Packed with ‘ifs & buts’ –

Will Prepacks have any takers?

-Megha Mittal | Associate
6th April, 2021

Vinod Kothari & Company | Resolution Division

Kolkata
1006-1009 Krishna Building
224 AJC Bose Road
Kolkata – 700017
Phone: 033- 2281 7715/ 1276/ 3742
E: resolution@vinodkothari.com
Delhi Mumbai
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Colony, D.N. Road, Fort,
New Delhi-110024 Mumbai – 400001
Phone: 011 6551 5340 Phone: 022 – 22614021 / 30447498
E: delhi@vinodkothari.com E: bombay@vinodkothari.com

Overview (Executive Summary)

Pre-packs, all over, are known to ease the However, packed with ‘ifs & buts’ one
formalities, cut costs and save time – wonders if the framework will have any
basically, pre-pack more of an informal takers.
framework than a formal one.
In this article, critically analyse the
The pre-pack framework introduced vide Ordinance, and assess the likelihood of a
Insolvency and Bankruptcy (Amendment) positive welcome in the given framework.
Ordinance, 2021, looks like a complicate
maze of words and makes several
amendments in the Code pertaining to
pre-packs.

The Ordinance has inserted Chapter IIIA in

the Code pertaining to pre-packaged
insolvency process only.
 Packed with ‘ifs & buts’ – Will Prepack have any Takers?

Table of Contents
Introduction........................................................................................................................ 3
Applicability & Eligibility ....................................................................................................... 3
PIRP – An Alternate Remedy ................................................................................................. 4
Initiation of PIRP.................................................................................................................. 5
PIRP Process........................................................................................................................ 7
Resolution Plan ................................................................................................................... 8
Debtor-in-Possession ........................................................................................................... 9
Termination and Liquidation ............................................................................................... 10
PIRP vs Other Modes of Debt Restructuring .......................................................................... 10
A Subscription for Possible Liquidation – Prepacks a Non-Starter? ........................................... 11

Key areas of discussion

1. Insolvency and Bankruptcy (Amendment) Ordinance, 2021

2. Feasibility of the PIRP
3. PIRP vs. alternate modes of insolvency resolution

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Introduction
There have been multifarious discussions on possibility of pre-packs in India, including the Report of the
Sub-Committee of the Insolvency Law Committee 1 . The unforeseen impact of COVID-19 – India and
abroad, especially on the operations of micro, small and medium enterprises (‘MSMEs’) particularly
amplified the need for a faster insolvency process.

The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 (‘Ordinance’)2 has thus been
notified with the purported objective of “ensuring quicker, cost-effective and value maximising
outcomes for all the stakeholders, in a manner which is least disruptive to the continuity of their
(MSMEs) businesses”. The Ordinance takes effect from 4 th April, 2021. The Ordinance has inserted
Chapter IIIA and several new sections in the Code relating to Pre-packaged Insolvency Resolution
Process (‘PIRP’). Besides, there are consequential amendments in various sections of the Code.

However, in what looks like a complicated maze of words, the Ordinance seems to be packed with too
many ifs and buts, has too many contingencies which the MSME’s might be exposed to. As such,
concerns as to whether the objectives which the Ordinance proposes to serve, are bound to arise

In our article below, we analyse the Ordinance and its expected impact, identify possible concerns, and
attempt to answer to what may have been left unanswered.

Applicability & Eligibility

The Ordinance has been notified for MSMEs as defined under the Micro, Small and Medium Enterprises
Development Act, 2006 (‘MSMED Act’) with minimum default under section 4 of the Insolvency and
Bankruptcy Code, 2016 (‘Code’)

 Applicability restricted to MSMEs only

The preamble of the Ordinance suggests PIRP is specifically meant for MSMEs. While section 54A (1)
supports such interpretation, the words “without prejudice to sub-section (1)” in section 54A (2) give an
impression that the PIRP framework may also be applicable to entities other than MSMEs, having
minimum default under section 4.

