act, 2006 and which has committed a default of Rs. 10 Lakhs and above can make an application to the Hon’ble Adjudicating Authority, NCLT for invoking PIRP.
- Which CD qualifies to make an application for initiating PIRP?
A CD which has the below requisites can make an application for PIRP:
- The CD must be a registered MSME.
- The CD has committed a default of Rs. 10 Lakh or above.
- The CD must not have not undergone PIRP or completed CIRP, as the casemay be, during the period of three years preceding the initiation date.
- It is not undergoing any CIRP.
- No Order for Liquidation u/s 33 of the Code has been passed.
- It is eligible to submit a resolution plan undersection 29A.
- What are the pre-requisites for making an application for PIRP:
- A special resolution or resolution by at least 3/4th of the total number of partners, as the case may be, have been passed by the CD approving for filing of an application for initiating PIRP.
- The CD has obtained approval of the Financial Creditors, not being related parties, representing 66% of the financial debt value for filing application initiating PIRP.
- The Financial Creditors, not being related parties, have proposed name of Insolvency Professional to be appointed as Resolution Professional (RP) for conducting PIRP and Financial Creditors, not being related parties, representing 66% of the financial debt value have approved the name of IP and proposal of initiating PIRP.
- A Declaration by the majority of Directors or Partners that:
- They shall file an application for PIRP within a definite time period not exceeding 90 days;
- That the PIRP is not being initiated to defraud any person;
- Name of the IP proposed to be appointed as RP
- The CD to provide to the Financial Creditors a base resolution plan which conforms to the requirements as specified, declaration and special resolution/ resolution, prior to seeking approval from Financial Creditors.
- What are the specific details required to be furnished by the CDalong with application for PIRP?
- Declaration by the majority of Directors/ Partners.
- Special Resolution/ Resolution, as the case may be.
- Name and consent of IP proposed to be appointed as RP
- Report of the IP proposed to be appointed as RP confirming that the CD meets the requirement for making an application to initiate PIRP and also that the base resolution plan proposed by the CD conforms with the requirements as specified in Section 30(1) & (2) of the Code.
- Declaration by the applicant with respect to existence of any avoidance oftransactions under Chapter III or fraudulent or wrongful trading under Chapter VI, in such form as specified in the regulations.
- information relating to books of account of the CD and such other documents relating to such period as may be specified., i.e.
- audited financial statements of the CD for the last two financial years;
- provisional financial statements for the current financial year made up to the date of declaration and
- Consent to act as authorised representative in Form P5, if any.
- What if an application u/s 7 or 9 or 10 is already pending with the Hon’ble Adjudicating Authority, NCLT?
- Where an application for PIRP (u/s 54C) is filed, the Adjudicating Authority, NCLT, shall pass an Order to admit or reject such application before considering any application u/s 7 or 9 or 10.
- Where an application for PIRP u/s 54C is filed within 14 days of application u/s 7 or 9 or 10, the Adjudicating Authority, NCLT shall first consider disposing of application u/s 54C, i.e for PIRP.
- Where an application for PIRP u/s 54C is filed after 14 days of application u/s 7 or 9 or 10, the Adjudicating Authority, NCLT shall first consider disposing of application u/s 7 or 9 or 10.
- Where an application under section 7 or 9 or 10 is filed and is pending as on the date of the commencement of the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, they shall be dealt according to those provisions and not as per the Ordinance for PIRP.
- Whether consent of Insolvency Professional is required to be given along with the application to the Hon’ble NCLT for initiating PIRP?
Yes, consent of the Insolvency Professional to act as RP upon Order of the Hon’ble NCLT admitting PIRP is mandatory to be given along with the Application.
- What is the time limit for completion of PIRP?
The PIRP must be completed within a period of 120 days from the commencement of PIRP.
- Whether any extension of period of PIRP beyond 120 days is available?
Presently, the Code don’t envisage any extension for PIRP.
- Whether Public Announcement of initiation of PIRP is required to be made?
Yes, public announcement shall be made within two days of the commencement of the PIRPand be published at the website of the IBBI, website of the CD, if any and to Information Utility. (The Ordinance doesn’t envisage public announcement in newspapers.)
- When shall the RP Constitute Committee of Creditors?
The RP shall constitute a Committee of Creditors (CoC) based on the list of claims submitted by the CD and confirmed by him within 7 days of the commencement of PIRP.
- Who shall prepare the list of Claims?
The CD shall submit to the RP a list of claims along with details of the respective creditors, their security interests and guarantees, if any within 2 days of commencement of PIRP and the RP shall confirm the list of claims submitted by the CD and keep updating the list of claims.
