Changes in Insolvency Act

  • IASbaba
  • August 9, 2021
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Changes in Insolvency Act

  • Context: The Insolvency and Bankruptcy Code (Amendment) Bill, 2021 was introduced in Lok Sabha on July 26, 2021.  It amends the Insolvency and Bankruptcy Code, 2016.  
  • Insolvency is a situation where individuals or companies are unable to repay their outstanding debt.
  • The Bill replaces the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was promulgated on April 4, 2021.
  • The Code provides a time-bound process for resolving the insolvency of corporate debtors (within 330 days) called the corporate insolvency resolution process (CIRP).  
  • The debtor himself or its creditors may apply for initiation of CIRP in the event of a default of at least one lakh rupees.  
  • Under CIRP, a committee of creditors is constituted to decide on the insolvency resolution.  The committee may consider a resolution plan which typically provides for the payoff of debt by merger, acquisition, or restructuring of the company.  
  • If a resolution plan is not approved by the committee of creditors within the specified time, the company is liquidated.  During CIRP, the affairs of the company are managed by the resolution professional (RP), who is appointed to conduct CIRP.

What exactly does this amendment do? 

  • The Bill introduces an alternate insolvency resolution process for micro, small, and medium enterprises (MSMEs), called the pre-packaged insolvency resolution process (PIRP).
  • It creates a framework for small enterprises to be a part of insolvency process. The current corporate insolvency resolution process that is there for MSME is very a well worked but rather expensive and given the size and scale of MSME it’s not required hence the government has come up with the pre-packaged insolvency resolution process (PIRP).
  • Application for initiating PIRP may be filed in the event of a default of at least one lakh rupees. The central government may increase the threshold of minimum default up to one crore rupees through a notification.
  • PIRP may be initiated in the event of a default by a corporate debtor classified as an MSME under the MSME Development Act, 2006.  
  • Currently, under the 2006 Act, an enterprise with an annual turnover of up to Rs 250 crore, and investment in plant and machinery or equipment up to Rs 50 crore, is classified as an MSME.  
  • For initiating PIRP, the corporate debtor himself must apply to the National Company Law Tribunal (NCLT).  The authority must approve or reject the application for PIRP within 14 days of its receipt.

Rationale of the need behind the pre-packaged insolvency resolution process (PIRP)

  • Unlike CIRP, PIRP may be initiated only by debtors.  The debtor should have a base resolution plan in place.  During PIRP, the management of the company will remain with the debtor.
  • This allows faster mode of resolution from both sides (debtor and creditors). Hence it has the advantage of providing speedy resolution and not choking the capacity of the existing system.
  • Unlock land labour and capital and cleaning up sheet of the books of the bank by fastening the resolution process.
  • Help the MSME sector which is recovering from the pandemic shock.

How will the pre-packaged insolvency resolution process (PIRP) work?

  • For applying for PIRP, the debtor must obtain approval of at least 66% of its financial creditors (in value of debt due to creditors) who are not related parties of the debtor.  
  • Before seeking such approval, the debtor must provide creditors with a base resolution plan (RP).  
  • The debtor will submit the base resolution plan to the RP within two days of the commencement of the PIRP.  
  • A committee of creditors will be constituted within seven days of the PIRP commencement date, which will consider the base resolution plan.  
  • The committee may provide the debtor with an opportunity to revise the plan.  The RP may also invite resolution plans from other persons.  
  • Alternative resolution plans may be invited if the base plan: 
    1. is not approved by the committee, or 
    2. is unable to pay the debt of operational creditors (claims related to the provision of goods and services).
  • A resolution plan must be approved by the committee (with at least 66% of the voting shares) within 90 days from the commencement date of PIRP.  
  • The resolution plan approved by the committee will be examined by the NCLT.  If no resolution plan is approved by the committee, the RP may apply for the termination of PIRP.  
  • The authority must either approve the plan or order termination of PIRP within 30 days of receipt.  Termination of PIRP will result in the liquidation of the corporate debtor.
  • During PIRP, the debtor will be provided with a moratorium under which certain actions against the debtor will be prohibited.  These include filing or continuation of suits, execution of court orders, or recovery of property. 
  • During PIRP, the board of directors or partners of the debtor will continue to manage the affairs of the debtor.  However, the management of the debtor may be vested with the RP if there has been fraudulent conduct or gross mismanagement.
  • At any time from the PIRP commencement date but before the approval of the resolution plan, the committee of creditors may decide (with at least 66% of the voting shares) to terminate PIRP and instead initiate CIRP.

How the IBC act has performed so far?

  • Insolvency and Bankruptcy Code 2016, (IBC) in a span of four years, has turned out to be the proverbial giant in the annals of Indian corporate law. 
  • The legislation catapulted India in World Bank’s Doing Business rankings from a lowly 142 in 2014 to 63 in 2019. 
  • Jurisprudence of any legislation takes time to evolve and IBC was no exception.
  • Covid-19 disrupted IBC’s stellar run as filings under IBC were suspended.
  • An opportunity to reduce the backlog amidst Covid-19 was missed, which would have been possible, with better infrastructure, more members, and expeditious hearings.

Can you attempt this question now?

  • Discuss the Insolvency and Bankruptcy Code (Amendment) Bill, 2021. 

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