However, a harmonious reading of the Ordinance, inter-alia objectives set out in the preamble,
conditions and consequences for initiation would suggest that the Ordinance is applicable to MSMEs
only

 Minimum Default

Once the first leg for pre-requisite, viz, MSME-CD stands satisfied, the second leg of eligibility, that is,
minimum default is to be checked. Section 54A (2) of the Ordinance draws reference to default amount
set out in section 4, to be read with the second proviso inserted vide section 2 of the Ordinance.

Hence, the minimum default for initiation of PIRP would be Rs. 1 lakh unless a higher amount, not
exceeding Rs. 1 crore, is notified by the Central Government – grapevine suggests that the minimum
default threshold of Rs. 10 lakhs may be notified.

1 https://www.ibbi.gov.in/uploads/whatsnew/34f5c5b6fb00a97dc4ab752a798d9ce3.pdf. See our comments

here on the proposals- http://vinodkothari.com/2021/01/comments-on-proposed-framework-for-prepacks/
2 https://www.ibbi.gov.in/uploads/legalframwork/04af067c22275dd1538ab2b1383b0050.pdf

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Key Takeaways – Applicability and Eligibility

(a) Applicable on MSMEs only;
(b) MSMEs shall be ascertained as per definition under the MSMED Act;
(c) Default is mandatory – an apprehension of default would not suffice;
(d) The tenure of default is irrelevant;
(e) Minimum default (as may be notified) shall not exceed Rs. 1 crore in any case.

PIRP – An Alternate Remedy

PIRP has been identified as an efficient alternative insolvency resolution process for corporate persons
classified as MSMEs. As per the extant prerequisites, minimum default criteria for initiation of PIRP/
CIRP are as follows –

Eligible for
Default (in Rs.)
PIRP CIRP
Threhsold amount No No
Rs. 1 lakh to less than Rs. 1 Yes No
crore
Rs. 1 crore or more Yes Yes
Table 1: Application under CIRP / PIRP in different cases of default

Hence, PIRP acts as an alternative recourse only for MSMEs where the minimum default > Rs. 1 crore;
which implies choice-making. Later in our analysis, we shall compare key provisions of PIRP vis-à-vis
CIRP, as well as other informal modes viz. OTS, CDR, Resolution Framework under RBI, thus putting the
reader in a better position to choose between the various alternatives.

PIRP as a stone-wall to CIRP?

Given that PIRP is alternative course, which among the two would sustain in case of simultaneous
proceedings? The newly inserted section 11A, by essence, implies that where an application for
initiation of PIRP is initiated immediately3 after an application for CIRP, the former would first warrant
adjudication. Section 11A provides that –

Scenario Outcome / Order of Priority

Pending PIRP Application but CIRP Application PIRP application to be admitted/ rejected prior
filed afterwards to CIRP Application

Pending CIRP Application but PIRP Application PIRP application to be admitted/ rejected prior
filed within 14 days of CIRP Application to CIRP Application

Pending CIRP Application but PIRP Application CIRP application to be admitted/ rejected prior
filed after 14 days of CIRP Application to PIRP Application

Table 2: Treatment of Simultaneous Applications

3
Within 14 days of filing of the CIRP Application

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The nominal window of 14 days to file a PIRP Application raises concerns over practicality - Initiation of
PIRP requires a resolution plan to be submitted within 2 days of commencement, approval of FCs,
approval of members (see discussion below), leaving a little possibility of filing of PIRP Application within
14 days of the CIRP Application. Thus, though PIRP seems to be the preferred route, implementation
issues may act as a significant hindrance.

Nevertheless, assuming that the PIRP application is filed within the stipulated time, it could pose as a
stone-wall for the CIRP application which cannot be adjudicated upon unless the PIRP Application is
admitted/ rejected.

