Lok Sabha passed Insolvency and Bankruptcy Code (Amendment) Bill, 2021 on July 28, 2021 to amend the Insolvency and Bankruptcy Code, 2016. The Bill was introduced in the Lower House on July 26, 2021 to replace the Insolvency and Bankruptcy Code (Amendment) Ordinance, 2021, which was promulgated on April 4, 2021.
The Code will provide a time-bound process for resolving the insolvency, ie; a situation where individuals or companies are unable to repay their outstanding debt, of corporate debtors (within 330 days) and is called the corporate insolvency resolution process (CIRP). In case of a default of at least one lakh rupees, the creditor or debtor may apply for initiation of CIRP. Under CIRP, a committee of creditors will be made to decide on a resolution plan which will provide merger, acquisition or restructuring of the company to pay off the debt. If the resolution plan is not approved by the committee within a given time then the company will be liquidated.
The Bill also introduced a pre-packaged insolvency resolution process (PIRP), an insolvency resolution process for micro, small, and medium enterprises (MSMEs) . PIRP may be initiated only by debtors, who will hold the management of the company during the resolution process. The debtor should have a base resolution plan in place. The application for initiating PIRP can be filed in case there is a default of minimum of 1 lakh rupees, the threshold of which may be increased upto 1 crore by the central government through a notification.
Who Will Be Eligible For PIRP?
PIRP may be initiated against an MSME, i.e; 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. For initiating PIRP, the corporate debtor must apply to the National Company Law Tribunal (NCLT) and authority must approve or reject the application within 14 days of its receipt.
During PIRP moratorium will be provided to the debtor, under which actions like, filing or continuation of suits, execution of court orders, or recovery of property against them will be prohibited. The board of directors or partners of the debtor will continue to manage the affairs once PIRP is initiated. However, the management of the debtor may be acquired by the Resolution Professionals in case of fraudulent conduct or gross mismanagement.
At any time after the commencement of PIRP 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.