Insolvency and Bankruptcy Code (Amendment) Bill 2021_00.1
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Insolvency and Bankruptcy Code (Amendment) Bill 2021

Relevance

  • GS Paper 2: Government policies and interventions for development in various sectors and issues arising out of their design and implementation
  • GS Paper 3: Indian Economy: Issues relating to planning, mobilization of resources, growth, development, and employment

Insolvency and Bankruptcy Code (Amendment) Bill 2021_40.1

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Context

  • Recently, the parliament has passed the Insolvency and Bankruptcy Code (Amendment) Bill 2021, replacing the Insolvency and Bankruptcy Code (Amendment) Ordinance 2021.
  • It amends the Insolvency and Bankruptcy Code, 2016. 
  • It has introduced ‘pre-packs as an insolvency resolution mechanism for Micro, Small, and Medium Enterprises (MSMEs).

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Pre-packaged insolvency resolution Process (PIRP)

  • Definition: PIRP is an alternate insolvency resolution process for Micro, Small, and Medium Enterprises (MSMEs) with defaults up to Rs 1 crore.
  • The pre-pack is merely an informal way of providing a corporate rescue plan for which approval from the National Company Law Tribunal (NCLT) will be sought.
  • The minimum default amount for initiating the PIRP is 1 lakh rupees which can further be increased up to Rs 1 crore by the central government.
  • Eligibility for debtor: PIRP may be initiated in the event of a default by a corporate debtor classified as an MSME under the MSME Development Act, 2006.
  • Initiation process: the corporate debtor himself is required to apply to the adjudicating NCLT who must approve or reject the application for PIRP within 14 days of its receipt.
  • Approval of creditors: Prior approval of 66% of creditors (who are not related to debtors) is to be taken by the debtors before submission of a resolution plan in the NCLT.
  • The debtor must also propose the name of the Resolution Professional (RP) who then must be approved by at least 66% of the financial creditors.
  • Moratorium: During PIRP, the debtor will be provided with a moratorium under which certain actions against the debtor will be prohibited.

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How it is different from the corporate insolvency resolution process (CIRP)?

  • Initiation: Unlike CIRP, PIRP may be initiated only by debtors. The debtor should have a base resolution plan in place.
  • Duration of resolution process: For PIRP, it is limited to a maximum of 120 days while in CIRP, it is 270 days. At the end of March 2021, 79% of the ongoing insolvency resolution proceedings had crossed the 270-day threshold.
  • Control: In CIRP, a resolution professional takes control of the debtor as a representative of financial creditors but in PIRP, the existing management retains control, ensuring minimal disruption of operations relative to a CIRP.
  • Initiation of CIRP: At any time from the PIRP commencement date but before the approval of the resolution plan, the committee of creditors may decide to terminate PIRP and instead initiate CIRP in respect of the debtor (by a vote of at least 66% of the voting shares).

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Advantages of PIRP

  • Quick resolution process, aimed to be completed within 120 days.
  • Offers a way for MSMEs to restructure their debts.
  • Reducing the workload of NCLT: by providing an alternate speedy mechanism CIRPs, for debt resolution.
  • Business-friendly: results in minimum disruption to businesses as control remains under existing management, unlike CIRPs where resolution professionals take over the control of the business.
  • Prevents job losses: Under PPIR, there is less probability of liquidation. Thereby ensuring continuity of business and resulting in fewer layoffs for workers.

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Associated challenges with the PIRP

  • Difficulty in meeting timeline: It is challenging for CoC (Committee of Creditors) and NCLT to complete the process within just 120 days (similar to the CIPR mechanism).
  • Issue with NPA status: firm can restructure its outstanding debt through a PIRP with the existing management retaining control. So, the NPA status of the company’s account with lenders may not be automatically upgraded under RBI guidelines.

Government of National Capital Territory of Delhi (Amendment) Act, 2021

 

Way forward

  • The amendment will benefit the small players and encourage time-bound resolution of stressed assets similar to the IBC model. However, further improvement and augmentation are necessary for its success.
  • The government should increase the manpower of NCLT and set up regional centers to ensure easy access to the resolution mechanism and timely completion of the resolution process.
  • The introduction of PIRP is a step in the right direction. Its scope and coverage must be widened to ensure optimum benefits to businesses and the Indian economy.

 

Prelims Specific Articles- 30 July 2021

 

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