Key Takeaways – Treatment of Simultaneous Applications

(a) A CIRP application pending as on the date of enforcement cannot be stalled by a PIRP
Application;
(b) PIRP application may be misused to stone-wall a pending CIRP Application. Note that the 14
day timeline for adjudication by AA is directory, not mandatory

Initiation of PIRP
While the interplay of section 54A (1) and (2) may create a muddle regarding the eligible entities, some
clarity is rendered by the object clause of the Ordinance which recognizes PIRP as a recourse for MSMEs.

Can all MSMEs with the minimum default initiate PIRP? No – Section 54A (2) stipulates an exhaustive
list of conditions which must be fulfilled to proceed under the PIRP Framework.

 Conditions for Initiation-

The conditions, as enlisted in
Figure 1, have been imposed
to ensure to avoid misuse of
PIRP by the CD.
CD has not undergone PIRP or CIRP for 3 years prior to
application
CD not undergoing any CIRP or liquidation process

By providing for a minimum CD is eligible to submit application u/s 29A - to be

cooling period of 3 years read with section 240A
between two PIRP Period
and for initiation of PIRP Declaration by majority of directors that
after a CIRP, the lawmakers PPIRP is not to defraud any person
have ensured that the
eligible CDs do not misuse
Approval by atleast 66% Unrelated FCs
the benefit of moratorium,
amongst others, by initiating
a relay of insolvency Approval by Shareholders - SR in GM
proceedings.

Another important criteria is Figure 1: Conditions for initiation of PIRP

eligibility under section 29A
– section 29A, as known to all, ensures that the CD does not go back in the hands of the ineligible
promoters at subsidized rates, free of all liabilities. However, in view of the macro-level requirements
of MSMEs, it was considered necessary to give certain relaxations to MSMEs by allowing the MSME-

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CD’s promoters to acquire the CD by way of a resolution plan4 . On similar lines, the Ordinance also
requires that to initiate PIRP, the promoters of the CD should not attract any ineligibility u/s 29A (except
clause (c) and (h)) – necessary amendments have been made in section 240A, which provides such
relaxation to MSMEs.

Hence, section 29A remains mutatis mutandis applicable in case of MSME-CDs under PIRP as under CIRP.

 Approvals for Initiation –

Chapter IIIA requires the CD to obtain three-fold approval for initiation of PIRP – (a) Shareholders; (b)
from Unrelated FCs; and (c) Adjudicating Authority. Below we briefly discuss the approval requirements
–

The text of the Ordinance suggests Approvals

required for
that while the proposal for initiation of PIRP
initiation of PIRP may be made by
the creditors or the CD itself, the
approvals as well as the application
for initiation shall be filed at the Adjudicating
Shareholders Unrelated FCs
behest of the CD only. Authority

For seeking approval from the FCs,

the CD shall submit a copy of the
base resolution plan5 to the FCs – representing Upon an
by passing SR in
which once again be submitted to atleast 66% of application to be
GM
the RP within 2 days of the FCs filed by CD
commencement of PIRP.
Figure 2: Three-fold approval for initiation of PIRP
While obtaining such approval, the
majority of directors of the CD also give a declaration to undertake that the initiation of PIRP is bonafide
and there exist no avoidance transactions in the CD.

The final admission by AA marks the commencement of PIRP – moratorium also commences with effect
from such ‘PIRP Commencement Date’.

Key Takeaways – Initiation

(a) May be proposed by any creditor or the CD;
(b) Shall be initiated at the behest of the CD only – pre initiation approvals and application has
to be moved by the CD. Thus, consent of the CD is mandatory
(c) Asset of 66% unrelated FCs is required – does it imply that notice to other FCs may not be
required at all?
(d) In absence of any notice to unrelated FCs, the moratorium may come as a surprise to such
FCs

4
Section 240A.
5
To be prepared in terms of section 54K

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PIRP Process
Largely similar to CIRP, PIRP commences on the date of admission of application by AA, and continues
for a period of 120 days thereof, without any provision for an extension.