- What if there are no Financial Creditors or all the Financial Creditors are related parties?
Where the CD has no financial debt or where all financial creditors are related parties, the CoC shall consist of those Operational Creditors(OC) which are not related to the CD.
- What is a preliminary Information Memorandum?
A preliminary information memorandums an information memorandum prepared by the CD and submitted to the RP which shall contain all such information relevant for formulating a resolution plan.
- What is an Information Memorandum and who shall prepare it?
An information memorandum is prepared by the RP based on the preliminary information memorandum submitted by the CD. The RP may include any other relevant information as may be required to be included in the Information Memorandum for formulating a Resolution Plan.
- Whether Valuation of the assets of the CD is required to be obtained in PIRP?
Yes, Valuation of the assets of the CD is required to be obtained during PIPR. The RP shall within 3 days of his appointment, appoint two registered valuers to determine the fair value and the liquidation value of the CD.
- Who shall manage the CD while the Company is under PIRP?
The Board of Directors or the partners, as the case may be, of the CD shall continue to manage the affairs of the CD during PIRP.
- What are the circumstances where the management of CD vests in RP?
Under the below two circumstances, the management of the CD can be taken away from the existing Directors or partners and be vested in RP:
- Where the affairs of the CD have been conducted in a fraudulent manner or
- Where there has been gross mismanagement of the affairs of the CD
- What is the procedure for vesting of the management of CD in RP?
- The Locoweeds to resolve by 66% of voting rights to vests the management in the RP.
- The RP then has to make an application to NCLT and the NCLT may pass an order for vesting the management of the CD with the RP.
- What are the duties of RP in PIRP?
The Insolvency Professional proposed to be appointed as RP shall be envisaging two sort of duties, as below:
1.Before admission of PIRP
The IP proposed to be appointed as RP shall after approval of the Financial Creditors for appointment of IP as RP and till the time of admission into PIRP observes the following duties:
- prepare a report confirming that whether the CD meets the requirements of making an application for initiating PIRP and the base resolution plan conforms to the requirements conforms with the requirements as specified in Section 30(1) & (2) of the Code.
- file such reports and other documents, with the Board, as may be specified and
- perform such other duties as may be specified.
2.After admission of PIRP:
The RP shall after approval of the Hon’ble NCLT for admission of the into PIRP observes the following duties:
- Confirm the list of claims submitted by the CD
- inform creditors regarding their claims as confirmed
- maintain an updated list of claims
- monitor management of the affairs of the CD
- inform the CoC in the event of breach of any of the obligations of the Board of Directors or partners, as the case may be.
- Constitute the CoC and convene and attend all its meetings;
- Prepare the information memorandum on the basis of the preliminary information memorandum submitted by the CD
- file applications for avoidance of transactions under Chapter III or fraudulent or wrongful trading under Chapter VI
- any other duties as may be specified.
- Whether any remedy is envisaged for any non-cooperation to the RP in PIRP?
Yes, where the personnel of the CD, its promoters and any other person associated with the management of the CD don’t extend assistance and cooperation to the RP,the RP can make application for non-cooperation as envisaged under section 19(2) of the Code.
- Whether Insolvency Professional is appointed as Interim Resolution professional or Resolution Professional?
The Insolvency Professional is proposed by the Financial Creditors of not less than 10% of the total financial debt and approved by the Financial Creditors representing 66% of the total financial debt.Hence, Interim Resolution Professional is not envisaged under PIRP (Chapter IIIA).
- What is the basis for deciding the fees payable to the RP?
The fees payable to RP is required to be structured for the below three scenarios:
- Fee payable to the RP for performing duties under prior to an Order passed by the NCLT for admitting PIRP and after approval of the financial Creditors for appointment of RP.
- Fee payable to the RP and expenses to be incurred by him for conducting the process of PIRP.
- Fee payable to the RP and expenses to be incurred by him in case management of the CD is vested with the RP.
- What is a base Resolution Plan?
Base Resolution Plan is a plan provided by the CD to the Financial Creditors before taking approval for making application for initiation of PIRP.
The Base Resolution Plan may be submitted by the CD individually or jointly with any other person.
- When shall the base Resolution Plan be submitted to the CoC?
The CD shall within 2 days of commencement of PIRP shall submit the base resolution plan to the RP and the RP shall present the base Resolution plan to the CoC.
- What are the contents for base Resolution Plan?
All such provisions as envisaged u/s 30(1)& (2) of the Code must be adhered in base resolution plan.
- Whether the CoC can invite other Prospective Resolution Applicant to submit a Resolution Plan?
