What is Pre Pack Insolvency and Its Process?

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What is Pre Pack Insolvency Process?

Highlighting the significance of Micro, Small & Medium Enterprises (MSMEs) in terms of their contribution towards employment and Gross Domestic Product of the country, pre-packaged insolvency resolution process (PPIRP) has been introduced specifically to cater to the MSME sector with the following intendment, as provided in the Ordinance vide Notification dated 09.04.2021:

“it is considered expedient to provide an efficient alternative insolvency resolution process for corporate persons classified as MSMEs under the IBC, ensuring quicker, cost-effective and value maximizing outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their businesses and which preserves jobs."

Pre-pack is considered as 'Debtor-in-possession and creditor-in-control' model of resolution, which ultimately has the benefits and structure of formal insolvency proceedings. It entails keeping the promoters in possession of the Corporate Debtor (CD), who can continue to run it as a going concern, thereby ensuring minimal disruptions in the business activities and preservation of jobs. It further aims at providing the honest debtors a second chance to retain their enterprises by entering into an arrangement with their lenders. It also provides numerous powers to the creditors to direct and control the process.

Initiation of PPIRP

The pre pack insolvency shall be initiated by a borrower (Corporate Debtor) classified as MSME after obtaining an approval from its financial creditors representing not less than sixty-six per cent in value of the financial debt due to such creditors.

Eligibility

Apart from being an MSME, the CD must fulfil the following conditions in terms of the code and Pre-Pack regulations to initiate PPIRP:

1. A default of an amount ranging from Rs 10 lakhs to Rs 1 crore.
2. The CD must not have undergone PPIRP or CIRP during the 3 years immediately preceding the date of initiation of PPIRP.
3. The CD must not be undergoing CIRP.
4. The CD must be eligible to submit a Resolution Plan under section 29A.
5. CD must make a declaration in Form P6 that CD shall file an application for initiating PPIRP within a definite period not exceeding 90 days and, the same is not being initiated to defraud any person; the form should include the name of IP proposed to be appointed as RP.
6. CD, along with an application must furnish the declaration in special resolution or resolution with the approvals of FCs for initiating PPIRP, the name and written consent of IP proposed to be appointed as RP is to be mentioned in Form P1, including information relating to books of account of CD.
7. CD also must make a declaration regarding the existence of transactions in respect of avoidance or fraudulent or wrongful trading in Form P7.

Approval of Financial Creditors (FCs)

For the approvals of FCs, the CD shall convene a meeting of unrelated FC and enclose the list of creditors along with the amounts due to them in Form P2 with the notice of meeting and seek approval from 66 per cent of its unrelated FCs (where the CD has no financial debt or when all FCs are related parties, the applicant shall convene a meeting of unrelated operational creditors) for the following purpose:

• Proposal of names of Insolvency Professionals (IPs) to be appointed as RP to conduct PPIRP
• Approval of terms of appointment of resolution professional shall be in Form P3
• Approval for filing of application for initiating PPIRP shall be in Form P4

Without any of the above approvals, the relevant adjudicating authority will not admit the company into PPIRP.

Duties of Insolvency Professional (IP)

The IP, proposed to be appointed as RP, shall have the following duties before the commencement of the PPIRP:

1. Prepare a report in Form P8 confirming that the CD is eligible and meets the requirements of section 54A
2. File such report and other documents with IBBI
3. Ascertain class(es) of creditors by examining Form P2 (a list of creditors given with the notice of meeting to FCs)
4. Obtain the consent of IPs to act as authorised representative (AR) of creditors in the class in Form P5.
5. Select the IP, who is the choice of the highest number of creditors in the class to act as AR of creditors of the respective class.
6. Inform the name of the IP to the applicant, along with his consent in Form P5.

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How PPIRP Works ?

The Adjudicating Authority (AA) shall admit or reject the application within 14 days of the receipt of the application. The AA shall declare a moratorium as referred to in Section 14 and appoint a RP as named in the application, on the pre-packaged insolvency commencement date (PPICD), along with the order of admission. PPIRP shall be completed within a period of 120 days from the commencement date and RP shall submit the resolution plan as approved by the CoC within 90 days from the pre-packaged insolvency commencement date. If no resolution plan has been approved by CoC within the specified time, RP shall file an application with AA for termination on the day after the expiry of specified time period.

