Insolvency And Bankruptcy Code (Amendment) Bill, 2021 Passes In Rajya Sabha: Here Are The Key Highlights

The Rajya Sabha passed the amendment to the Insolvency and Bankruptcy Code (IBC), 2016 targeted towards simplification of insolvency procedure for micro, small and medium enterprises (MSMEs). This follows the repeal of the same ordinance which was promulgated in April earlier this year.

The highlights of the bill are

1. Introduction of Pre-Package Insolvency Resolution Process

The new bill introduces Pre-package Insolvency Resolution Process (PIRP) apart from the Corporate Insolvency Resolution Process (CIRP). For this purpose, the bill inserts a whole new chapter (III A) into IBC. PIRP is where the corporate debtor himself comes up with a base resolution plan which can be approved by the adjudicating authority subject to the approval of the board of creditors. PIRP can be initiated only by the corporate debtor himself, unlike CIRP, which can be initiated by either the corporate debtor or creditors.

2. Threshold Default Amount set to Rs 1 crore

PIRP has been introduced exclusively for MSMEs as defined under the MSME Act, 2006. The definition of MSME had undergone a revision last year as a part of the announcements related to the Atmanirbhar Bharat Economic Stimulus. The new definition of MSME currently covers around 99 per cent of all businesses registered with the GST, according to Ministry officials.

The bill has also set an upper limit of default amount at Rs 1 crore. This means that PIRP would be a viable option for defaults amounting between Rs 1 lakh and Rs 1 crore. The government can, at any time, by means of notification, revise the minimum amount (Rs 1 lakh) upwards to any amount below Rs 1 crore.

3. Management of the company to remain with the Corporate Debtor

Unlike the CIRP process, where the responsibility of the management of the company gets transferred to the resolution professional, in PIRP, the board of directors or partners of the debtor can continue to manage the affairs of the company. This right to manage the company gets rescinded if it has been found out that there has been mismanagement or any fraudulent activity. The management then gets transferred to the resolution professional after the approval of the board of creditors and approval of the adjudicating authority.

4. Resolution process under PIRP must be completed within 120 days

To initiate the process for PIRP, the corporate debtor needs to receive consent from a minimum of 66 per cent of creditors (financial value of debt) to file an application with the Adjudicating Authority (National Company Law Tribunal).

Once the application has been filed with the National Company Law Tribunal (NCLT), it must approve the application if it is complete or reject the application for PIRP if it is found incomplete within 14 days of receiving the application. If any corrections are required in the application, NCLT must give notice to the applicant to correct the application. This must be informed within seven days of receiving the application.

Once the application has been accepted by NCLT, the Resolution Plan must be submitted within 90 days by the Resolution Professional to NCLT. The resolution plan can be filed with the NCLT only after getting the consent of a minimum of 66 per cent of the board of creditors. If no plan has been agreed upon by the board of creditors within the 90 day period, then the resolution professional must file an application with NCLT for termination of PIRP.

If the resolution plan has been filed within the time limit of 90 days, then the NCLT has to approve the plan within 30 days. Therefore, the entire process must be finished in 120 days.

At the same time, the board of creditors can, at any time before approval of the plan, vote with a minimum of 66 per cent to terminate PIRP. The board of creditors can also vote to initiate CIRP at any time before the approval of the PIRP Resolution Plan if the corporate debtor is eligible for CIRP.

Measures taken by the government for MSMEs

Since the onset of the pandemic, the government has increased the minimum default amount for CIRP to Rs 1 crore and also suspended the filing of CIRP for defaults arising between 25 March 2020 and 24 March 2021. It subsequently revised the definition of MSMEs to include 99 per cent of all businesses. The government had also announced the Emergency Credit Line Guarantee Scheme (ECLGS) to provide emergency credit to pandemic hit sectors as a part of the Atmanirbhar Bharat Scheme.