Yes, the CoC can invite other Prospective Resolution Applicant to submit a Resolution Plan however, it has to give an opportunity to the CD to revise its base Resolution plan before such invitation for Resolution Plan.
- When can the other Prospective Resolution Applicant be invited to submit a Resolution Plan?
- Where the CoC doesn’t approve the Base Resolution Plan or
- The Base Resolution Plan impairs any of the claims of the Operational Creditor, the RP shall invite prospective resolution applicants to submit a resolution plan or plans, to compete with the base resolution plan.
- What is meaning of impairment of claims of Operational Creditors?
Claims are considered tobe impaired where the resolution plan does notprovide for the full payment of the confirmed claimsas per the updated list of claims maintained by theRP.
- What if the base resolution plan submitted by the CD is not accepted by the CoC?
Where the Base Resolution Plan submitted by the CD is not approved by the CoC, the RP shall invite prospective Resolution Applicant (PRA) to submit a Resolution Plan to compete with the Base Resolution Plan.
- What are the pre-requisites to approve a base resolution plan submitted by the CD?
In addition to adhering the provisions u/s 30(1)&(2) of the Code the base resolution plan submitted by the CD should not impair any claims of the operational creditors.
- Whether any specific criteria and/ or conditions can be laid down for inviting Resolution Plans?
The RP shall, in consultation with the CoC, lay down such specific criteria, terms and conditions considering the complexity and scale of operations of the business of the CD,to be fulfilled by the PRA for submitting a resolution plan.
- Whether public announcement is required to be made for Invitation for resolution plans?
Yes, public announcement for inviting resolution plans is to be made by the RP in respective form, at website of CD, website of the IBBI and in any other manner as may be decided by CoC. (The Ordinance doesn’t envisage public announcement in newspapers.)
- What is the limit for approval for a resolution plan?
The resolution plan or the base resolution plan may be approved by the CoC by a vote of not less than 66% of the voting shares, after considering its feasibility and viability, the manner of distribution proposed, as per the order of priority as laid down in section 53(1), including the priority and value of the security interest of a secured creditor and such other requirements as may be specified.
- What if neither base resolution plan nor resolution plan provided by the PRA’s, any of them is approved by the CoC?
Where the base resolution plan or the resolution plan provided by the PRA, both is not approved by the CoC, then the RP shall apply to the NCLT for termination of PIRP.
- Under what circumstances the PIRP comes to an end?
- Where No Resolution plan is approved by the CoC;
- The specified time limit of 90 days for submission of CoC approved resolution plan to Hon’ble NCLT is expired;
- Where After commencement PIRP and before approval of any resolution plan, COC by a vote of 66% voting share, decides to terminate PIRP.
- What is the consequence of termination of PIRP
The Hon’ble NCLT shall upon application made by RP for termination of PIRP shall Order for Liquidation of the CD
- Whether CIRP can be initiated where the CD is under PIRP?
Where the CoC, any time after commencement of PIRP and before approval of any Resolution Plan, approves by 66% of voting share to initiate CIRP, RP shall make an application for initiation of CIRP.
- What are the tentative steps in considering any resolution plan under PIRP?
Tentative Steps in considering a resolution plan under PIRP:
- Base Resolution Plan is submitted by the CD.
- CoC may provide an opportunity to the CD to revise the Base Resolution Plan.
- CoC may approve the Base Resolution Plan if it doesn’t impairs any claims of the Operational Creditors.
- CoC may invite PRA to submit resolution plan if the Base Resolution Plan is not approved by the CoC or if the base resolution plan impairs any of the claims of OC.
- Before invitation to any PRA to submit Resolution Plan, CoC may provide an opportunity to the CD to revise the Base Resolution Plan.
- If the Resolution Plan submitted by the PRA is significantly better than the Base Resolution Plan, the CoC may approve Resolution Plan submitted by the PRA
- If the Resolution Plan submitted by the PRA is not considered for approval or doesn’t fulfil the criteria laid down by the CoC, the COC may consider any one of the Base Resolution Plan or the Resolution Plan for approval.
- The PRA may be required to compete with the Base Resolution Plan.
- The resolution plan and base resolution plan shall compete with one another as per the criteria and subject to such conditions as may be specified by the CoC.
- The CoC may consider any of the base Resolution Plan or the Resolution Plan submitted by the PRA for its approval.
- Where the Revised Resolution Plan provided by the CD impairs any of the claims of the OC then the CoC may require promoters of the CD to dilute their shareholding or voting or control rights in the CD.