Figure 3: Prepackaged Insolvency Resolution Process

Thus, the entire process could essentially be divided into three phases –

(a) Pre NCLT – Approval by Shareholders to Admission of application by AA

The duties of the insolvency professional6 shall commence and continue till the termination of the
Process. Further, during this stage the CD shall prepare a base resolution plan, take necessary approvals
from shareholders and FCs, and submit declarations and other documents as required, and event ually
file the application for initiation of PIRP.

(b) Plan Stage – Admission by AA to Submission of Plan to AA (T to T+90)

The Plan Stage marks the commencement of PIRP, and as a result, the commencement of moratorium.
During this period, the RP is required to make public announcement 7 , constitute the committee of
creditors and submit the resolution plan (as approved by CoC), if any, to the AA within 90 days from
commencement.

6
As enlisted in section 54B
7
In such form and manner as may be specified in the awaited regulations.

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During this period the CD shall provide the list of claims, preliminary information memorandum and
the base resolution plan to the RP. Further, the base resolution plan shall be considered by the CoC,
and outside resolution plans, if required, shall be invited. It is mandatory that the CoC decided to
approve/ reject a resolution plan and that the RP submits the plan to the AA, if any, within the stipulated
period of 90 days, failing which PIRP shall be terminated.

Another important feature of the Plan Stage is that is follows the Debtor-in-possession model (see
discussion below)

(c) Post Submission – After submission of plan by NCLT to its admission/ rejection by AA (T+90 to
T+120)

The final begins after the plan is submitted to AA. Clearly, where no plan is submitted to the AA, this
stage does not come into picture. During this phase, the AA shall admit/ reject the plan.

The three-stage process also makes it clear that a great deal still depends on the involvement of the
AA- hence, one may wonder whether the burden is actually removed of AA’s back.

Key Takeaways – PIRP

(a) The window between filing of application till its admission gives ample opportunity to the
secured creditors to initiate recovery proceedings prior to admission and commencement of
moratorium;
(b) Heavy dependence on AA – for initiation; approval of plan; approval of shift from DIP to CIP;
approval of termination; approval for initiation of CIRP. Thus, the inherent benefits of time and
cost saving are lost;
(c) Multiple approvals from FCs for the same plan – approval of FCs is required both before and
after the admission by AA;
(d) While the IRP is required to prepare a report during the Pre-NCLT stage, the Ordinance does
not provide for its submission with the AA – expected to be introduced vide Regulations

Resolution Plan
The very essence of a pre-packaged insolvency resolution process, is that a resolution plan is pre-
negotiated between the CD and the creditors, and is submitted to the AA for approval. This basic
principle is the pillar on which prepacks have been operating in jurisdictions like UK, US, Singapore,
Germany since its very inception.
Hence, in India too, the Ordinance requires that the CD must prepare a ‘base resolution plan 8 ’ and
submit to the FCs while seeking their approval prior to filing the application. This base resolution plan
(“Base Plan’) must be in accordance with section 54K and 54L. Further, the base resolution plan must
once again be submitted to the RP within 2 days of PIRP Commencement Date, who shall then forward
the same to the CoC for consultation. The Base Plan if approved by the CoC ought to be submitted to
the AA within 90 days of PIRP Commencement.

The RP may invite plans from outsiders where, Base resolution plan not approved by CoC; or claims of
OCs are impaired. Hence, in view of the fact that the initiation as well as approval of the Base Plan is

8
Defined in section 3 (2A) of the Code

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subject to the approvals by FCs, the interest of the OCs is safeguarded by ensuring that plans with
impairment of OCs, or in breach of section 30 (2) of the Code are rejected.

