Insolvency and Bankruptcy Ordinance, April 2021

1. The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021 [“Ordinance”] was promulgated on
4th April, 2021. It amends the Insolvency and Bankruptcy Code, 2016. The Ordinance introduces an
alternate insolvency resolution process for micro, small, and medium enterprises [“MSMEs”] [Section
54A], called the pre-packed insolvency resolution process [“PIRP”]. Unlike Corporate Insolvency
Resolution Process [“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.

2. The minimum amount of default for initiating PIRP may be filed in the event of a default of at least 10 [ten]
lac rupees. The central government may increase the threshold of minimum default up to 1 [one] crore
rupees through a notification [Section 54A(2)].

3. An application for initiating PIRP may be initiated in the event of the default by a corporate debtor
classified as an MSME under MSME Development Act,2006 [“Corporate Debtor”]. The authority must
approve or reject the application for PIRP within 14 days of its receipt. [Section 54C(4)]

4. Corporate Debtor prior to applying for PIRP needs to obtain approval of at least 66% of its financial
creditors [in value of debt due to creditors] who are not related parties to the debtor. [Section 54A(3)]

5. The Corporate Debtor prior seeking approval of the financial creditors must provide a base resolution
plan. [Section 3 (2A) of Ordinance / Section 5 IBC]

6. The Corporate Debtor must also propose the name of the resolution professional along with the
application for PIRP. The proposed resolution professional must be approved by 66% of financial
creditors. [Section 54A(2)(e)] A resolution plan must be approved by the committee within 90 days from
the commencement date of PIRP [Section 54D(2), Section 53A(2)(f)(i)]. The authority must either approve
the plan or order termination of PIRP within 30 days of receipt [Section 54L(1), Section 54L(3)]
Termination of PIRP will result in the liquidation of the corporate debtor.

7. During the PIRP, the board of directors or partners of the corporate debtor will continue to manage the
affairs of the corporate debtor [Section 54H]. However, the management of the corporate debtor may be
vested with the resolution professional if there has been fraudulent conduct or gross mismanagement.

Issues:

1. Ordinance making power:

 The aforementioned Ordinance added a whole new chapter to amend the Insolvency and Bankruptcy Code,
2016. The Hon’ble Supreme Court of India in catena of judgments held that the ordinance making power of
the government is in the nature of emergency power or taking immediate action when the legislature is not
in session. The object of the power of the ordinance making power of the government is an emergent power
exercisable when the legislature is not in session, an ordinance promulgated by the government to deal
with the situation which requires immediate action, and which cannot wait until the legislature reassembles.
The power to promulgate an ordinance is essentially a power to be used to meet an extraordinary situation
and it cannot be allowed to be perverted to serve political ends. Therefore, passing an ordinance and by
passing the procedure laid down in Constitution of India, the government is trying to gain political milage in
the society.

1.1 Rustom Cavasjee Cooper (Banks Nationalisation) v. Union of India, (1970) 1 SCC 248
1.2 D.C. Wadhwa v. State of Bihar, (1987) 1 SCC 378
1.3 Krishna Kumar Singh v. State of Bihar, (2017) 3 SCC 1

2. Time and Parameters for deciding on the resolution Plan:

The basic premise on which PIRP has been introduced is that the corporate debtor shall be in a better
position to revive the activities as it is managing the operations and hence, should be allowed to submit a
plan which is referred as Base Resolution Plan in IBC. The Base Resolution Plan shall be placed before the
financial creditor to approve the said plan or invite new plans from third parties. The biggest issue that PIRP
schemes will face initially is that Corporate Debtor may not raise additional capital or debt from Investors or
Banks. This is because of the risk involved in recovering the money being provided by these Investors and
Lenders. Hence a Resolution Plan based on the restructuring of debt may not help realise the adequate
number of financial creditors and may find it challenging to achieve a turnaround. The timeline given for
approval of the Resolution Plan under PIRP is 90 days with additional 30 days to Adjudicating Authority for
support of the scheme. It is challenging for financial creditors to decide on the Base Resolution Plan within
this short period of time without any broad parameters on which the Resolution Plan be approved.

3. Continuation of personal guarantee and collateral security

It is not clarified that in case the Base Resolution Plan submitted by the Corporate Debtor gets approved in
PIRP by Financial Creditors and Adjudicating Authority, whether the guarantees [personal or corporate] and
collateral security provided to Financial Creditors against the loan facilities shall also get released, or
Financial Creditors can start the process under Insolvency and Bankruptcy Code, 2016 or any other law for
recovery of dues from the balance amount.

4. Preferential, Undervalued, Extortionate and Fraudulent Transaction

 The time limit for determining any transaction that fall under the category of Preferential, Undervalued,
Extortionate and Fraudulent under Sections 43,45,50 and 66 of IBC is 45 days and for reporting with
Adjudicating Authority is 60 days from commencement of PIRP. It isn’t easy to compete this process within
such a short time. If certain such transactions are determined, the Base Resolution Plan submitted by
Corporate Debtor may have to be treated differently.

5. Transparency
During PIRP the existing management would oversee alienating the assets to keep the company afloat and
therefore, there would always be apprehensions regarding the correctness of the entire process. This may
lead to creditors, especially unsecured, to approach the NCLT and filing cases against Corporate Debtor.