- Where the resolution plan submitted by the CD does not provide for such dilution, the CoC shall, prior to the approval of such resolution plan record reasons for its approval.
TIMELINE FOR MAJOR EVENTS UNDER PIRP
||Submission of Base Resolution Plan by CD to RP
||Within 2 days of commencement of PIRP
||Submission of List of Claims by CD to RP
||Within 2 days of commencement of PIRP
||Submission of Preliminary Information Memorandum by CD to RP
||Within 2 days of commencement of PIRP
||Public announcement for commencement of PIRP
||within 2 days of commencement of PIRP.
||Appointment of valuers
||within 3 days of commencement of PIRP
||Constitutionof Committee of Creditors
||within 7 days of commencement of PIRP
||First meeting of CoC
||within 7 days of constitution of CoC
||Submission of IM to CoC by RP
||Within 14 days of commencement of PIRP
||Invitation for submission of Resolution Plan
||Within 21 days of commencement of PIRP
||Submission of Resolution Plan by PRA
||Within 15 days from date of issue of invitation for resolution plan
||Opinion on transactions u/s 43, 45, 50 or 66 by RP
||Within 30 days of commencement of PIRP
||Determination of transactions u/s 43, 45, 50 or 66 by RP
||Within 54 days of commencement of PIRP
||Application to NCLT for relief of transactions u/s 43, 45, 50 or 66.
||Within 60 days of commencement of PIRP
||Submission of CoC approved Resolution Plan
||within 90 days of commencement of PIRP
||Approval/ rejection of Resolution Plan by NCLT
||within 30 days of receipt of CoCapplication for approval of resolution plan or otherwise
||Completion of PIRP
||within 120 days of commencement of PIRP
- What is a Swiss Challenge?
A Swiss challenge is a form of public procurement operated in some jurisdictions, which requires a public authority (usually an agency of government) which has received an unsolicited bid for a public project (such as a port, road or railway), or for services to be provided to government, to publish the bid and invite third parties to match or better it.
Some Swiss challenges also allow the entity which submitted the unsolicited bid itself then to match or better the best bid which comes out of the Swiss challenge process. Indian journalist Vinayak Chatterjee describes it as “one of the lesser known and even lesser-used methods of public procurement for core and social infrastructure projects”.
- How does the system of Swiss Challenge works?
A Swiss Challenge System is a bidding process designed to elicit private sector initiative in core sector projects. It’s an offer made by the original proponent to the government ensuring their process to be the best (in terms of effectiveness including both the factors cost and time) by its initiative as a result of their own innovative approach or on the demand of the government to perform certain task.
- Why is it called a Swiss Challenge?
The term “Swiss Challenge” was coined to compare a government’s impartiality in awarding contracts to the private sector to Switzerland’s neutrality during the World Wars 1 and 2.
Though there is no authoritative source of information, it is opined that this model is named “Swiss Challenge Model”, perhaps since “neutrality” was the central piece of Swiss national policy during the two world wars and the model relies on neutrality or the absence of bias between the project proponent (the original project proposer) and the challenging bidders (the counter project proposers).
- How is Swiss Challenge connected to PIRP?
The sub-committee of the Insolvency Law Committee on Pre-packaged Insolvency Resolution Process noted that swiss challenge is a time-tested mechanism and has proven to be highly effective in value maximisation and ensuring transparency of the process and proposed ways and options for successful resolution of the Corporate Debtor.
The sub-committee then recommended that the pre-pack should offer two optional approaches, namely,
- without swiss challenge but no impairment to Operational Creditors (OC’s), and
- with swiss challenge with rights of OC’s and dissenting FC’s subject to minimum provided u/s 30 of the Code.
- How is Swiss Challenge envisaged in PIRP?
- The pre-pack starts with a Base Resolution Plan.
- Where the Committee of Creditors (CoC) is not satisfied with the Base Resolution Plan or the Base Resolution Plan impairs claims of Corporate Debtor (CD), the CoC shall invite the Prospective Resolution Applicant (PRA) to submit a resolution plan after giving an opportunity to the CD to revise its base resolution plan.
- Where the resolution plan submitted by the PRA is significantly better than the base resolution plan, the CoC may approve the resolution plan submitted by the PRA.
- Where the CoC is not satisfied with the resolution plan submitted by the PRA, it may ask the PRA to compete with the Base Resolution Plan submitted by the CD.
- Where the CoC is not satisfied with the Base Resolution Plan submitted by the CD, it may ask the CD to compete with the Resolution Plan submitted by the PRA.
- The process shall go on till the CoC approves one of the Resolution Plan.
Source: Wikipedia, business-standard.com
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