Key Takeaways – Resolution Plan

 Plan to be approved by FCs at 2 stages –
before and after admission by NCLT;
 CoC has the power to shift the
management control from the CD to any
new RA;
 RA may be given by promoters, jointly or
individually with others – exemption u/s
240A is available
 Plan cannot provide for impairment of
OCs’ claims – Hence, PIRP is essentially
designed to restructure claims of FCs only
 Conditions u/s 54K must be met
 CoC may resolve for inviting plan from
other RAs – risk of transfer of control;
 CoC can also demand dilution of stake of
the promoters in case of impairment of
FCs’ claims
 Plans must adhere to section 30(2)
 Plan by other RAs to be approved only if
‘significantly better’ – specific conditions
to be notified – however, going by
precedents final decision should be based
on commercial decision of CoCs
 Binding clause is applicable on an
approved plan (section 54L)

Debtor-in-Possession
The Ordinance provides for a Debtor-in-Possession (DIP) Model, that is, management of the CD shall
continue to vest in the hands of the Board of Directors or the partners, as the case may be, subject to
conditions that may be specified, and monitoring by the RP. This seems to be the USP of PIRP
framework – but it has its own limitations (safeguards).

During such period, the Board of the CD, is under the duty to endeavour to protect and preserve the
value of the property of the corporate debtor, and manage its operations as a going concern, and carry
out all statutory and contractual rights and obligations as may be required.

Nevertheless, where the CoC is of the view that the affairs of the CD, under the DIP Model, are being
grossly mismanaged, or are being conducted in a fraudulent manner, section 54J (1) empowers the CoC
to resolve, with consent of atleast 66% members, to shift the power of management from the Board to
the RP, i.e. a shift from DIP to Creditors-in –Possession (‘CIP’) Model. Upon such a resolution, the RP
shall file an application to the AA, which shall admit/ reject the application in terms of section 54J (2)
of the Ordinance.

The DIP approach is seemingly the sole motivator for opting PIRP over the alternative modes (see
discussion below) – given that the said factor is also not certain, and is subject to non-action by the CoC
implies that the ultimate decision whether the management shall continue to vest with the CD is

Key Takeaways – Debtor-in-possession

(a) Board is entitled to control the affairs of the CD after PIRP Commencement;
(b) DIP is subject to supervision by the RP
(c) CoC, with 2/3rd consent can resolve to shift from DIP to CIP – subject to ratification by AA
(d) Penal provisions inserted for wrongful action by the Board during DIP

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subject to the CoC’s decision. Hence, by when entering into PIRP, the CD is subscribing itself to the risk
of losing control of management – the CD is not estopping the CoC from warranting a shift in
management.

Termination and Liquidation

Generally, there could be two outcomes to any PIRP process – either, a successful resolution plan being
approved, or termination.

Interestingly, the Ordinance provides

for a third outcome too – liquidation Mandatory liquidation
after PIRP
(In cases discussed in Fig. 4)

Thus, while taking resort under the

PIRP framework, the CD is enters its
Shift from DIP to CIP
own grave as the PIRP may also lead to
liquidation, rest aside revival. Further,
given that liquidation would otherwise
not be possible prior to CIRP, the Resolution Plan
approved without PIRP is terminated
impending risk of liquidation acts as a change in management
demotivator for resorting to PIRP.

 Consequences of Termination Figure 4: Cases for mandatory liquidation from PIRP

As per the extant provisions, the
consequences of termination of PIRP can be understood as follows –
Event Remarks
Subsequent PIRP Cannot be initiated for 3 years
CIRP Can be initiated by any person
Liquidation Only in cases discussed above

Hence, a failed PIRP cannot be considered as a shield from a following CIRP process, however, shall definitely
restrict the CD from resorting to a relay of PIRP processes to enjoy moratorium.

Key Takeaways – Termination & Liquidation

(a) Termination can be effected only upon order of the AA – hence, additional involvement of
the AA.
(b) What happens in case of violation of an approved resolution plan – can CIRP be initiated?
(c) Can liquidation order u/s 33 be passed for CD whose default < Rs. 1 crore – would it
tantamount to be a violation of section 4?