Tasks to be undertaken by Corporate Debtor (CD) after the commencement of PPIRP:

The CD shall submit the following information to the RP in such form and manner as specified:

• A detailed list of claims along with their security interests and guarantees, if any in form P10 within 2 days of PPICD
• Preliminary Information Memorandum (IM) containing information of the CD for preparation of a Resolution Plan
• Base Resolution Plan (BRP) prepared by CD in consultation with CoC, has to be submitted to the RP within 2 days of PPICD, who shall then place it before CoC.

Tasks to be undertaken by Resolution Professional (RP) after the commencement of PPIRP:

• RP shall make a public announcement in Form P9 within 2 days of PPICD and send it to every creditor listed in Form P2, send to information utilities (IUs), and publish it on the website of the CD and the Board.
• RP shall confirm the list of claims received in Form P10
• Maintain a list of claims and update it as and when required
• RP to file Form P10 with the Board on electronic platform and display it on the website of CD
• Constitute the CoC and convene and attend all its meetings
• Prepare the IM on the basis of preliminary information memorandums submitted by CD
• RP may call for information related to operations of CD, including payments made
• Visit premise(s) of CD & inspect the assets of the CD
• Call for information relating to the compliances applicable to CD and its status
• Ask for details relating to litigation initiated by or against CD
• Ask details for ascertaining the conduct of CD during the process

Base Resolution Plan (BRP)

Upon consideration of the BRP by CoC, either of the following two scenarios may emerge as per Section 54K of the Code and Regulation 43 of Pre-Pack Regulation:

1. Approval of Base Resolution Plan: If the BRP confirms to the requirements of Section 30 and does not impair the claims owed by CD to the Operational Creditors (OCs), the CoC may approve the BRP
2. Rejection of Base Resolution Plan and the Swiss Challenge: If the CoC does not approve the BRP or if the Base Resolution Plan impairs any claims owed to OCs, the RP shall invite independent Prospective Resolution Applicants (PRAs) in Form P11 to submit Resolution Plan(s), which shall then compete with the Base Resolution Plan of the CD.
3. In the ‘Invitation of Resolution Plan(s)’ RP shall include the basis for evaluation, basis for considering a resolution plan better than another resolution plan, tick size and the manner of improving a resolution plan.

[“tick size” means minimum improvement over another resolution plan in terms of score, as approved by committee and disclosed in the invitation for resolution plans]

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RP shall present the resolution plan(s) to the CoC for its evaluation

CoC shall evaluate the same and select a resolution plan from amongst the same. The Resolution Plan selected by the CoC shall then compete with the BRP.

The CoC shall compare and score the selected Resolution Plan and the BRP based on the criteria given in the ‘Invitation for resolution Plans’ as per Regulation 48 of Pre -Pack Regulations, upon which either of the following situations may emerge:

1. If the score of the selected resolution plan is significantly better than BRP, then it may be selected for approval
2. If no resolution plan is received or the ones which are received do not confirm to the requirements of the code and the Regulations, the BRP may be considered for approval by CoC.
3. In any other case, the RP shall disclose the scores to the submitters of the resolution plan(s) – the CD and the PRAs and invite them to improve upon their Resolution Plans

The submitter with a lower score shall be given an opportunity to improve its Plan by at least a tick size, as stated in the 'Invitation for Resolution Plans'. Thereafter, the other submitter of the Resolution Plan, shall be given the same opportunity.

The said process shall continue between the two submitters till either of them fails to exercise the option within the time specified in the 'Invitation for Resolution Plans'.

The entire process shall be completed within 48 hours and the Resolution Plan which ultimately has a higher score, shall be considered for approval by CoC.

In case BRP is approved in the first go, RP may move an application before AA. In another case, if PRAs are invited and a resolution plan is approved by CoC after the entire process of competition/ swiss challenge, the RP may move an application with AA along with a compliance certificate in Form P12. AA shall then approve the resolution plan within 30 days of its receipt.

