INSOLVENCY AND BANKRUPTCY CODE AMENDMENT BILL, 2021
WHY IN THE NEWS?
The Insolvency and Bankruptcy Code (Amendment) Bill, 2021, was passed by the Lok Sabha on July 28, 2021, and by the Rajya Sabha on August 3, 2021. The Bill will replace The Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was officially announced in April this year.
First, let us understand the ordinance. An ordinance is a temporary law made by the President when the Parliament is not in session.
The Bill aims to provide a pre-packaged insolvency resolution process (PIRP) for Micro, Small and Medium Enterprises (MSMEs), under the Insolvency and Bankruptcy Code, 2016 (IBC).
So, here we get two new keywords- Pre-pack resolution and Insolvency and Bankruptcy Code. Let them understand one by one.
WHAT IS INSOLVENCY AND BANKRUPTCY
In simplest terms, insolvency means a situation, when a debtor is unable to pay the debts, and those who are in this situation are called Insolvents. Insolvents can be a person, company or any organisation.
And, bankruptcy is a legal process, where a debtor declares that he has no more available to pay off his debts.
INSOLVENCY AND BANKRUPTCY CODE(IBC)
According to PRS India– “The Insolvency and Bankruptcy Code, 2016 provides a time-bound process for resolving insolvency in companies and also among individuals”.
It was started to simplify insolvency and bankruptcy proceedings in India, and to protect the interests of all stakeholders(all members who have given money for the success of the company) and resolving the issues of non-performing assets.
So, if this condition(i.e insolvency) occurs, the IBC allows the creditors of the company or company itself to initiate a Corporate Insolvency Resolution Process(CIRP) by filing an application before the National Company Law Tribunal(NCLT).
AMENDMENT IN THE BILL
The amendment bill has been introduced to offer an alternative resolution mechanism to MSMEs that is quicker and cost-effective, that is Pre-packaged insolvency resolution process(PIRP).
The minimum threshold default of Rs 10 Lakh for initiation of PIRP.
The amendment didn’t make any change for companies, other than MSMEs.
WHAT IS PRE-PACK RESOLUTION
The pre-Packaged Insolvency Resolution Process(PIRP) allows the promoters and the management of the firm (debtors) to create an informal plan for debt resolution with its creditors.
It allows for 120 days for the entire process — 90 days for the submission of the resolution plans, and 30 days for the NCLT to improve them.
The resolution plan can then be taken for approval by the secured creditors to the National Company Law Tribunal (NCLT).
However, the resolution plan has to be approved by a minimum of 66 per cent of financial creditors that are unrelated to the corporate debtor, before submitting the resolution plan to NCLT.
Further NCLTs are also required to either accept or reject any application for a pre-pack insolvency proceeding before considering a petition for a CIRP(Corporate Insolvency Resolution Process).
WHAT AFTER ONCE THE RESOLUTION STARTS
Once the resolution process starts, the National Company Law Tribunal (NCLT) will appoint a resolution professional, who will act only as a facilitator.
Thus, during the resolution process, the company will still be in control of the existing management instead of coming under the control of a resolution professional.
The resolution professional will help to improve the base plan or invite a competitive plan if required.
The pre-pack mechanism also provides an alternative called a swiss challenge for any resolution plans but it provides less than full recovery of dues to operational creditors.
Under the swiss challenge mechanism, any other person(other than the debtor or creditor) would be permitted to submit a resolution plan for the distressed company.
Creditors are also permitted to seek resolution plans from any third party if they are not satisfied with the resolution plan offered by the promoters of the company.
TYPES OF CREDITOR
- Financial Creditors — Entities (lenders like banks) that have provided funds to the corporate. Their relationship is a hardcore financial contract, such as a loan.
- Secured Creditors — A secured creditor is any creditor or lender that gives credit (loan) after taking a collateral (guarantee).
- Unsecured Creditor — An unsecured creditor is an individual or institution that lends money without any security, security here means specific assets as collateral. This puts the creditor at high risk.