Insolvency and Bankruptcy Code (Amendmen

Q. Why is this in News?

A. Recently, the government introduced the Insolvency and Bankruptcy Code (Amendment Bill), 2021 in the Lok Sabha.

• The Bill is set to replace the Insolvency and Bankruptcy Code Amendment Ordinance 2021 promulgated in April 2021.
  
  • It introduced an alternate insolvency resolution process for Micro, Small and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore called the Pre-packaged Insolvency Resolution Process (PIRP).
• In March 2021 a sub-committee of the Insolvency Law Committee (ILC) recommended a pre-pack framework within the basic structure of the Insolvency and Bankruptcy Code (IBC), 2016.

Q. What is Insolvency and Bankruptcy Code?

A. 

• It is a reform enacted in 2016. It amalgamates various laws relating to the insolvency resolution of business firms.
• It lays down clear-cut and faster insolvency proceedings to help creditors, such as banks, recover dues and prevent bad loans, a key drag on the economy.

Q. What are its Major Provisions?
A. 

• Distressed Corporate Debtors (CDs) are permitted to initiate a PIRP with the approval of two-thirds of their creditors to resolve their outstanding debt under the new mechanism.
• The PIRP also allows for a Swiss challenge to the resolution plan submitted by a CD in case operational creditors are not paid 100 % of their outstanding dues.
  
  • A Swiss Challenge is a method of bidding, often used in public projects, in which an interested party initiates a proposal for a contract or the bid for a project.

Q. What is Pre-packaged Insolvency Resolution Process (PIRP)?
A. 

• A pre-pack is the resolution of the debt of a distressed company through an agreement between secured creditors and investors instead of a public bidding process.
  
  • This system of insolvency proceedings has become an increasingly popular mechanism for insolvency resolution in the UK and Europe over the past decade.
  • Pre-packs are largely aimed at providing MSMEs with an opportunity to restructure their liabilities and start with a clean slate while still providing adequate protections so that the system is not misused by firms to avoid making payments to creditors.
  • Unlike in the case of Corporate Insolvency Resolution Process (CIRP), debtors remain in control of their distressed firm during the PIRP.
  • Under the pre-pack system, financial creditors will agree to terms with a potential investor and seek approval of the resolution plan from the National Company Law Tribunal (NCLT).

Q. What are the need of Pre-Packs?
A. 

• CIRP is a time taking resolution. At the end of December 2020, over 86% of the 1717 ongoing insolvency resolution proceedings had crossed the 270-day threshold.
  
  • Under the IBC, stakeholders are required to complete the CIRP within 330 days of the initiation of insolvency proceedings.
  • One of the key reasons behind delays in the CIRPs are prolonged litigations by erstwhile promoters and potential bidders.

Q. What are the Key Features of Pre-Packs?

A. 

• Insolvency Practitioner:
  
  • Pre-Pack usually requires services of an insolvency practitioner to assist the stakeholders in the conduct of the process.
  • The extent of authority of the practitioner varies across jurisdictions.
  • Consensual Process:
    
    • It envisages a consensual process - prior understanding among or approval by stakeholders about the course of action to address stress of a CD, before invoking the formal part of the process.
  • No requirement of Court Approval:
    
    • It does not always require approval of a court. Wherever it requires approval, the courts often get guided by commercial wisdom of the parties.
    • Outcome of the pre-pack process, where approved by the court, is binding on all stakeholders.

Q. What are the Benefits of pre-packs?
A. 

• Quick resolution:
  
  • It is limited to a maximum of 120 days with only 90 days available to the stakeholders to bring the resolution plan to the NCLT.
  • Besides offering a way for MSMEs to restructure their debts, the pre-pack scheme could also reduce the burden on benches of the NCLT by offering a faster resolution mechanism than ordinary CIRPs.
  • Minimises Disruptions to the Business:
    
    • Existing management retains control in the case of pre-packs rather than resolution professionals in CIRP, hence avoids the cost of disruption of business and continues to retain employees, suppliers, customers, and investors.
  • Addresses the entire liability side:
    
    • PIRP will help CD to enter into consensual restructuring with lenders and address the entire liability side of the company.