If no resolution is approved by the committee or where the committee has approved the termination of process, RP shall file an application in Form P13 to AA for termination of process.

Swiss Challenge Method to Get Best Possible Resolution Plan

A ‘Swiss challenge’ is a method where a bid is published, and third parties are invited to match or better it. This system has been specifically provided in PPIRP regulations.

A Swiss challenge is a method of bidding, in which an interested party initiates a proposal for a contract or the bid for a project. The details of the project are out in the public and invites proposals from others interested in executing it. On the receipt of these bids, the original contractor gets an opportunity to match the best bid.

Monthly Reporting

The CD in consultation with the RP shall prepare a monthly report and forward it to the members of CoC with the following details:

1. a) Details of legal proceedings having a material impact on the business of the CD
2. b) Details of key contracts executed during the reporting period and
3. c) Any other relevant matter(s) that may have a material impact on the business of CD

PPIRP vis-a-vis CIRP

The most significant feature of the Pre-pack scheme is that it allows the management of the affairs of the corporate debtor to continue to vest in the Board of Directors or the partners of the corporate debtor, subject to conditions specified, unlike in the CIRP where the resolution professional gets to run the affairs with guidance from financial creditors. If creditors want to initiate bankruptcy proceedings against MSMEs, they can still do so but only through the CIRP.

Pre-pack resolution plans have to be submitted in only 90 days and the NCLT will have another 30 days to approve them. Thus, the pre-packaged insolvency resolution process shall be completed within a period of one hundred and twenty days from the pre-packaged insolvency commencement date.

The IBC currently stipulates a maximum of 270 days for the completion of the entire CIRP. Given that MSMEs have limited wherewithal to go through a long and rigorous insolvency process, the reduction in the time-limit for resolution comes as a blessing for insolvent MSME's. Pre Pack Insolvency resolution plan allows creditors and debtors to work on an informal plan and then submit to Adjudicating Authority (AA) for approval. Thus, flexibility is available in initial stages.

Order of Priority

If an application for PPIRP is filed within 14 days of the CIRP filing or before the CIRP filing all together, the court is required to give priority to the PPRIP application. However, If a CIRP process is already pending against a corporate debtor and 14 days have passed since the CIRP application was filed, the courts are required to deal with the CIRP application first.

How can Operational Creditors (Ocs) Benefit From Pre Pack Insolvency Resolution Process

The power dynamics in the PIRP has shifted from a pre-dominantly creditor-in-control model to a debtor-in-control model.

Although section 54K read with section 21(2) under IBC says that the power vests with the CoC to approve the resolution plan. But section 54K(4) further says that, “the CoC may approve the base plan if it does not impair the dues of the operational creditors”.

Under the section 54k of the PIRP, there are two scenarios which arise in the base resolution plan, 1) where the operational creditors are getting their complete due, 2) or where the operational creditors are not getting their complete dues. In the first scenario it is optional for the COC to go for a Swiss challenge i.e., inviting third party resolution applicants similar to CIRP proceedings but in case of the 2nd scenario the COC has to compulsorily go for a Swiss Challenge, thereby introducing an element of competition to maximize plan value.

It is worth noting that the dues of the OCs has been given an equal treatment with that of FCs, especially in the debtor-in-control model of PPIRP.

About Ancoraa

Ancoraa Resolution is a financial services firm focussed on debt resolution and financial restructuring. Ancoraa Resolution helps suppliers file the insolvency applications and get their dues faster by leveraging its technology platform and speeding up the recovery process. With over 35 licensed Insolvency Professionals located across 14 cities in India, Ancoraa Resolution ensures that you are equipped to take speedy action in matters of insolvency, debt resolution and liquidation.

Ancoraa’s flagship technology, the Rezolution Engine® – is India’s first and only ‘Resolution-as-a-Service’ platform providing a collaborative digital avenue to run the entire resolution process in compliance with the Insolvency & Bankruptcy Code of India. Whether you are a supplier, a homebuyer, a bank or a personal guarantor, Rezolution Engine® enables anyone to initiate an insolvency application and allows all the participants to get a single point of view to the insolvency and bankruptcy proceedings, while maintaining compliance and governance throughout the process.

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