PIRP vs Other Modes of Debt Restructuring

One must appreciate that PIRP is not the only recourse – it is merely a hybrid of formal (say, CIRP) and
informal procedures (think, OTS/ CDR). Hence, it would be crucial to analyse PIRP vis-à-vis the other
alternatives inter-alia informal One-Time Settlement (OTS), CDR Mechanism for MSMEs (CDR),
Resolution Framework under RBI, and finally the formal process of CIRP.

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 Restructuring of FCs’ claims only –

First, the primary motivator of a prepackaged arrangement is the benefits of a formal system - under
the Code, the benefits of moratorium and washout of all pre-PIRP liabilities. It must be noted that under
a mainstream CIRP, a resolution plan massively restructures the claims of OCs, such that the FCs have
to bear a minimal haircut, with the benefit of a binding impact on all stakeholders. This is preferred over
an OTS or CDR since such arrangements are with FCs only – not other stakeholders. However, the rider
under section 54K of the Code that the Base Plan should not impair the OCs’ claims, thus leaving scope
for restructuring of FC claims only. This makes one wonder why the CD would chose PIRP (with its
associated risk of liquidation) over an OTS / CDR if similar results were to be achieved.

 Manifold Approvals –
The extant framework provides for a three-fold approval for initiation of PIRP, a three-fold approval for
approval for approval of the resolution plan, as well as approval of the AA for other acts viz. termination
of CIRP and shift from DIP to CIP. Hence, such manifold approval requirements may create unwarranted
burden on the CD, thereby also frustrating the essential ‘time and cost’ effectiveness feature of
prepacks. On the other hands, an OTS/ CDR is privy to the CD and the FCs only – thereby saving time,
cost and effort.

 Loss of Control –

The most important feature of PIRP over CIRP is the DIP Approach. However, in view of the fact that DIP
is also subject to no-action in this regard by the CoC, leaves the CD at the constant risk of change in
management. Whereas, in case of OTS/ CDR, there remains no risk of such loss of control

 Consequence of failure –

The fact that a failed PIRP may also lead to liquidation in certain cases, acts as a deal-breaker for PIRP –
if compared to OTS/ CDR, it must be appreciated that since the same objective (restructuring the FCs)
would be achieved, commercial rationale would not suggest undertaking a risk of liquidation vis-à-vis a
possible CIRP in case of a failed OTS/ CDR.

A Subscription for Possible Liquidation – Prepacks a Non-Starter?

A bird’s eye view of the Ordinance gives an idea that the PIRP framework i s similar to a creeper plant, finding
its support from the already established provisions of the Code. However, one must wonder if the PIRP
framework could have been so deeply based on the CIRP Process. With the given ifs and buts in the
framework, a positive welcome to prepacks seems rather ambiguous.

In view of the fact that other informal, time and cost effective processes are expected to provide similar
results as PIRP, it is important to weight the benefits of PIRP against its cons – a prelim analysis suggests the
latter being heavier.

The authors is of the view that sound inspiration may have been drawn from the established and time-tested
provisions of prepacks adopted in US and UKM and thereafter moulded as per the Indian requirements.
Nevertheless, the instant move is only the first step towards a sound PIRP infrastructure, which like the
Code, is expected to evolve with time and jurisprudence.

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Other relevant articles-

http://vinodkothari.com/2021/01/comments-on-proposed-framework-for-
prepacks/
http://vinodkothari.com/wp-content/uploads/2020/06/Bringing-pre-packs-to-
India.pdf

About the Author

Megha Mittal is an Associate at Vinod Kothari & Company. She
is a commerce graduate from the University of Calcutta and a
Practising Associate Member of the Institute of Company
Secretaries of India.
Her interest lies in the fields of Insolvency and Bankruptcy
Code, Corporate Restructuring, Legal Drafting and
oto) Documentation. She has a keen interest in academic works and
actively contributes articles and write-ups which are published
in several prominent blogs, journals and books.

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